II.I.II Protocol Fees

There are two fees assessed on Minters in the M^0 protocol.

The first is called Minter Rate, a governance controlled parameter, which is levied continuously on the Minter’s balance of Owed $M. This fee compounds on a continuous basis. The beneficiaries of Minter Rate are the Earn Mechanism (see II.I.V The Earn Mechanism) and the ZERO holders (see III. Governance).

The second is Penalty Rate, another governance controlled parameter, which is levied on balances that are in violation of protocol rules and has the same beneficiaries as the Minter Rate.

One of the primary invariants of the protocol is that the balance of a Minter’s Owed $M should not exceed the on-chain Collateral Value (sans open Retrieval IDs) multiplied by the Mint Ratio.

Penalty Rate is imposed upon any balance in excess of this amount. If a Minter has not called Update Collateral within Update Collateral Interval, they will incur Penalty Rate on their entire balance of Owed $M for each Update Collateral Interval that they miss – i.e. when Update Collateral is not called in the TTG-specified time the system interprets its value to be zero.

Unlike Minter Rate, Penalty Rate is not continuously levied on the Minter’s balance of Owed M, but is charged discretely as a one-time percentage fee on their delinquent balance at the moment the balance is checked, and then added to the Minter’s Owed M. Collecting Minter Rate is contained in the Get Present Amount method, which is exclusively embedded in all other Minter methods, including Burn, and cannot be called independently. The Minter Rate is mechanically affected by updating a global index value which is applied to all Owed $M in the Minter’s balance, as is Penalty Rate. Penalty Rate is contained in the Impose Penalty method, which is exclusively embedded in the Update Collateral, Burn and Deactivate Minter methods. When Impose Penalty is called in conjunction with Update Collateral, it checks for both missed Update Collateral Interval periods and the Minter’s balance of Owed $M relative to their on-chain Collateral Value discounted by the Mint Ratio. When it is called in conjunction with Burn, it only checks for missed Update Collateral Interval periods. This is done to ensure that the Minter is not penalized on the same errant balance more than once. Impose Penalty will also account for whether it has already been called in the current Update Collateral Interval period and will not charge a Minter twice for the same missed period.

The following is a diagram which demonstrates a hypothetical sequence where a Minter incurs Penalty Rate charges. The example below describes this hypothetical sequence.

Hypothetical sequence where a Minter incurs Penalty Rate charges.

Hypothetical sequence where a Minter incurs Penalty Rate charges.

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