The following documentation is a proposal to invest a portion of Merit Circle’s treasury funds into the Maple Finance protocol. Maple Finance is a decentralized corporate credit platform that allows KYC’d institutions to borrow funds on an undercollateralized basis. The protocol works with lending pools that are managed by Pool Delegates, who are asset managers (such as Blackrock in TradFi) with credit expertise that assess the borrower’s credit worthiness and set up the terms of the loans such as interest rate and collateral ratio. We, Maven 11, act as a Pool Delegate and manage one of the four pools on Maple Finance. We are a digital asset investment firm combining deep roots in the DeFi ecosystem with professional experience in finance. To strengthen our team and our credit capabilities, we in addition hired an external advisor who has over 10 years of experience in high-risk loan origination and credit risk management who currently manages a EUR 2B credit book in his TradFi job but equally has been a DeFi participant personally and shares our passion and conviction to the space. This addition to the team has been instrumental in understanding and pricing risk for our Maple Finance activities.
The numbers in the proposal were last updated on the 19th of November, so we cannot guarantee that they are up-to-date by the time of posting or reading. Also, for this proposal we’ve borrowed from our successful proposal on the KeeperDAO governance forum which resulted in a $3.5 million deposit into our pool.
We invite you to read through the proposal and welcome any feedback, comments, suggestions, and concerns. We are happy to schedule a Maple x M11 AMA with the MC community in order to walk you through our origination and risk management practices and discuss the proposal more in depth. We are looking forward to your feedback!
Currently, assets in the Merit Circle treasury are valued at approximately $130 million (excluding $MC tokens), of which roughly $92 million is kept in USDC.
The main purpose of utilizing a portion of stablecoins held by the Merit Circle’s treasury to provide liquidity on Maple Finance is to generate an additional yield on now-idle assets. This will enhance the capital efficiency of the treasury, the value of which will ultimately find its way back to the members of the DAO.
We are aware that the risk appetite for the majority of DAOs is relatively low as the treasury assets, in particular stablecoins, are viewed as a buffer for potential adverse scenarios such as a bear market and as operational resources. We think that the lending opportunity in collaboration with Maven 11 Capital and Maple Finance as presented in this proposal is particularly suitable from a risk/reward perspective. This lending opportunity presents a solution that combines a relatively moderate risk profile while simultaneously offering a generous yield.
Why Maple Finance?
To reiterate, the lending opportunity presented in this proposal is for Merit Circle to use (a part of) their treasury’s stablecoins to provide liquidity in the Maple Finance protocol. As mentioned previously, Maple Finance is a decentralized corporate credit platform where KYC’d institutions can borrow funds on an undercollateralized basis based on legally enforceable loan agreements. The protocol currently works with USDC lending pools that are semi-permissioned: liquidity provision is fully permissionless, i.e. any participant can freely deposit collateral, but borrowing is fully permissioned as ensured by a Pool Delegate (PD). These PDs are parties with credit and fund management expertise and act as asset managers for their pool. The PDs perform the activities required for the borrowing, i.e. identifying and reaching out to potential borrowers, assessing borrower’s credit worthiness, negotiating loan terms like interest rates and collateral ratios and monitoring of the exposure.
It is important to stress the strong incentive alignment between the PDs and the collective of depositors of the liquidity pool. PDs stake USDC/MPL Balancer Pool Token (BPT) as a protection mechanism which would take full hits until fully wiped out in case of loan defaults, ensuring that the PD has skin in the game as well as ensuring that LPs have a security buffer before their capital would be affected by a default in any form. The current pool cover amounts to ~ USDC 9.7 million which is largely provided by Maven 11. There are concrete plans to increase the pool cover through deposits from 3rd parties that are also stakeholders in the Maple Finance ecosystem soon. Finally, Maple will roll out a single-sided staking option in Q1 2022 where participants will be able to stake MPL tokens and other assets such as ETH or wBTC.
The features outlined above that are unique to Maple Finance allow them to position themselves as the new go-to undercollateralized liquidity provider for institutional borrowers. Because of this, the protocol has attracted many well-known and highly reputable borrowers. The full list of previous borrowers, loan amounts and durations can be found here at the bottom of the page, but the list is composed of Alameda Research, Framework Labs, Amber Group, Folkvang, Nibbio, Orthogonal, Wintermute, MGNR, and more borrowers of similar reputation. For liquidity providers, Maple Finance and the Maven 11 pool grant access to such crypto-native, top-notch borrowers, which cannot be directly dealt with in an equally institutionalised and safeguarded process elsewhere.
To summarize, we think the lending opportunity presented here is appealing for the following reasons:
- The ability to generate an attractive yield on idle stablecoins in the treasury while diversifying treasury assets
- Participation in a lending & borrowing platform where highly reputable borrowers are sourced by a PD with relevant credit and risk management expertise.
Statistics of Maven 11 pool
The following is a summary to provide some context on the performance of the Maven 11 liquidity pool.
- The Maven 11 liquidity pool has grown from $0 TVL to almost $135 million TVL from mid July when we launched the pool.
- We have funded 26 loans thus far, at a total value of over $121 million.
- 4 loans already matured, 22 are active.
- The pool has faced 0 defaults.
The total composition of the pool consists of market making/trading companies as well as yield funds. All of our borrowers are considered as market neutral (i.e. they do not have directional exposure to the market).
The distribution of the borrowers in terms of their size is very wide and ranges from 10M USD to as large as 10B+ USD.
The geographical distribution of the borrowers is also very spread. As we can observe on the pie chart, 1/3rd of our borrowers are registered on the Cayman Islands while the rest is spread rather uniformly among other jurisdictions such as the US, Australia, Hong Kong or UK.
The loan amount per borrower varies from $2 million to as much as $15 million. We are working hard to reduce the pool concentration with a target of maximum 10% of the pool size per borrower. We are close to achieving this goal, however it is worth noting that in the early phase of the project, larger counterparties require relatively larger loans compared to the smaller participants. Once the pool size grows substantially, the borrower base will follow, which will drastically reduce the exposure to a particular counterparty.
As we can observe on the following chart, the interest rates are hovering around the 10% mark. Recently, we have seen an uptick in the rates across the market, therefore our borrowers are paying between 11% to 12.5% at the moment.
We started the pool with the loans set for 90 days to build a credit history with our borrowers and bootstrap the pool in a shielded manner. Currently, our loans in large majority have a tenor of 180 days. We are also exploring longer term (360 days) as well as super short term loans (30 days) to better fit into our borrowers’ needs.
Amount and Duration of Investment
The proposal is for Merit Circle to invest 10,000,000 USDC in the liquidity pool where Maven 11 is a Pool Delegate. This amount of USDC would represent ~0.374% of the value of MC treasury’s assets (inclusive MC token), or ~10.87% of the total stablecoin assets in MC’s treasury. Providing this amount of USDC to the liquidity pool would maintain risk at an appropriate level with negligible risk for the overall financial health of the DAO.
Amount of asset to be invested: 10,000,000 USDC
Minimum lock up period: 90 days
Lenders receive 80% of the interest payments from the borrowers in USDC, while the remaining 20% is distributed in a 50:50 split to the Maple Finance treasury and the PD. On top of that, Maple Finance provides incentives to the lenders in their native governance token MPL which can be used for staking (i.e. providing capital of last resort in case of defaults) and for governance of the protocol and the treasury. In the future, it is also expected that the value capture of the MPL token will expand. The most prominent example of this would be to enable a pro-rata revenue sharing scheme between the Maple Finance protocol and token holders.
To summarize, depositing USDC in the Maven 11 liquidity pool on Maple Finance will generate two different types of yield: yield in USDC, and yield in the MPL governance token.
- USDC yield, which currently hovers around 10% APY. This yield is released on an ongoing basis as the interest payments are paid.
- MPL reward token yield, which currently hovers around 20% APY. These MPL rewards are released on a block by block basis.
This means that at time of writing, the total APY on USDC deposits is roughly 30%.
The APY itself is dependent on 3 factors:
- Interest rates - when the interest rates among the borrowers in the pool are increasing, the USDC part of yield is increasing as well (and vice versa).
- Amount of liquidity in the pool - when the pool increases in size, the rewards in MPL are decreasing proportionally as the number of MPL tokens needs to be distributed among a larger number of participants (and vice versa).
- MPL price - when the price of MPL is increasing, the rewards in MPL are higher in $ terms, effectively increasing the APY (and vice versa).
*The values are indicative up to 6th of January 2022. This chart takes into consideration 3 factors listed above, including different MPL price levels, and is based on the current MPL rewards rate. Note that these numbers used are purely for educational purposes to demonstrate the mechanism for MPL APY; they do not represent actual rates and should not be relied upon as such.
Smart contract risk
Participating in DeFi protocol comes with an inherent risk of smart contract vulnerabilities and bugs. In the case of participation in Maple Finance, a few mitigating factors can be noted. Firstly, the contracts used by Maple Finance have been thoroughly audited by Peckshield, Code Arena and Dedaub (please refer to the Maple Finance Github for more details). Secondly, the contracts are characterized by their relatively low complexity which leads to a low probability of exploits. Third, the utilization rate of funds in the liquidity pool is very high as PDs aim to keep as little cash as possible in the pool in order to consistently lend out the USDC to borrowers and provide yield to our LPs (of course, keeping in mind that proper risk management practices are in place). Therefore, the smart contracts of Maple Finance become highly unattractive targets for hackers as the potential reward is very small.
As Maple Finance facilitates undercollateralized lending, the protocol faces an inherent risk of borrowers defaulting. To mitigate this, Maven 11 together with other protocol participants provide the capital of last resort for our pool. This capital is liquidated first when the default of the borrower occurs, therefore it should be treated as a “junior tranche”. As a result, LP capital - the “senior tranche” - is affected on a pro-rata basis if the junior tranche does not cover the loan amount in full. On top of that, the borrowers are facing legal consequences on their defaults. They are obliged to sign a Master Loan Agreement (enforceable by NYC law) as well as to go through the full KYC process. Lastly, they are facing reputational risk, as a default on Maple Finance will likely translate into a complete drought of credit facilities for the borrower. It is relevant to note that the protocol has faced 0 defaults thus far.
MPL price risk
As mentioned previously, a portion of the yield generated on USDC deposits comes from MPL governance token rewards. This means that price appreciation of these tokens will lead to increased APYs, but naturally also means the same vice versa. The accumulation of these governance tokens will provide Merit Circle with a stake in the Maple Finance project, but the value of these tokens is dependent on the growth and adoption of Maple Finance in the broadest sense.
Liquidity pool growth (decrease in APY)
As the liquidity pool grows in size, the liquidity incentivization through MPL governance tokens rewards will decrease proportionally as the total amount of MPL tokens emitted is distributed over a larger number of participants.
Market conditions (decrease in interest rates on stablecoins)
If market conditions were to deteriorate, a low volatility period where our target borrowers i.e. market makers are less profitable, it would be sensible to assume that the demand for leverage would also decrease. This could lead to a decrease in interest rates, and thus a decrease in the APY for depositors.
The proposal outlined here is to be put through the Merit Circle governance process in order for the community to be able to review the proposal and provide feedback where necessary. If the proposal is approved by the DAOs governance process, the implementation of the proposal should follow these steps:
- On Maple Finance, approve USDC to spend.
- Deposit 10,000,000 USDC to the Maven 11 liquidity pool and receive Maple Pool Tokens (MPT), to be eligible for receiving USDC rewards
- Approve MPT to spend.
- Stake MPT in Maple Finance, to be eligible for receiving MPL governance token rewards (do not confuse with staking for the pool cover, staking MPT is purely to receive MPL rewards and it is a technical requirement).
We want to thank the MC community for considering our proposal, and would love to engage in discussion about our offer. As mentioned previously, we would also be happy to schedule additional AMA sessions or community calls to go over the proposal in-depth and address any questions or concerns!