MIP-3 Yield Generation on Maple Finance

Introduction

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.

AMA session

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!

Rationale
Why invest?
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.

For more statistics, please refer to the Dune Analytics dashboard or to the Maple Finance page.

Proposal

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.

Parameters

Amount of asset to be invested: 10,000,000 USDC

Minimum lock up period: 90 days

Rewards

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:

  1. 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).
  2. 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).
  3. 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.

Risks

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.

Default risk

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.

Specification

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:

  1. On Maple Finance, approve USDC to spend.
  2. Deposit 10,000,000 USDC to the Maven 11 liquidity pool and receive Maple Pool Tokens (MPT), to be eligible for receiving USDC rewards
  3. Approve MPT to spend.
  4. 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).

Final thoughts

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!

Additional links:

Merit Circle treasury address

Maple Finance app

Guide to lending on Maple

Maple Finance Dune Dashboard

Maple Finance AML KYC procedure

Master Loan Agreement (MLA)

Maple Finance API docs

Credit Memo

2 Likes

Overall I agree with the proposal and think this is a great way to earn an outsized yield on a portion of the DAO’s stablecoins. I agree with the risk:reward and think it is favorable.
In the previous proposal there was concern about using funds for purposes that benefit the proposer, e.g. using funds to purchase a token that one of the multisigs owns, “pumping their bag” for lack of a better word.

This proposal is clearly mutually beneficial for the DAO as well as Maven11, as mentioned in the proposal a portion of the interest paid goes to the PD (Maven11 in this case). Personally I don’t have a problem with this, but I think to get a broader acceptance from the DAO one amendment could be put in place.

I propose that Maven11 agrees to airdrop a small % of their proceeds generated from the DAO’s liquidity back to the DAO. Nothing excessive but a small amount as a show of good faith. Perhaps 5% only including proceeds from the DAO’s liquidity, excluding any proceeds from other sources of liquidity.

I think this would ensure a healthy relationship, and set a fair precedent as more proposals like this come in.

4 Likes

Can Maven11 disclose what their gain/involvement is with Maple and how it benefits them if this proposal passes?

The site shows a current yield of 35%, aggregate APY. Back of the envelope calculation is 50% of 20% of 35%, split between Maple Finance/PD.

So that’s a gain of $350k on a yearly basis ($10MM x 0.35 x 0.5 x 0.2) as a PD for Maven11. On their website, it shows they are also an investor in Maple Finance.

2 Likes

Hey Maximus,

Thank you for your question. We are not receiving part of the APY as you suggested.
We receive 10% of interest payments and half of the establishment fee (50% of 0.5% = 0.25%).
The APY displayed will be purely for Merit Circle - you will receive 80% of interest rates and incentivization in MPL token. The current APY consists of 9.8% of USDC interest rates (80% of total) and 25.2% in MPL incentivization.

We are an investor in Maple Finance protocol, therefore we decided to actively participate in it as a Pool Delegate. However, the PD compensation has nothing to do with it and it is the same for all current and future PDs.

2 Likes

Sad Cat Cartel Response to Maven 11

We welcome Maven 11’s proposal to utilize a portion of the stable-coins the Merit Circle treasury currently has sat idle. While it is vital these funds are put to use in earning yield to off-set inflation as well as strengthening the DAO treasury, it must be done in such a way that maximizes yield whilst minimizing risk.

We are grateful that Maven 11 has provided a comprehensive proposal which provides a lot of key information regarding the Maple Finance protocol and the benefit to be gained from using it. There are some areas where we would appreciate clarification or expansion, especially in areas regarding transparency about what Maven 11 stands to gain and the benefit of that to the Merit Circle DAO.

We have highlighted some quotes from the proposal below, with a respective comment/question. We look forward to hearing responses from Maven 11.

“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.”

Is there any information on who this external hire is?

“We, Maven 11, act as a Pool Delegate and manage one of the four pools on Maple Finance.”

By contributing $10,000,000 to the Maven 11 pool, we would be increasing the pool TVL, thus allowing Maven 11 to extract direct value from the utilization of the Merit Circle Treasury. It is clear how the Merit Circle Treasury investing in this pool would benefit Maven 11.

Aside from the provided APY, is there any benefit to the Merit Circle DAO for choosing this? For instance we could use another pool delegate or even another protocol. How else does Maven 11 provide value-add to the Merit Circle DAO in return for the DAO funds directly benefiting their Maple Finance pool?

“The main purpose of utilizing a portion of stable-coins 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.”

There are countless options for stable-coin yield farming across DeFi. This also isn’t something restricted to the Ethereum blockchain. There are many options for earning stable-coin yield on Solana, Luna, Cosmos and other Layer 1s which have equal, or lower, risk that currently yield a higher APY. A number of these options are also considered delta-neutral (which Maple Finance isn’t). Even on Ethereum, strategies utilizing KP3R or Alpha Homora V2 provide a higher APY than the approximate 30% APY given for this strategy.

Have Maven 11 considered any alternatives to Maple Finance? Would Maven 11 be able to provide any comparisons between Maple Finance and other popular stable-coin yield earning platforms which would highlight why they believe Maple Finance to be the better choice?

At what point will the decision be made to continue or pause the participation (after the 90 days have passed) in the proposed yield product?

“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.”

A considerable portion (roughly 2/3rd) of the APY is derived from the MPL governance token rewards. Price volatility to the upside would be welcomed as it would result in an increase in APY, however price volatility to the downside also needs to be considered.

One reason for a price decrease could be due to the selling-off of MPL yield from earners or investors. Can Maven 11 provide any analytics for how much MPL yield has been sold off, or could be sold off in the near future? If MPL yield is currently being accumulated by funds, a large sell off could cause a sudden price decrease of the MPL token, thus negatively impacting our expected APY.

If the price of the MPL governance token dramatically decreases, it is a possibility our APY could be reduced purely to the interest payments from the borrowers. This would likely make the approximate 10% annual yield not worth the risks involved with using the Maple Finance platform, especially with the possibility of borrowers defaulting on loans. In such a case, another DAO proposal could be suggested to withdraw funds from the pool and redeploy elsewhere.

The smart contract risk appears fairly low due to the high utilization of funds and number of audits obtained, as explained in the proposal.

The default risk is unique to the Maple Finance protocol as not many other DeFi lending/borrowing platforms provide under-collateralized loans. As previously mentioned, while the price of the MPL token remains at a high enough level to provide an attractive APY, the default risk (as cushioned through the Master Loan Agreement) can be accepted. However if this changes, and APY decreases, it is likely this default risk would no longer be acceptable.

One final comment on risk would be to ensure that any approval of USDC spend for the Maple Finance protocol would be walled off from the Merit Circle DAO treasury by ensuring a separate, unrelated, multi-sig wallet is used.

The MPL Governance Token Rewards

It is not immediately clear from the proposal what will happen to the MPL token rewards. We believe it to be in the DAO’s best interest to not start building a spot position in the MPL token. The purpose of this strategy is to increase the value of the Merit Circle stable-coin treasury, not to take long positions in low-cap coins.

This would mean selling off the MPL token rewards for USDC once they are received, irrespective of the current MPL price. These funds can then either be added back to the treasury, or they could be used for Merit Circle token buybacks.

Addition to Current Proposal

NFTs have become increasingly popular within the cryptocurrency community and we believe providing NFTs as a reward for participating in the voting system would be an excellent way of connecting with the Merit Circle community and would likely create a positive feedback loop with regards to engaging with the voting system.

As an act of goodwill and mutual trust, we would like to propose that the establishment fee is used to create/purchase, or otherwise obtain, NFTs which are either Merit Circle themed or are related to games which have partnered with Merit Circle. These would then be distributed or airdropped to voting participants (both for and against) involved in this proposal.


Signed with left paw,
Fluff Meowson

7 Likes

Thanks Maven11 for setting up this proposal.
I think we all agree on looking for alternatives to maximize the DOA´s return on assets
However, I do think this proposal is complex and risky, to get something close to 20% APY.

There are other protocols around that provide similar APY with much less risk. For instance, Anchor Protocol on Terra has been paying aprox. 20% for months on USDT, with minimum risk.

Agree on most of SadCatCartel comments.

Best regards,

1 Like

Am I the only person who really does not like this proposal or are people afraid to speak up.
Willing to listen further my issues with this are the following:

  1. Why are we investing in “Corporate Credit on an undercollaterlized basis” ? This is highly risky and the reward risk ratio in my view is not worth the investment.
  2. Borrower’s comprise of 86% Market Makers which implies they are trading firms I assume playing in the options market in traditional finance. Please correct me if I am wrong.
  3. a third of the borrowers are derived from the Cayman Islands which again implies risk in this arena.
  4. Only 4 loans have reached maturity and have not defaulted not exactly a record that has depth.
  5. With regard to the default risk I am not convinced the capital of last resort as a “junior tranche” will be of any comfort, I am willing to hear further details on this with respect to how the “Senior tranche” plans to cover potential default. Master Loan agreements enforceable by NYC laws seem of little consequence to businesses located in the Cayman Islands.

Personally whilst a decentralized outfit I am not in favor of supporting any legacy companies outside of crypto. I believe the opportunity cost of placing $10M here is not worth the risk with corporate debt defaults on the rise even though from investigation it seems to be around the 5-8% mark not much information is available to me for market maker trading firm defaults in corporate debt.

Personally whilst high risk i would rather see the funds deployed in ten different gaming companies who are offering seed funding in the PTE space and have the decks distributed to the DAO for perusal. This is obviously potentially even higher risk than corporate debt but $1M to 10 different projects to potentially return 1000’s of % seems a better fit for us as a DAO. I have wanted to put this forward before this proposal. E.g. imagine investing $1M at $1 per token in the next Illuvium. Not only do we support the crypto community but the return is far in excess and also serves to support our scholars in developing revenue and potentially finding others to join Merit Circle.

For this reason as it stands I find it difficult to support this proposal. Any feedback welcomed.

3 Likes

Terra itself is a huge risk. Maple has only whitelisted borrowers and lenders which mitigate huge risks of retail who might not know what they even doing and in harsh market enviroment can cause serious troubles to the liquidation mechanisms. Terra has proven to not be able to handle those in harsh market enviroment. Their team had manually to intervent their own system. This is unacceptable.

2 Likes

As far as Im aware they already placed 2.5mln in a seeds for PTE games it was proposed in the MIP1.

That’s great. I want to get closer to what is happening as I get more time on my hands. I believe we should be doing more in this regard and have pitch decks available for use to peruse as a DAO.

Response to Sad Cat Cartel (meowww)

We highly value the engagement of the community and willingness to discuss, especially because you raised some important questions that could have been addressed more in depth in our original proposal, so that everybody feels comfortable proceeding further.

Maven 11, seed investor in both Merit Circle and Maple Finance, has mutual interest for both projects to succeed. We always try to take a proactive approach in our ventures (yes, value addoooor :cowboy_hat_face:), therefore when we invested in Maple Finance earlier this year, we decided that we would like to open up a lending business within our fund and start our role as a Pool Delegate on the platform to take an active role in the ecosystem and expand beyond equity investments. For context, this is also what happened in traditional finance when private equity investors ramped up private debt arms as well. We took this responsibility seriously because as a PD we are also providing the largest share of the pool cover (currently around $3M) and we are also one of the largest LPs in our pool. This way, our interest is perfectly aligned from all angles. As a PD, it’s in our best interest to perform the DD and credit risk underwriting process in a flawless manner as our capital and reputation is directly at stake. With our credit decisions we are potentially risking a loss of $3M (and a chunk of LP capital if the junior tranche is not enough to cover it), not mentioning a potential price decline in MPL (which we hold) and general outflow of lenders from the protocol. As you can see, we are fully aware about the potential impact of our PD activity which leads us to your first question:

Is there any information on who this external hire is?

The hire has a senior position in a large European commercial bank in their leveraged finance department with 10 years experience in investment banking and focus on loan origination and credit risk management. He is involved in all discussions with both borrowers and major LPs and you’d get to meet him in an AMA session together with the rest of the team. Furthermore, he is an active DeFi participant and also involved in other protocols like PoolTogether (here’s a recent interview for more color).

By contributing $10,000,000 to the Maven 11 pool, we would be increasing the pool TVL, thus allowing Maven 11 to extract direct value from the utilization of the Merit Circle Treasury. It is clear how the Merit Circle Treasury investing in this pool would benefit Maven 11.

We would like to discuss this point extensively because we feel like the “extraction of direct value” by Maven 11 is overstated in the comments. Let’s take a look at the numbers:

Assumptions:

  1. MC deposits 10M USDC for 90 days
  2. Maven 11 lends out 10M USDC to e.g. Amber Group for 90 days with conservatively assumed 10% interest rate (annualised) and 0.5% establishment fee (one-off, fixed value)

Revenue calculations for Maven 11 from PD activity:

  1. We receive half of the establishment fee = (0.5%/2) * 10M = 25,000 USDC
  2. We receive 10% of interest payments. There are 3 interest payments over a 90 day period. Therefore, we effectively receive 0.1*(10%/4) * 10M = 25,000 USDC

In total, we are expected to make 50,000 USDC over the next 3 months from 10M USDC liquidity provided by Merit Circle. To be fair, this compensation given our operating expenses (4 FTE working on Maple) and a risk of potentially losing $3M with our pool cover, does not seem to be exaggerated by any means. In fact, we treat our PD role more as a support for Maple Finance than the main source of income. We believe that our INDIRECT benefits from the success of both projects are much greater than making 50,000 USDC from it, therefore it’s in our best interest to provide synergies that will benefit all parties involved. That is why we would like to oppose the view expressed in some of the comments where Maven 11 is trying to make “a big buck” from this proposal as clearly that is not the case.

Aside from the provided APY, is there any benefit to the Merit Circle DAO for choosing this? For instance we could use another pool delegate or even another protocol. How else does Maven 11 provide value-add to the Merit Circle DAO in return for the DAO funds directly benefiting their Maple Finance pool?

Besides the above mentioned reasons for choosing Maple Finance, we believe that dedicating roughly 10% of the USDC treasury provides a number of benefits to Merit Circle.

First of all, there is a solid base of around 10% APY distributed in USDC which is not the case for many of the other protocols. Furthermore, Maple Finance will see demand for its product irrespective of the conditions on the general crypto market. The demand for borrowing and lending will always be needed as the core businesses of market makers and trading companies are dependent on the leverage and 0% collateral model. We also believe that exposure to the largest and most respectable borrowers in the space should not be underestimated. These firms are extremely profitable and hold incredibly strong balance sheets. As previously mentioned, their revenue-making is not dependent on adverse market conditions, therefore their ability to generate profit is not limited to “up only” like with the majority of other protocols. As you already correctly mentioned, the smart contract risk is much lower for Maple than for other protocols. Why? With the utilization of the pool at around 90%, only 10% of funds are being held in the smart contract which makes it a rather economically uninteresting choice for a potential hacker. On top of that, the quality of the code has been tested by multiple reputable parties and did not reveal major weaknesses. Finally and most importantly, as previously stressed, Maven 11 is a trusted party for both of the protocols. It is in our best interest to serve both of the DAOs in a way that benefits both parties with maximum efficiency. No other pool delegate nor protocol can express the same level of mutual trust and involvement at this stage.

At what point will the decision be made to continue or pause the participation (after the 90 days have passed) in the proposed yield product?

The protocol locks the funds for 90 days after which Merit Circle can request a withdrawal and enter the so-called “cooldown period” for 10 days. After the 10 days, Merit Circle has 48h to withdraw their funds (yield is available on a continuous basis). We do not have a strong opinion on the length of participation. We think that the performance should be evaluated after the initial 90 days and extended for another 90 days (this time without a lock up) if the yield is satisfying given the general performance of the market and other stablecoin yield farms with comparable risk profile. To sum up, 90 days + 10 days cool down period is a minimum, however if the performance will be in line with the expectations, we would be more than happy to continue with the partnership.

If the price of the MPL governance token dramatically decreases, it is a possibility our APY could be reduced purely to the interest payments from the borrowers. This would likely make the approximate 10% annual yield not worth the risks involved with using the Maple Finance platform, especially with the possibility of borrowers defaulting on loans. In such a case, another DAO proposal could be suggested to withdraw funds from the pool and redeploy elsewhere.

To be fair, this statement is applicable to almost all other protocols in the space. Turning this statement around, if MPL price goes 10x from here which given its low market cap ( ~ $80M), CEX listings and aspiration to become a DeFi blue chip, sounds a bit more probable than dropping to 0$. Of course, it is just speculation, therefore let’s focus on the present situation and tremendous growth of the protocol in recent months. APY since inception is hovering around the 30% mark and there is no fundamental reason to believe in such an extremely bearish scenario.

The default risk is unique to the Maple Finance protocol as not many other DeFi lending/borrowing platforms provide under-collateralized loans. As previously mentioned, while the price of the MPL token remains at a high enough level to provide an attractive APY, the default risk (as cushioned through the Master Loan Agreement) can be accepted. However if this changes, and APY decreases, it is likely this default risk would no longer be acceptable.

The default risk is unique to Maple Finance because we are solving an issue that the majority of lending protocols cannot solve. Market Makers will not use overcollateralized loans because their business relies on very high utilization of capital combined with the leverage and market neutral approach which makes it highly inconvenient to post any collateral. Keep in mind that the current largest exposure to a single borrower (Amber Group) is 15M USDC. Given the pool cover size of roughly 10M USDC and 135M USDC pool size, the lenders would be affected pro-rata with only (15M-10M) 5M loss on 135M pool which is equal to a 3.7% loss on the capital provided (excl. accumulated rewards). Not that scary given the APY, right? It also becomes less scary if we understand that the reputational risk of e.g. Amber not repaying 15M USDC given their size and performance far outweighs potential benefits of default.

As an act of goodwill and mutual trust, we would like to propose that the establishment fee is used to create/purchase, or otherwise obtain, NFTs which are either Merit Circle themed or are related to games which have partnered with Merit Circle. These would then be distributed or airdropped to voting participants (both for and against) involved in this proposal.

We like the addition to the current proposal that was signaled by Sir Fluff Meowson. However, all of the lenders on Maple Finance enjoy the same benefits from the protocol with no exception to the rule. This holds for all current and future pools on Maple as well. However, due to our role as a seed investor in Merit Circle we want to be accommodating to the DAOs concerns and also thank you for the engagement and questions sparked by this proposal. We are happy to sponsor 25 Merit Circle NFTs (Q1 2022) that can be distributed to community members (in the form of a raffle) that will attend the AMA session with Maven 11 and Maple Finance coming Thursday at 5pm UTC and vote for or against the proposal.

Finally, we see our contribution as a reward for community engagement rather than the payment of establishment fees. Maple Finance will be putting to vote their contribution to the NFT raffle but we are confident that it will be warmly welcomed by their community as well.

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Response to Maven 11

Meow.

The Sad Cat Cartel thanks Maven 11 for the thorough response given to our questions regarding their proposal. Clearly Maple Finance is something Maven 11 is very knowledgeable about and considers a future (if not current) blue chip in the DeFi space. We are especially grateful for explaining what Maven 11, Merit Circle and Maple Finance stand to gain from the $10m deposit.

We’re happy to see the proposal for Merit Circle NFTs was accepted with 25 NFTs to be raffled off to voters who participate and attend the upcoming Maven 11 and Maple Finance AMA. We believe rewarding the community for engaging with the DAO proposals will be greatly beneficial in the short and long term and will continue to foster an inclusive Merit Circle community.

Overall this has been a useful topic of education for the Sad Cat Cartel and the wider Merit Circle community regarding Maple Finance. We are satisfied with Maven 11’s response and hope the Merit Circle community is as well.

Signed with left paw,
Fluff Meowson

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Hey Doom,

Thank you for expressing your concerns.

Why are we investing in “Corporate Credit on an undercollaterlized basis” ? This is highly risky and the reward risk ratio in my view is not worth the investment.

As expressed in the response to the Sad Cat Cartel, we actually believe that the risks of Maple Finance are well balanced and that the reward/risk ratio is favourable for Merit Circle. Please refer to our response there.

Borrower’s comprise of 86% Market Makers which implies they are trading firms I assume playing in the options market in traditional finance. Please correct me if I am wrong.

All of our borrowers are crypto native - they do not engage in activities on traditional markets. All of them are market neutral. We see that as an asset rather than a risk.

A third of the borrowers are derived from the Cayman Islands which again implies risk in this arena

All of the borrowers are fully KYC’d and compliant. It is very common to register on Cayman Islands for crypto related companies these days. We believe that we are doing everything possible to ensure that the procedures that we have in place right now are sufficient to enforce the repayments of the loans. Finally, let’s no forget about the reputational aspect - every late repayment or default is visible on chain which puts a pressure on the borrowers to fulfil their obligations.

Only 4 loans have reached maturity and have not defaulted not exactly a record that has depth.

While 4 loans have reached maturity in our pool (we started in mid July), a total of 13 loans has been repaid across all pools since inception.

With regard to the default risk I am not convinced the capital of last resort as a “junior tranche” will be of any comfort, I am willing to hear further details on this with respect to how the “Senior tranche” plans to cover potential default. Master Loan agreements enforceable by NYC laws seem of little consequence to businesses located in the Cayman Islands.

I think maybe you misunderstood the concept of the junior tranche aka the pool cover. Pool cover takes a first hit during the default. Keep in mind that the current largest exposure to a single borrower (Amber Group) is 15M USDC. Given the pool cover size of roughly 10M USDC and 135M USDC pool size, the lenders would be affected pro-rata with only (15M-10M) 5M loss on 135M pool which is equal to a 3.7% loss on the capital provided (excl. accumulated rewards).

Personally whilst high risk i would rather see the funds deployed in ten different gaming companies who are offering seed funding in the PTE space and have the decks distributed to the DAO for perusal. This is obviously potentially even higher risk than corporate debt but $1M to 10 different projects to potentially return 1000’s of % seems a better fit for us as a DAO.

We understand your point here but Maple Finance offers completely different reward/risk profile than your description. Maple is a stablecoin farm with credit risk assessment and KYC’d borrowers that will see demand for its product in bull and bear market. Therefore, we believe that dedicating roughly 10% of stablecoins from the treasury towards moderate risk yield farm will be beneficial to Merit Circle.

We are happy to invite you to our upcoming AMA on Thursday 5pm UTC :wink:

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Appreciate your detailed response. I will try to attend AMA.

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Thank you for the very detailed proposal and the excellent responses Maven11

In general we believe it is a great idea to put utilize 10% of the USDC in the treasury to gain yield.

We would however like to see a comparison of maple finance vs other stable-coin yield earning platforms. Can you provide such an overview?

I appreciate the professionalism and time invested in this proposal. My concern is likely steeped in general ignorance, but I will share in nonetheless. I personally invested in Merit Circle to gain broad exposure to the metaverse. While this proposal does sound interesting, I personally would prefer to see the MC DAO funds be used in metaverse and P2E related ventures.

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Hey Popper,

Please keep in mind that the main goal of the DAO is to invest into P2E/metaverse related projects. As you can imagine there is not enough interesting opportunities right now to deploy a $100M treasury. This proposal is solely meant to use a part of the treasury to yield while we are searching for interesting games and opportunities.

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We have > $40M which can be deployed besides of Maple. Any interesting opportunity will separately be voted on. We are exploring opportunities almost daily but so far nothing that comes close to the 30% yield on USDC.

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Thank you Mark for that information.

I think it is a great idea to deploy the funds and earn yield. I trust that you have evaluated options and decided maple is the best fit.

tir. 23. nov. 2021 17.30 skrev MC_MARK via Merit Circle <merit@discoursemail.com>:

It is an excellent proposal, I fully accompany it. It helps the assets that follow the dollar do not deteriorate due to inflation and earn a yield on a protocol that has more than proven its worth. As time goes by, and there are moments in which the assets remain on standby in the treasury, a strategy should be created with different protocols, depending on the asset class, so that these tokens generate a yield in safe conditions . Other protocols that should be considered: CURVE, CONVEX, YEARN.

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