Written by Erebos, guest contributor from the Maple community
The goal of the article is to shed some light on how MPL is employed on Maple and how it accrues value for its holders. I hope it will allow readers to better grasp the worth of MPL and will open a discussion with the community about ways to improve it further.
How MPL is used in the protocol
Maple’s institutional credit market integrates a governance token, Maple Token (MPL), to serve three vital functions:
- Providing insurance to lending pools through staking
- Distributing a share of the fees generated by the protocol
- Participating in the evolution of the network via governance
We will focus on the first two use cases of MPL listed above, namely Cover Staking and Fee Sharing; both essential to strengthen the protocol and to align incentives.
Fee Sharing 101
Two types of fees exist on Maple: Establishment Fee and Ongoing Fees. These fees are both denominated in the underlying asset of the pool, which is exclusively USDC at this time.
You can think of it as the cost of taking a loan on Maple, currently set at 1% of the loan amount. This fee is equally split between the pool delegate and MPL holders (0.5% - 0.5%).
The portion of establishment fees accrued passively to MPL holders is collected by the Maple Treasury which can then distribute it to token holders. The distribution mechanism of these fees is not activated yet; a governance vote would be needed to make it a reality. It could happen after the imminent release of cover staking on July 22th but feel free to start discussing it in the #governance channel on Discord.
As of July 21, Maple had generated $440,000 in establishment fees (with more loans from the latest rounds being finalized). Half of these fees will potentially be divided among MPL’s total supply.
Protocol parameters are subject to evolve over time to adapt to market forces and get adoption. As a result, the team has recently released the MIP 005 governance proposal with the goal of adjusting the establishment fee based on feedback from borrowers. Fellow mapes are invited to get involved: https://community.maple.finance/t/mip-005-adjust-establishment-fee/70
This refers to fees on the interests generated by Maple’s lending pools and are currently set at 20% of the interest earned. As of right now, the average USDC annual interest paid by borrowers is 10.95% thus ongoing fee is set at 2.19% to be split equally between the pool delegates and MPL stakers (1.095% - 1.095%). The next section of the article will cover extensively how cover staking allows MPL holders to capture half of the ongoing fees.
With an understanding of fees on Maple, it becomes clear that MPL is a productive asset that generates income for its holders in two ways: passively with establishment fees and actively via ongoing fees to stakers.
To illustrate how much fees the protocol can generate and give a better idea of yields for MPL holders, let’s produce an example with the following parameters:
- Yearly loans originated on Maple = $250,000,000
- Establishment fees accrued to MPL holders = 0.5% x $250m = $1,250,000
- Ongoing fees = 1.095% * $250m = $2,737,500
- MPL fully diluted valuation = $67,300,000 (10M total supply x current price)
Those parameters give us an APY for MPL holders (establishment fees alone) of 1.86%, as APY = $1,250,000/ $67.3m. While this passive return might not be immediately impressive to MPL holders and the broader crypto space, Maple is only a couple months old and is targeting a gigantic debt market which could bring billions of loans each year and thus a much higher passive return in the future.
On the other hand, ongoing fees account for more than 2 times the establishment fees but require holders to stake their tokens.
An outside contributor produced a great Excel sheet to understand the flow of fees on Maple and to project earnings for the different stakeholders of the protocol. You can create your own copy and start experimenting with various parameters: MPL Scenario Calculator.
Overview of Cover Staking
Staking is a powerful mechanism that has been around for almost a decade. In the context of Maple’s undercollateralized money market, staking brings two main benefits.
Staking aka cover staking is a security feature for lenders. The staking pool is a buffer in case of defaults from borrowers that is used to reimburse lenders immediately. Borrowers would indeed still be legally required to repay their loan but the process can be lengthy (more on this later in the article). In exchange for taking that risk, stakers earn a portion of the ongoing fees generated by the lending pool they stake.
Because cover staking makes depositing liquidity safer, Maple is able to scale quicker by attracting more capital which will fund more loans. An increase in loans translates into elevated fees for the stakeholders in the network; a virtuous cycle is created.
How staking works
The Maple token (MPL) can be staked alongside USDC into a MPL:USDC 50/50 Balancer pool to receive Balancer liquidity tokens (BPT). After depositing, stakers can choose to stake their BPTs to a specific lending pool based on its profile (strategy, fees, riskiness of the borrowers…). Finally, they receive Pool Cover Tokens (PCT) that need to be staked in the MPL Rewards Contract to generate MPL rewards.
Note that staking on Maple is subject to the same lockup as depositing in lending pools. Stakers are committing their MPL & USDC for 6 months (180 days) so that it provides default protection for the entirety of a lending cycle. They will also need to wait 10 additional days, known as the cooldown period, to be able to withdraw their stake. This is done to avoid a large volume of withdrawals right after the lockup ends.
Stakers are rewarded with 50% of the Ongoing Fees of the lending pool they chose for facing the risk of defaults by borrowers. As mentioned earlier, the average yield received by stakers in the first 2 lending pools (Orthogonal & Maven 11) is 1.095% of the pool size at the moment (10.95% x 20% x 50% *100). Additional MPL rewards will also be distributed to stakers as part of the liquidity mining program.
Moreover, pool delegates are also required to stake a minimum of $100,000 BPT to their pool to make sure they perform their duties consistently.
Cover pool sizing
Another important aspect to consider is the size of the cover pool. As of right now, cover pools are set to target a reserve size between 5 and 7.5% of the lending pools. This implies that lenders won’t lose capital in the short-term as long as defaults in their respective pool don't exceed 7.5% of the total loans.
This reserve size range was chosen based on the risk profile of the first borrowers (Alameda, Amber Group, etc). They are market makers and trading firms with positive cash flows and strong balance sheets so the likelihood of defaults is relatively low for these loans. Other actors, on the contrary, might be much riskier borrowers and thus would require the pool delegate to target a larger staking cover (10-15%) and thus set a higher portion of fees to go to stakers.
Staking expected returns
On to the most interesting part of this article for many: yield! Staking, although not riskless, is an opportunity for MPL holders to generate returns by taking on a critical role on the platform.
While six variables are required to estimate a staking return, here are three of them that are significant and volatile. The current state of these variables on the protocol are indicated in brackets:
- Volume of loans funded ($44,000,000)
- Average loan yield (10.95%)
- Staking reserve size ($2,960,000)
Based on these variables, we can estimate a staking return. We expect that the staking APR will fluctuate between 15-20% APY with a yield composed of USDC and MPL rewards. Keep in mind that staking APR will not stay fixed, particularly because of the size of each staking pool.
The yield is distributed in USDC as it’s extracted from ongoing fees of the pool. On top of the USDC yield, Maple stakers will receive MPL incentives. The community can have a look at the math behind the staking APR mentioned above and even experiment with various variables on a copy of the MPL Staking Rewards Simulator.
For the specifics on staking returns, refer to the dedicated post on the community forum below: https://community.maple.finance/t/mpl-staking-rewards/71
Risks of staking
After covering the potential returns of staking, it’s important to balance it with a disclaimer on the risks of providing insurance in the protocol.
Slashing & Contract risk
The most obvious risk of Maple’s staking mechanism is slashing. In the event of borrowers being unable to pay their interests or principals back, the staking reserve would be liquidated proportionally to the default. A procedure would then be activated against the borrower(s) to recoup the funds.
Stakers also need to consider that, as always in the crypto space, they’re exposed to smart contract risk that could lead to loss of funds. Balancer’s infrastructure is quite battle-tested by now but users should always consider the riskiness of a platform, especially when it’s new and innovative.
Impermanent Loss (IL)
Another consideration for stakers is the existence of impermanent loss which is defined as “the difference between holding tokens in an AMM and holding them in your wallet.” Follow this link to learn more about impermanent loss.
Just like in any other pool on Balancer/Uniswap, stakers are exposed to IL. In other words, the amount of MPL and USDC you’ll receive when you decide to withdraw from the pool will fluctuate based on MPL’s price. The pool constantly rebalances between the two tokens to keep the 50-50 equilibrium hence why you might receive more or less MPL and USDC when unstaking.
This dynamic could lead to a net loss compared to just holding tokens on your wallet. Fortunately, any potential impermanent loss could be offset by staking’s returns.
As a final word on IL, Maple is considering adjusting the weights of the pool to reduce IL. The community will be updated in due time.
Walkthrough of an event of default
Many community members have asked about the standard procedure followed by the network in the case of a default. Maple’s co-founder Sid Powell addressed the question in a recent podcast with Leslie Lamb; you can skip to 29:16 to hear his explanations.
Here is a written and detailed breakdown of what would happen in a default scenario:
- A borrower doesn’t pay his monthly interest or doesn’t return the loan principal
- 5 days window of grace period to repay and discuss with the pool delegate
- Pool delegate triggers a function that liquidates the collateral of the borrower for USDC
- A shortfall is created for the pool as the loan was undercollateralized
- The staking reserve is partially or totally emptied of its content through a single-sided withdrawal of USDC to replenish the lending pool. In other words, USDC is taken from the reserve and MPL is sold to USDC up to the default amount
- If the staking pool doesn’t cover the entire loan default, lenders suffer a loss on a pro rata basis and are awaiting to be compensated through legal action
- Because the borrower signed a master loan agreement, legal enforcement can start to recover the funds
- An existing Cayman Islands foundation set up by Maple is enforcing the loan either through litigation in New-York or AAA arbitration procedures
- A legal resolution is met
Concerns were recently voiced in the community regarding MPL’s price in case of a default. It is a valid consideration as a large default would result in staked MPL being sold on Balancer to USDC and thus impacting its price. The good news is that the staking pool, which is also the main liquidity pool for swapping MPL, is attracting more and more liquidity over time so the selling of MPL in a default scenario will influence MPL’s market price to a lesser and lesser extent over time.
Impact of staking on MPL
Being a major use case for Maple’s token, staking obviously has a large influence on MPL. Because staking pools scale along the volume of loans funded, we can anticipate that this link will only intensify over time.
The more loans issued on the network, the more MPL staked in reserve pools and therefore the less liquid MPL. Without entering speculation territory, it is safe to say that staking creates a virtuous cycle for the token by making MPL productive, creating a security feature for Lenders and by taking MPL off the market.
In order to simulate different scenarios and envision how large staking on Maple could become, a sheet displaying various variables and projections was recently created. Feel free to create a copy and model different outcomes.
The future of MPL and Maple
$57 million in liquidity has already been deposited on Maple in just two months since launch and roughly 75% of it has already been lent out (with the rest being processed as we speak). The protocol is on a trajectory towards exponential growth with the ambition of funding a total of $150m of loans before the end of the year.
As explained in this article, MPL holders directly benefit from the activity of the marketplace through establishment fees (passive return) and staking (active return). Maple will keep scaling without a doubt, at least at the same pace as the crypto industry, by funding the operations of top institutions. MPL’s utility and value will thus become clearer and clearer to the world.
Staking will launch on July 22th so get your MPL and USDC ready! Follow the Guide to Maple Staking for more details on how to participate.