M^0 Overview

PDF | EPUB

Disclaimer

The information contained in this analysis is provided for general informational purposes only and is not intended to be, and should not be relied upon as, legal, financial, or professional advice. Steakhouse Financial assumes no liability or responsibility for any errors or omissions in the content of this assessment or for any actions taken based on the information provided herein.

This analysis is based on the information available at the time of its preparation and is subject to change without notice. The assessment is not a guarantee of future performance or results, and past performance is not necessarily indicative of future results.

You should seek professional advice from a qualified attorney or financial advisor before making any decisions or taking any actions based on the information contained in this assessment. Steakhouse Financial disclaims all liability and responsibility for any actions taken or not taken in reliance on the information contained in this analysis.

1. M^0 Structural Analysis

1.1. What is M^0?

M^0 seeks to credibly represent the value of $1 through mechanisms unique to digital assets. The software protocol combines smart contracts on Ethereum (for now) with robust off-chain standards to create a stable, fungible digital value representation called $M. 

In essence, the protocol mints a stable digital asset, soft-pegged to $1, backed by liquid off-chain collateral. User guarantees are made through automatic enforcement of smart contract rules and legal enforcement of user claims to off-chain collateral. Specific actors are responsible for managing on-chain $M supply, while others verify the existence of the “real world” collateral. The protocol’s governance is managed through a system called Two Token Governor (TTG).

In this way, the software can operate without concentrating trust assumptions in a single counterparty and therefore aims to mitigate counterparty risk exposure in relation to collateral custody. 

1.2. Protocol Actors

Minters: Institutions authorized by governance to generate and manage the supply of $M. They interact with the M^0 protocol to propose and mint $M based on their verified Eligible Collateral, which is currently US Treasuries with a maturity of 90 days or less.

Validators: Independent entities responsible for verifying the presence and sufficiency of off-chain collateral held by Minters. Validators provide the necessary on-chain confirmations that allow Minters to mint $M and ensure the integrity of the protocol.

1.3. Earners and Wrapped $M

1.3.1. Earners

Certain addresses approved by Governance as Earners receive yield on their $M tokens at the designated Earner Rate. Yields are earned through rebasing, where Earners’ $M balance will increase over time. The Earner Rate is strategically aligned with the US Federal Funds rate to maintain competitiveness and incentivize Earners to hold $M. The Earner Rate serves as a dynamic tool for price stability. When the price of $M exceeds $1, governance can lower the Earner Rate, encouraging Earners to seek alternative yield sources and sell M, which helps stabilize the price. Conversely, if the price drops below $1, the TTG can increase the rate, making it more attractive to hold or purchase $M, thereby bolstering demand. 

Earners are not necessarily intended to be the end user of $M, but rather the highest layer of a protocol, product, or organization using $M that can then distribute the earnings on to others.

1.3.2. Smart $M

The $M Smart Wrapper is an upgradable DeFi focused extension of $M. It allows for $M to be integrated more seamlessly into various DeFi and CeFi platforms, enhancing the functionality and flexibility of $M. Instead of rebasing directly to the address holding $M, the Smart $M adds a claim function to redirect the earnings away from an address or smart contract holding $M to a separate address. This will permit DeFi smart contracts to use $M without forgoing the yield that would have otherwise accrued into the smart contract. Additionally, Smart $M is intended to maintain the $1.00 denomination of $M to avoid complications with DeFi integrations.

Multiple audits by Chainsecurity, Three Sigma, and Kirill Fedoseev have been conducted and further documentation can be found on the M^0 Github.

1.4. Issuance & Redemption Process

The issuance and redemption process for $M involves several steps and interactions between Minters, Validators, and the protocol itself. The core operating condition of the protocol is to make sure all of the $M in existence is backed by an equivalent or greater amount of real world collateral. To issue $M, A Minter must first secure a sufficient amount of approved collateral, currently short-term U.S. Treasury bills, in an approved off-chain custody solution. The Minter then interacts with a Validator, who verifies that the Minter has the required Eligible Collateral. The Validator provides a signed attestation confirming this verification.

The Minter then submits this signed attestation to the M^0 protocol, updating the protocol with the verified collateral information. With the verified collateral in place, the Minter can propose the minting of a specific amount of M, ensuring that the proposed amount is within the limits of their available collateral. If there are no objections from the protocol or other participants, the Minter finalizes the minting request and the specified amount of $M is created. Once minted, the $M tokens can be sold or distributed by the Minter to counterparties in the market.

To redeem $M, the steps are much the same, but in reverse. A Minter must first obtain an existing amount of $M from the market by repurchasing it from counterparties. The Minter then interacts with the protocol to burn these tokens, removing them from circulation. After burning the tokens, the Minter submits a request to retrieve the corresponding amount of collateral that was initially locked. The protocol validates this request against its rules and, if approved, issues a retrieval identifier. The Minter presents the retrieval identifier to the SPV Operator of the specific custody solution, who then releases the appropriate amount of collateral back to the Minter. Finally, the Minter must engage a Validator to verify the updated off-chain collateral balance, ensuring it reflects the recent redemption. The Validator then provides a signature for the removal of the retrieval identifier, after which the Minter can update the collateral in the protocol and remove the retrieval ID.  

1.5. M^0 Governance

M^0 is governed by the Two Token Governor (TTG) system, which allows token holders to vote on proposals and manage various aspects of the protocol. TTG incentivizes active participation by penalizing those who do not vote. The governance system operates with two types of utility tokens: POWER and ZERO, that can affect protocol parameters, including permissioning of Minters and Validators, adjustments to fees, and other critical governance decisions.

“POWER tokens are the primary voting tokens within the TTG system. Holders use these tokens to participate in governance decisions, and in return, they earn ZERO tokens as a reward for their active involvement. These tokens have a built-in inflation mechanism which is designed to incentivize active participation in governance by rewarding voters with newly minted POWER tokens. This inflationary mechanism dilutes the influence of inactive holders, encouraging continuous involvement in the decision-making process. The inflation rate balances the need to reward participants with maintaining the protocol's long-term stability. 

ZERO tokens are held by more passive governors who typically vote only on significant protocol changes. ZERO holders have a crucial role in safeguarding the system and possess the ability to reset the supply of POWER tokens, effectively removing voting rights from POWER holders if necessary.”

1.6. Epochs

The M^0 protocol operates on a 30-day cycle known as an epoch, which is split into two 15-day periods:

“Transfer Epoch (First 15 Days): During this period, transfers and delegation of POWER tokens are allowed, but voting is not. Holders can move their balances, reassign delegations, and purchase POWER tokens through auctions (explained later)

Voting Epoch (Second 15 Days): This period is dedicated to voting on Standard Proposals. During the Voting Epoch, transfers and delegation of POWER tokens are disabled to ensure accurate accounting for voting and inflation.”

Proposals are collected during one 15-day period and voted on in the next 15-day Voting Epoch. If a proposal passes, it will be executed in the following Transfer Epoch.

‍

1.7. Proposals

The TTG model allows for three types of proposals: Standard Proposals, POWER Threshold Proposals, and ZERO Threshold Proposals. Each proposal type serves different purposes and has distinct requirements for passing and execution.

1.7.1. Standard Proposals

“Voting Mechanism: Standard Proposals are decided by a simple majority vote among POWER token holders. They do not require a threshold percentage of yes votes to pass.

Example: If 100 POWER tokens participate in a vote, a proposal will pass if 51 vote yes and 49 vote no. If the votes are split 50/50, the proposal will fail.

Participation Requirement: POWER holders are required to participate in Standard Proposal votes. Failure to do so leads to dilution of their voting power and forfeiture of any ZERO rewards they would have earned.”

1.7.2. POWER Threshold Proposals

“Voting Mechanism: POWER Threshold Proposals are similar to Standard Proposals but require a specific percentage of yes votes from the total POWER token supply to pass. That threshold is determined by the POWER token holders and is currently set to 65%

Immediate Execution: Unlike Standard Proposals, which follow the protocol's epoch schedule, POWER Threshold Proposals are votable and executable immediately upon reaching the required yes threshold.

Use Case: These proposals are typically used in urgent or emergency situations where immediate action is necessary. If the required threshold is not met before the proposal expires, it cannot be executed.”

1.7.3. ZERO Threshold Proposals

“Voting Mechanism: ZERO Threshold Proposals are used for specific actions, including the Reset function, toggling CASH between WETH and M, and setting the thresholds for POWER and ZERO votes. These proposals require a yes threshold of votes from ZERO token holders.

Reset Function: The Reset function is a unique feature that allows ZERO holders to change the system’s governor (i.e., the POWER token contract) by replacing it with a new one. This can be used to address issues with the current POWER holders' voting behavior or in cases of system corruption.

Execution: ZERO Threshold Proposals are immediately executable once the required yes threshold is met. If a Reset is executed during a Voting Epoch, all active proposals under the old governor are canceled.”

Standard Proposals allow for routine governance decisions with mandatory participation from POWER holders. POWER Threshold Proposals provide a way to handle urgent matters requiring immediate action. Finally, ZERO Threshold Proposals offer a safeguard mechanism through the Reset function, enabling ZERO holders to intervene if necessary. Together, these proposal types ensure that the M^0 protocol remains adaptable, secure, and responsive to both ordinary and extraordinary governance needs.

1.8. Governance-Controlled Parameters

Governance can control many parameters of the protocol, including:

Collateral: Additional assets can be approved by governance that can be locked in custody solutions to generate an on-chain Collateral Value for minting $M. Initially, 30-90 day U.S. Government T-bills are expected to serve as Eligible Collateral.

Mint Ratio: The proportion of a $M a Minter can create relative to its verified on-chain Collateral Value. This ratio is crucial for maintaining the protocol’s stability and is set by governance through the TTG system.

Minter Rate: The annual percentage fee charged to Minters on their outstanding $M balance, which is payable to the protocol to support the Earner Rate. This rate is also adjustable by governance and can impact the overall supply and demand dynamics of $M.

Earner Rate: The annual percentage paid to Approved Earners for holding $M.

Penalty Rate: The fixed percentage penalty applied to Minters who fail to update their collateral in time or become undercollateralized. Governance controls this parameter to enforce compliance and ensure protocol security.

Update Collateral Interval: The required timeframe within which Minters must update their collateral status. Governance sets this interval to maintain timely and accurate information within the protocol.

Minter Freeze Time: The period during which a Minter is prevented from minting. Validators can trigger this freeze, and it can be reset multiple times if necessary.

1.9. Adopted Guidance, Off-Chain Actors, and Components

M^0 has produced an adopted guidance framework that outlines the core rules of engagement that exist outside of the enforceable domain of the protocol’s smart contracts. Additionally, as defined in the Adopted Guidance, a variety of off-chain actors play into the day to day operations of M^0. Key concepts from the Adopted Guidance include: 

Eligible Collateral: The assets approved by governance that can be locked in custody solutions to generate an on-chain Collateral Value for minting $M.

Eligible Custody Solution: The legal and operational framework within which Eligible Collateral is held. Governance-approved structures, such as orphaned Special Purpose Vehicles in specific jurisdictions, and actors designated to interact with those SPVs.

Eligibility Criteria and Obligations of Protocol Actors: The necessary requirements and responsibilities for entities to be approved as protocol actors: SPV Operators, Validators, BD Minters, and Minters.

Mandatory Contracts: Required agreements between protocol actors to ensure collateral protection and enforceability of the protocol’s rules, improving defense against collusion of malicious actors. These contracts are intended for scenarios without robust on-chain equivalents, though they may become redundant with future tokenization advancements. 

Minter Wind Down Procedures: The process which Minters must follow if removed from the Minter list. They have a 90-day grace period to wind down their operations cooperatively. Failure to do so results in forfeiture of the Administrative Buffer and remaining off-chain value, which will be used to finance the wind-down process.

Administrative Buffer: A reserve of value that Minters may be required to maintain within the custody solution, intended to cover the costs of winding down the Minter’s operations in case of inactivity or incapacitation. Initially, this buffer is set at $25,000.

1.10. Delegation

Both POWER and ZERO owners may delegate their voting power to any Ethereum address during the Transfer Epoch. Delegated POWER will retain its inflation in the owner address, while ZERO rewards will be claimable by the delegate address.

Owning ZERO does not earn the owner rewards aside from $M generated by the protocol fees, and thus delegation does not have any impact on the owner outside of transferring voting power. ZERO does earn fees from Proposal Fees on failed Standard Proposals, the payments from POWER token auctions and a portion of Minter Rate and Penalty Rate charges to Minters.

Delegation snapshots are taken at the beginning of the epoch and close at the end of the epoch, and the values in the snapshots are subject to change until the epoch closes. Both POWER and ZERO follow ERC20 standard and holders must call the Delegate method and provide the address they wish to delegate to. For holders that do not actively Delegate, the default delegation is set to the address which owns the tokens.

2. Legal Overview

The M^0 protocol’s service providers and legal documentation play a crucial role in supporting the stability, transparency, and governance of its on-chain infrastructure. While the protocol's smart contracts handle the enforceable mechanics of $M creation and collateral management, the legal documents provide a framework for roles, responsibilities, and actions not easily codified on-chain. By defining compliance standards, operational agreements, and mandatory contractual obligations, these documents bridge gaps between decentralized protocol functions and the real-world financial practices of the service providers.

While Validators are asked to confirm all necessary agreements are in place, there is no designated team within the protocol to perform in-depth reviews and approve legal documents for every Minter set-up. Instead, the agreements below are posted publicly to allow the community to fully review each structure. 

2.1. Key Parties

One of the main reservations behind the use of off-chain collateral has always been the inability to independently verify the reserves and ensure the quality of service providers. Solutions such as “Proof of Reserves” or attestations from auditing firms generally still rely on a trust assumption that poses key counterparty exposure vulnerabilities. The innovation behind M^0’s separate roles is to provide market incentives for actors to independently serve the $M protocol and verify the robustness of the collateral underpinning $M. In a real sense, this key distinction is the reason why $M breaks the ‘skeumorphism’ of existing stablecoins, as it proposes from the ground-up a cryptoeconomic incentive model to align intended behaviors between users of the protocol.

2.1.1. Minter

An entity that generates and manages $M supply within the protocol. In order to maximize resilience and bankruptcy remotes, it may conduct no other business and have no direct employees. The Minter entity is controlled by the BD Minter.

2.1.2. BD Minter

A Business Development Minter is an entity responsible for managing the operational obligations of a Minter. It absorbs potential liabilities arising from agreements with the Minter's service providers, and maintains a clear segregation of liabilities to protect the Minter from financial risks outside of minting activities.

2.1.3. SPV Operator

The SPV Operator manages the collateral portfolio for the SPV (legal owner of the eligible collateral or any asset managed by the operator), ensuring the assets are properly maintained and can act on behalf of the SPV, including during wind-down scenarios when necessary. The SPV Operator is a distinct and separate role from the Minter, reducing the risks and incentives of potential bad actors.

2.1.4. Validator

An independent entity responsible for verifying the presence and sufficiency of off-chain collateral held by Minters. Validators provide the necessary on-chain confirmations that allow Minters to mint $M and ensure the integrity of the protocol

2.1.5. Auditor

The Auditor is responsible for independently reviewing and verifying the financial records and compliance of entities within the M^0 ecosystem, ensuring transparency and adherence to standards.

2.1.6. Corporate Service Provider

The Corporate Service Provider assists entities within the M^0 ecosystem by offering essential administrative and legal support, such as company registration and ongoing corporate compliance.

2.1.7. Custody Bank

The Custody Bank securely holds and manages the financial assets and collateral for the SPV, providing safe storage and safeguarding against unauthorized access. This role is crucial for maintaining the security and integrity of the collateral.

2.1.8. Broker for Eligible Collateral

The Broker facilitates the buying and selling of eligible collateral on behalf of the SPV, ensuring transactions are executed efficiently and within the guidelines set by the M^0 protocol.

2.2. Key Agreements

2.2.1. Minter Operating Memorandum

The Minter Operating Memorandum outlines the operational framework for a Minter, specifying the scope of its activities and the limitations placed on its business operations to ensure compliance. This document helps define the roles and responsibilities of the Minter and its BD Minter.

2.2.2. Minter-SPV Operator Agreement

This agreement defines the relationship between the Minter and the SPV Operator, detailing the obligations of the SPV Operator to manage collateral and enforce protocol rules. It is crucial for ensuring collaboration and accountability between the two parties. 

2.2.3. Minter-Validator Agreement

The Minter-Validator Agreement sets the terms under which Validators provide their services, including the verification of collateral and minting actions. It ensures that Minters receive the necessary validation support to comply with protocol rules.

2.2.4. Terms and Conditions (and Subscription Agreement) of the SPV Note

This document specifies the contractual terms under which the SPV issues Notes to Minters, linking the collateral to the Minter and outlining rights, obligations, and enforceability. It serves as the economic bridge between the collateral and the Minter’s activities.

2.2.5. SPV Operating Memorandum

The SPV Operating Memorandum establishes the operational standards and procedures for the SPV, including how funds and collateral are managed. It ensures the SPV's operations are consistent, transparent, and aligned with the broader objectives of the ecosystem.

2.3. Wind Down Procedures

Permissioned actors can be removed from the system through a proposal passed using the TTG mechanism, which removes them from specific lists, such as the Minter list. Once an actor is removed, they lose the ability to call methods within the contracts, effectively preventing them from further participation in the protocol. A subsequent wind down procedure is then initiated.

When a Minter is removed from the Minter list, they no longer incur the Minter Rate on their owed $M. The current amount of owed $M, along with any potential penalties for missed intervals, is tracked for repayment either by the Minter or by other parties interested in recovering their off-chain collateral. The burn method remains accessible to anyone, regardless of a Minter's permission status. This allows off-chain actors to facilitate the wind-down of the Minter’s activities and destroy the Owed $M to recover the value from the Eligible Custody Solution. Once a Minter is removed, any actor within the system can invoke the Deactivate Minter method, which stops the accrual of the Minter Rate and prevents any further Penalty Rate charges from being applied.

2.3.1. Amicable Wind Down

The Amicable Wind Down Period is a 90-calendar day timeframe that begins immediately after a Minter is offramped. During this period, the SPV Operator oversees the orderly wind down and assists the Minter on a best-effort basis in redeeming its owed $M. The Minter can redeem Owed $M by purchasing and burning $M tokens using the burn() function, specifying their address to reduce their balance. After each Burn Event, the Minter must notify the SPV Operator, who will verify the Burn Event on-chain. Upon verification, the SPV Operator will sell Eligible Collateral and transfer an amount to the Minter equivalent to the amount burned, divided by the Mint Ratio at the time of de-permissioning. Throughout the Amicable Wind Down, the SPV Operator is not required to adhere to portfolio composition requirements and any recommendations from the Minter regarding the sale of Eligible Collateral are non-binding.

If the Minter fully repays the Owed $M within the Amicable Wind Down Period, any remaining financial value will be paid to the Minter. However, if full repayment is not achieved, the SPV Operator will transition to a Non-Amicable Wind Down process, during which no further payments will be made to the Minter. Transitioning from an Amicable to a Non-Amicable Wind Down can also occur immediately if circumstances change significantly, particularly if the SPV Operator's compliance with applicable laws or the stability of $M is at risk. This process ensures that the protocol handles outstanding liabilities fairly while maintaining legal compliance and the stability of M.

2.3.2. Non Amicable Wind Down 

Upon the conclusion of the Amicable Wind Down Period, if the Minter's Owed $M remains greater than zero and there is still collateral in the Collateral Storage, the SPV Operator will initiate a Non-Amicable Wind Down. In this phase, the SPV Operator will singlehandedly wind down the Minter’s structure, acting as the selling agent for the collateral. All proceeds from the sale of collateral will be managed according to the rules of the Adopted Guidance, but none will be disbursed to the Minter. If the Non-Amicable Wind Down is triggered under exceptional circumstances without prior Minter de-permissioning, the SPV Operator must submit a governance proposal to de-permission the Minter. Additionally, if a Minter is unable or unwilling to redeem, counterparties may engage directly with the SPV Operator to execute primary redemptions, provided this adheres to the core principles of the Adopted Guidance and existing contractual agreements between the Minter and counterparties.

During this process, the SPV Operator aims to reduce the Owed $M of the Minter as much as possible through various strategies. These include allowing collateral to mature without replenishing it if market conditions are unfavorable, selling remaining collateral on a best-effort basis, and using the proceeds to purchase and burn $M on the Minter's behalf. The SPV Operator may also transfer assets and liabilities to another Minter operating within normal business conditions. If there remains an $M balance under the SPV Operator’s control after the Owed $M reaches zero, the SPV Operator will burn the excess $M to increase system-wide overcollateralization. Conversely, if the purchased $M is insufficient to eliminate the Minter’s owed $M, this shortfall will persist, decreasing the protocol’s overall collateralization. Governance is expected to monitor and manage individual collateralization levels proactively and de-permission Minters that pose excessive risks to prevent such situations. 

2.4. High Risk Jurisdictions

Validators, Minters, and SPV Operators may not be domiciled in what the Adopted Guidance calls a “High Risk Jurisdiction”. The list of these prohibited jurisdictions include all countries on the FATF Black and Grey lists, the European Commission's list of High-risk Third Countries, and any country subject to OFAC or EU sanctions. 

As of September 2024, those countries are: Afghanistan, Barbados, Belarus, Bosnia, Bulgaria, Burkina Faso, Cameroon, Croatia, Cuba, Democratic Republic of Congo, Ethiopia, Gibraltar, Guatemala, Guinea, Haiti, Hong Kong, Iran, Iraq, Jamaica, Kenya, Lebanon, Libya, Mali, Monaco, Mozambique, Myanmar, Namibia, Nicaragua, Nigeria, North Korea, Panama, Philippines, Russia, Senegal, Somalia, South Africa, South Sudan, Syria, Tanzania, Trinidad and Tobago, Uganda, United Arab Emirates, Vanuatu, Venezuela, Vietnam, West Bank, Yemen, Zimbabwe

2.5. Transfer Restrictions

The Adopted Guidance dictates that each Minter and its affiliates must comprehensive compliance requirements for focusing on anti-money laundering, the avoidance of terrorist financing, and sanctions adherence. Each Minter must implement robust policies and procedures to mitigate risks related to illicit activities, with systems in place for effective customer identification, ongoing due diligence, and the monitoring of suspicious transactions. 

However, the core protocol does not include a blacklist function for M, in keeping with its design philosophy of credible neutrality. Once $M has been issued by a Minter to an initial purchaser, the protocol cannot block addresses from holding or transferring M. 

2.6. Additional Resources

• M^0 Whitepaper
• M^0 Adopted Guidance v1.0
• M^0 Governance Dashboard

3. Financial Analysis

3.1. Eligible Collateral

3.1.1. Current Eligible Collateral

Currently, the only eligible collateral that can serve as backing for $M is U.S. Treasury bills with a maturity of 90 days or less. It’s important to note that cash and/or bank deposits are not considered Eligible Collateral. 

3.1.2. Future Eligible Collateral

While the protocol may, in the future, adjust the definition of Eligible Collateral to include products comparable to treasury bills (e.g. reverse repo), there is not currently any intention to take on products with additional credit or duration risk.

3.2. Tokenomics

The M^0 two token governance initially launched with one million POWER tokens and one billion ZERO tokens.

Each epoch, the supply of POWER tokens is inflated by 10%, and up to 5,000,000 ZERO tokens are issued. These new tokens are distributed pro rata to participating POWER holders through their delegate addresses. Any unclaimed POWER tokens are auctioned off in a Dutch auction during the Transfer Epoch, explained later. The auction ensures that newly purchased POWER tokens can be used in the subsequent Voting Epoch. The amount of ZERO tokens issued are directly proportional to the amount of POWER tokens that participated in the vote. For example, if 100% of POWER token holders vote, 5,000,000 ZERO tokens are issued pro rata to POWER token holders. If only 80% of POWER token holders vote, 4,000,000 ZERO tokens are issued pro rata to POWER token holders.

POWER holders must vote on all Standard Proposals during the Voting Epoch to claim their share of the inflation. Failure to participate results in a loss of voting weight and forfeiture of both POWER and ZERO tokens. Inflation does not occur if only POWER or ZERO Threshold Proposals are present, or if no proposals exist in that epoch.

The Dutch auction for POWER tokens begins at the start of the Transfer Epoch if any POWER holder fails to participate. The auction price starts at 2^99 wei per basis point of the total POWER supply and the exponent linearly decreases by 1 every 3.6 hours (meaning the price is 2^98 per basis point of total POWER supply after 3.6 hours, 2^97 after 7.2 hours, etc). Purchasers who want to buy POWER in the auction must call the Buy method. The auction's price curve is designed to decrease over the 15-day period, with a semi-linear pattern as the auction progresses.

3.3. Protocol Actor Economics

3.3.1. Minters

Minters are incentivized to participate by the opportunity to earn a yield spread between (a) their collateral’s net yield and (b) the protocol's Minter Rate, or the interest paid on minted $M, plus the costs of their service providers. These service providers include SPV corporate officers, custodians, SPV Operators, Validators, and auditors. The Minter’s economics will improve as the network scales and the fixed fees are reduced as a percentage of the income earned on collateral.

The attractiveness of minting also depends on the Mint Ratio (the percentage of their collateral value that can be minted into $M). A Minter's effective return on capital can be calculated by dividing the net yield from the Eligible Collateral by their net cash investment, which is the capital invested in Eligible Collateral minus their owed $M (assuming it sells at $1), plus an administrative buffer. The diagram below updates the figures from the M^0 whitepaper to illustrate a more realistic example:

Note: Numbers for illustration only, current rates and yields are subject to change at any time from governance and additional fees may be incurred. This does not reflect any additional costs necessary to pay service providers like validators, corporate servers, auditors, etc.

Additionally, Minters are expected to engage in arbitrage to optimize their returns. If $M trades above $1 in secondary markets, Minters are likely to deposit more Eligible Collateral to generate additional $M, increasing their net yield. Conversely, if $M trades below $1, Minters may repurchase $M and use it to retrieve their Eligible Collateral, again boosting their net yield. This arbitrage activity is expected to cause $M to trade with some volatility around $1, relying on market dynamics to maintain an average price of $1 over time.

3.3.2. Validators

Validators in the protocol are incentivized through off-chain agreements rather than on-chain compensation. Validators and Minters are expected to establish binding legal agreements that outline terms and compensation for services, such as providing signatures for collateral updates. Currently, most Validators are compensated on a fixed schedule, so the impact on Minters’ profitability should decrease rapidly as the network scales. Validators are anticipated to correspond to auditors off-chain, with their primary role being to attest to the real-time validity of Eligible Collateral used to generate M.

Although the protocol treats all Validator addresses as fungible, off-chain specializations may emerge within the Validator ecosystem. Some Validators might focus on updating on-chain Collateral Value, while others could specialize as “officers” to monitor and enforce protocol rules, such as initiating the Cancel and Freeze functions against non-compliant Minters. This specialization could expand further as additional periphery contracts are integrated into the ecosystem.

4. Competitive Landscape

The rise of tokenized T-bills and yield-bearing stablecoins has been a key development in response to the increased demand for stable, real-world asset-backed digital currencies. Starting in 2022, projects began offering tokenized U.S. Treasury bills as a means of combining the safety of traditional financial instruments with the flexibility and transparency of blockchain technology. This shift was largely driven by the gap in on-chain vs off-chain yields at the time. For the first time since DeFi had matured into an active ecosystem, interest rates in the U.S. were significantly higher than the rates seen in DeFi during the 2022 bear market. As a result, the market looked for a way to transfer these higher off-chain yields onto the blockchain. The solution was found with these yield-bearing products that could withstand the volatility of crypto markets while still providing attractive returns. As of October 2024, the market for tokenized treasuries and yield bearing stablecoin products has reached nearly $2bn on EVM compatible chains.

‍

The competitive landscape for these products is growing, with various players offering distinct solutions based on governance, collateral, and user incentives. By exploring these competitors, it is easier to understand how M^0 differentiates itself and the unique niche it aims to carve in the market.

4.1. Competitive Advantage

M^0’s approach integrates off-chain, real-world assets like U.S. Treasury bills with decentralized governance and issuance. By allowing multiple Minters to generate $M backed by low-risk, high-quality collateral, M^0 provides an alternative approach to crypto-native collateral for example.

As an alternative or complement to traditional fiat-backed stablecoins or cryptodollars, M^0’s crypto-native design aims to solve many of the counterparty exposure risks associated with single issuers, even with the advent of new regulatory regimes for supervised stablecoins.

Multi-Minter Model: M^0 allows multiple Minters to issue $M, making the system decentralized and more resilient. This contrasts with many stablecoin systems that rely on a single issuer. By enabling multiple Minters, M^0 fosters competition among issuers and provides flexibility in how $M is generated and managed.

Smart $M: The Smart $M wrapper is a DeFi focused extension of $M, that allows users to redirect the earnings away from an address or smart contract holding $M to a separate address. This further enables users who integrate $M into their product to distribute the Earner yield downstream to other users.

Off-Chain Collateral with Real-Time Attestation: The M^0 protocol relies on off-chain collateral, such as U.S. Treasury bills, which are held in custody. Validators offer real-time attestations of the collateral, to provide transparency and trust in the system. 

Arbitrage Opportunities for Stability: Rather than enforcing strict price controls, M^0 leverages the incentives of price arbitrage to help maintain the stability of $M around $1. When $M trades above $1, Minters are incentivized to mint and sell more $M, and when it trades below $1, they are motivated to repurchase $M to redeem collateral. 

Governance Through Two Token Governor (TTG): M^0’s governance mechanism, the Two Token Governor (TTG), separates governance roles into clear cryptoeconomic incentive mechanisms. POWER holders actively participate in governance and earn rewards, while ZERO holders have the ability to intervene and reset the governance structure if necessary.

No On-Chain Validator Compensation: Validators in M^0 are compensated through off-chain agreements rather than receiving protocol-level rewards. This structure allows for greater flexibility in validator relationships and avoids on-chain complexity, making it easier to onboard specialized Validators. This is especially useful in maintaining real-time attestations of collateral without the need for native token inflation or complicated reward systems.

Separation of Collateral and Token Risks: By using high-quality Eligible Collateral like U.S. Treasury bills, the M^0 protocol reduces the risk of collateral devaluation, which is common in crypto-native collateral systems. The off-chain nature of the collateral, combined with robust custody solutions, mitigates risks tied to market volatility and crypto-native assets, offering more stability and confidence to both Minters and users of $M.

4.2. Similar Products and Comparisons

Several products exist that offer functionality similar to M^0. However, we believe, in many regards, M^0 can play a complementary, rather than purely competitive role. Here are some comparisons:

4.2.1. MakerDAO/Sky (Dai/USDS)

• Collateral: Sky issues the USDS stablecoin, backed by overcollateralized crypto assets such as ETH, WBTC, and RWAs like US Treasuries and USDC. 
• Governance: Governance is decentralized, managed by MKR/SKY token holders who vote on various proposals .
• Key Features: Sky has been a pioneer in DeFi with its decentralized stablecoin issuance. It plays a fractional reserve cryptodollar role in the DeFi ecosystem, allocating dynamically between assets such as crypto-backed loans and traditional treasury bills
• Comparison: M^0 is a purely full reserve cryptodollar, backed exclusively by off-chain U.S. Treasury bills. This focused approach means that in many regards, USDS or Dai are complementary rather than competitive products and have different applications depending on the use-case of the holder.

4.2.2. Mountain Protocol (USDM)

• Collateral: Mountain Protocol’s USDM is also backed by U.S. Treasury bills, providing stability through the use of high-quality, low-risk real-world assets.
• Governance: The protocol is centralized, with a core team making most operational and strategic decisions.
• Key Features: USDM offers all holders a stable yield-bearing asset within a robust supervisory and regulatory framework. Secondary transfers are permissionless.
• Comparison: Both protocols use Treasury bills for collateral, but differ in the strategy largely as a result of the different approaches taken towards governance

4.2.3. BlackRock (BUIDL)

• Collateral: BlackRock’s BUIDL token is backed by U.S. Treasury bills.
• Governance: The governance structure is fully centralized, with BlackRock and Securitize maintaining control over all decisions and limits access only to those who have been approved on the whitelist.
• Key Features: BUIDL is notable by being backed by the world’s largest asset manager. BUIDL has also partnered with Circle to provide atomic swaps into USDC, prioritizing some degree of liquidity through the primary mint/redemption window.
• Comparison: BUIDL is a tokenized security with the narrow purpose of providing on-chain access to BlackRock’s Institutional Digital Liquidity Fund, rather than function as a reference asset indexed to $1.

For a table-view comparison against other tokenized products, please consult our PDF report.

Glossary and Terms

• Earner: An approved entity that holds or distributes $M and earns at the Earner Rate.
• Earner Rate: The annual percentage paid to $M holders within the Earn Mechanism.
• Eligible Collateral: Approved assets in custody that can generate on-chain Collateral Value for minting M.
• Eligible Custody Solution: Approved entities and agreements for holding Eligible Collateral.
• Mint Delay: The waiting period between proposing and executing a minting operation.
• Mint Ratio: The proportion of a Minter’s Collateral Value that can be minted into M.
• Minter: An institution that generates and manages $M supply within the protocol.
• Minter Freeze Time: A period during which a Minter is prevented from minting. It can be reset by Validators.
• Minter Rate: The annual percentage fee charged to Minters on their outstanding M.
• Penalty Rate: A fixed fee for under collateralization or missing collateral updates, assessed during updates or burns.
• Periphery Contract: A smart contract that adds extra functionality outside the core M^0 protocol.
• POWER: A utility token used for voting in governance. POWER holders earn ZERO for participating.
• Propose Mint Time To Live: The window of time after the Mint Delay during which a Minter can execute a mint.
• TTG (Two Token Governor): A system where holders of POWER and ZERO tokens manage the protocol and are penalized for non-participation.
• Update Collateral Interval: The required time frame for Minters to update collateral. Missing it results in penalties.
• Validator: An independent entity verifying the off-chain collateral used to generate M.
• ZERO: A utility token earned by POWER holders for governance participation, receiving a portion of fees and penalties.

‍