Overview
This MGP consists of two parts: Part I proposes a new approach to structuring yield generation via collateral assets, and Part II proposes a transfer of assets for funding purposes.
PART I: Yield
The Mento Reserve (https://reserve.mento.org/) consists of a diversified set of crypto assets. The core mandate of the Reserve is simple:
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Preserve the 1:1 peg of the outstanding stablecoins at all times.
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Maintain high liquidity for on-demand redemptions.
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Generate a safe and sustainable yield where possible without compromising stability.
To achieve this, the Reserve splits assets into risk tiers—from safe(r) stablecoins to higher-volatility crypto assets. Each tier has clear guidelines on allocation, liquidity, and yield expectations, ensuring that the lowest risk tiers can be liquidated immediately.
PART II: Funding
Development work on the Mento Protocol, marketing for the adoption of Mento, and strategic partnerships (e.g. MiniPay) can be funded by both yield on the Reserve and fees in the Mento Protocol, e.g. swapping fees. Over the years, this yield always went back into the Mento Reserve. With the restructuring of the Mento Reserve, we propose allocating USD 8m to the Mento Protocol Foundation to fund Mento development, USD 5m to Mento Labs for operations, and USD 3m to Mento ecosystem partnerships, including MiniPay.
PART I: Yield
Tier 0 – Liquidity (Low Risk, ~20% Allocation)
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Assets: USDC, USDT, axlUSDC etc., available for immediate redemption against Mento stablecoins
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Role: Immediate redemption liquidity
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Yield: 0% - might be some fees
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Liquidity: Real-time
Tier 1 – Liquid Core (Low Risk, ~1-5% yield, ~30%+ Allocation)
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Assets: Primarily top stablecoins like USDC, USDT, USDS. Possibly staked in low-risk savings (e.g. sUSDS), USDE or blue-chip lending.
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Role: Immediate redemption liquidity. Near-zero volatility, minimal smart contract risk.
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Yield: ~1–5% (low, but very liquid).
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Liquidity: T+0 to T+1 (basically same-day availability).
Yield-Bearing Stablecoins
Overview
Yield-bearing stablecoins are digital assets designed to maintain a stable value, typically pegged to fiat currencies like the US dollar, while simultaneously generating passive income for holders. Unlike traditional stablecoins, which do not offer returns, yield-bearing variants integrate mechanisms that accrue interest or rewards over time.
Examples and Mechanisms
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USDY by Ondo Finance: Backed by short-term U.S. treasuries and bank deposits, USDY automatically accrues yield without requiring users to stake or lock up their tokens.
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aUSDC and aUSDS (Aave): Users deposit USDC or USDS into the Aave protocol and receive aTokens that accrue interest over time, reflecting the yield generated from lending activities.
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cUSDC and cUSDS (Compound): Similar to Aave, Compound allows users to earn interest by supplying USDC or USDS, receiving cTokens that increase in value as interest accrues.
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USDE (Ethena): USDe works as a synthetic stablecoin that maintains its 1 USD peg through a “delta-hedging” strategy, using staked ETH (stETH) as collateral and shorting ETH perpetual futures to offset price volatility.
Risk Considerations
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Smart Contract Vulnerabilities: The reliance on smart contracts introduces risks related to potential bugs or exploits.
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Liquidity Risks: During periods of market stress, liquidity constraints may impact the ability to redeem stablecoins promptly.
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Regulatory Risks: The regulatory landscape for yield-bearing stablecoins is still developing, with potential implications for their classification and permissible activities.
Tier 2 – Yield Reserve (Moderate Risk, ~30% Allocation)
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Assets: Still USD stablecoins but deployed in DeFi protocols offering higher returns (e.g. stablecoin LP pools on Curve, mid-tier lending platforms, yearn strategies).
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Role: Enhanced yield on stable holdings while preserving moderate liquidity.
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Yield: ~3–10% (higher than Tier 1, with some smart contract or liquidity risk).
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Liquidity: T+1 to T+2 (aim to exit within ~48 hours).
Tier 3 – Growth / Volatile Assets (High Risk, ~20% Allocation)
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Assets: Major cryptocurrencies (ETH, BTC, CELO), staking derivatives (e.g. stETH) and staking platforms (Falcon.Finance).
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Role: Long-term upside and diversification. Limited to protect peg stability if markets crash.
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Yield: 5–15%+ (staking rewards in volatile coins).
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Liquidity: T+2 or more, subject to price swings or unbonding periods.
Addition: Falcon Finance: Multi-Strategy Yield Protocol
Overview
Falcon Finance is a DeFi protocol that offers a synthetic stablecoin backed by a diverse range of collateral, including both stable and volatile crypto assets. Its primary objective is to generate sustainable yield through a combination of strategies, such as positive funding rate arbitrage, negative funding rate arbitrage, cross-exchange price arbitrage, and native staking returns. By employing a dynamic collateral selection framework, Falcon Finance aims to optimize yield while managing risk exposure.
Sources:
Risk Considerations
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Market Competition: Falcon Finance operates in a highly competitive DeFi landscape. Falcon employs delta-neutral basis and funding rate arbitrage (which can perform well in bull markets), and Falcon employs negative funding rate arbitrage, cross-exchange arbitrage, altcoin yield farming, and insurance fund strategies that are more focused on performance during bear markets.
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Regulatory Uncertainty: The evolving regulatory environment poses potential risks, especially concerning the classification and treatment of synthetic stablecoins.
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Technological Risks: As with any DeFi protocol, Falcon Finance is susceptible to smart contract vulnerabilities and other technological threats.
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User Education: The complexity of Falcon Finance’s yield strategies may present barriers to entry for less experienced users, necessitating comprehensive user education initiatives.
Transparency and Security
Falcon Finance provides regular audits and maintains a transparency page detailing reserve allocations and yield performance. Security measures include the use of Multi-Party Computation (MPC) wallets and integrations with custodial services like Fireblocks to safeguard assets.
Table: Summary and overview of Risk Tiers.
| Tier | Risk | Allocation | Yield | Liquidity | Example Assets / Yield-Generating Protocol |
|---|---|---|---|---|---|
| 0 | Very Low | ~20% | ~0% | Real-time | USDC, USDT, USDS |
| 1 | Low | ~30% | 1–5% | T+0 to T+1 | sUSDS, Aave |
| 2 | Moderate | ~30% | 3–10% | T+1 to T+2 | Curve, Yearn |
| 3 | High | ~20% | 5–15% | T+2+ | stETH, Falcon |
Mento Reserve Key Principles
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Denomination Preservation: Assets should maintain their original denomination to reduce unnecessary risk. Stablecoins should remain in stablecoin form (e.g., USDS → sUSDS), and cryptocurrencies should remain in their native or staked versions (e.g., ETH → stETH). This approach avoids introducing foreign exchange (FX) or peg risk, which could otherwise create misalignment between Reserve assets and stablecoin liabilities.
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Cross-Chain Availability: The Reserve must support seamless, low-latency redemptions across supported ecosystems. This is achieved by either maintaining local liquidity on each chain or using fast, secure bridging infrastructure to ensure that users can exit their stablecoin positions without delay, even in stressed market conditions.
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80% in T+2 Liquidity: A minimum of 80% of Reserve assets—comprising Tier 0 (highly liquid assets), Tier 1 (liquid, low-risk yield assets), and Tier 2 (diversified, risk-adjusted assets)—should be unwindable within T+2 (two trading days). This ensures that in the event of a market shock or sudden redemption event, the Protocol can mobilize a large majority of its reserves quickly and without excessive slippage.
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Diversification & Risk Caps: Exposure to any single asset—whether stablecoin or volatile—must be capped to reduce systemic and counterparty risk. The Reserve avoids concentration by spreading risk across multiple issuers and chains. While the inclusion of higher-growth or volatile assets (Tier 3) can boost long-term sustainability, they are limited to a small allocation (e.g., 20% maximum) to ensure that the value of the Reserve is not overly sensitive to market drawdowns or asset-specific failures.
Governance & Future Automation
With this MGP, the Reserve strategy will rely on a governance-led framework based on both automated and manual execution, while laying the groundwork for full automation and resilience over time.
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Manual Rebalancing by Governance and Multisig members
Reserve allocations are determined and periodically updated by the Mento Community governance. Governance decisions include setting target allocations across tiers, defining risk thresholds, and whitelisting eligible protocols and assets. Based on these parameters, the reserve multisig monitors the Reserve composition and initiates rebalancing when assets deviate from target weights or exceed risk caps.
As part of this proposal, assets and protocols mentioned within the text, such as sUSDS and Falcon Finance, are explicitly whitelisted for the Reserve allocation for a one-year period, subject to risk reviews. This enables immediate deployment while ensuring continued oversight.
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Emergency Powers for Rapid Response
In the event of significant disruptions such as stablecoin depegs, protocol exploits, or systemic market stress, the reserve multisig is authorized—under governance-approved emergency powers—to take immediate action. These powers allow for swift movement of assets into Tier 0 (native stablecoins) or Tier 1 (highly liquid and secure yield-bearing stablecoins), in order to preserve the Reserve’s integrity and maintain the Mento stablecoin peg.
Emergency actions will be transparently reported post-execution and subject to retrospective community review.
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Path Toward Automation
While the initial implementation involves manual monitoring and intervention, the long-term vision includes automated on-chain reserve management. Inspired by systems such as MakerDAO’s Dynamic Savings Rate (DSR) controller, smart contract-based agents could dynamically rebalance assets across tiers based on predefined risk models and liquidity needs. This would further reduce operational overhead, improve reactivity, and allow for 24/7 cross-chain reserve optimization without constant human input.
PART II: Funding
Overview of Revenue, Income, and Costs of the Protocol
Mento currently has an average yearly income of USD 1.1m in yield (an income stream that should be expanded with the program in PART I), and swapping revenues are increasing. The average monthly swapping volume over the past 12 months is USD 500m, and over the past 3 months, it is USD 1bn. Fees on swapping volume depend on the respective pairs; they range from 0% (current fee on USD to USD swaps) to 0.3%. The average monthly swapping revenue is currently around ~USD 0.2m. The community and Mento Labs are building out both revenue streams. All of the yield and fee revenue that the Protocol generates is flowing back to the Reserve.
The costs for the Mento Protocol are coming from protocol operations (e.g. oracles, custody, entity setup, etc), partnerships, sales and marketing activities, payroll for Mento Labs and other ecosystem entities building out the code infrastructure, and other administrative expenses. The average monthly cost over the last 12 months, including partnership activities (MiniPay), payroll for Mento Labs, marketing, and protocol operations, is around USD 0.4m.
Mento Labs is using funds to support partner ecosystem growth, e.g. partnering with Opera on MiniPay. MiniPay is using Pockets, powered by Mento, for stablecoin swaps, and has cUSD as one of three stablecoins integrated. MiniPay has powered over 260 million transactions, and currently has over 9 million users.
Funding / Investment
Mento would like to invest USD 3m for partner ecosystem growth, the continued MiniPay partnership, and to generate income of > USD 1m p.a. in this partnership.
To support Mento Labs’ payroll and operations, increase the Mento stablecoin supply and circulation, build out the Reserve yield program, build and audit Mento V3, and develop cross-chain Mento, Mento Protocol Foundation would like to request USD 5m in funding for Mento Labs and USD 3m for partner ecosystem growth through MiniPay. MPF will continue to share the ongoing Protocol cost and revenue with the community transparently. As the community wants to move forward with the launch of Mento V3 and transferability of MENTO, the budget for audits, platform security, and platform operations will rise.
With the USD 3m investment in MiniPay, the Mento <> MiniPay partnership enters a new phase, focused on generating revenue for the Mento Platform. Mento and MiniPay will enter a revenue-sharing agreement, where revenue accrues via Mento swaps (within the “Pockets function” of MiniPay), and revenue shares on a future Mento MiniApp for FX swaps. MiniPay will also expand its local currency offering with Mento stablecoins.
At the time of writing, and after handing back 120m CELO to the Celo community, the Mento Reserve has approx. USD 28m in overcollateralization, approx. USD 11.7m in BTC and ETH.
We propose to sell USD 9m worth of BTC and ETH holdings of the Reserve. The proceeds shall be allocated as follows: USD 1m for additional yield-bearing stablecoins in the reserve. USD 5m for Mento Labs (of which USD 2m to Mento Labs Inc and 3m to Mento Protocol Foundation) and USD 3m to fund partner ecosystem growth for Mento Protocol Foundation.