Beyond TVL: How Minterest Changes DeFi Lending

Minterest’s innovative approach to emission rewards & buybacks, protocol sustainability, and long-term value creation.

TVL is typically used to gauge a protocol’s success, stability, and security. Although useful in measuring growth and deposit trends, it fails to capture the bigger picture. TVL doesn’t effectively indicate a protocol’s sustainability or user benefits and is often used as a misleading marketing tool.

Minterest has developed a suite of features and mechanisms that go beyond superficial metrics. By addressing the commonly overlooked issues of token utility and a sustainable incentives model, Minterest aims to grow and retain TVL and its user base—a win-win for the protocol and its participants.

DeFi’s Overlooked Challenges

While TVL is an important metric, it shouldn’t act as the be-all and end-all of a protocol’s success or value. In fact, many ‘seemingly successful’ projects have fallen victim to the challenges and pitfalls of DeFi.

Insufficient Incentives

DeFi protocols offer incentives to borrow from or provide liquidity to their platforms, but these rewards are often insignificant—especially for blue chip coins and tokens. 

Cryptocurrencies like $ETH, $wBTC, and stablecoins are considered relatively safe investments and usually have a much higher TVL than low-cap, volatile alternatives. Because of this oversaturation of liquidity, APRs for LPs are regularly less than 5%.

The Cycle of Rotating Capital

Some protocols compensate for low APRs by providing native tokens (emission rewards) as an additional incentive. This is a bonus for users and a great way for projects to build out-of-the-gate TVL and bootstrap liquidity. 

However, if a well-planned tokenomics and utility model is not employed, this approach can quickly lead to detrimental consequences.

When tokens lack legitimate use cases or are plagued by high inflation rates, recipients have little incentive to hold long-term. They’ll likely opt to sell at the first opportunity and move on to bigger and better things.

Over the years, this cycle of ‘rotating capital’ has taken its toll on countless protocols.

Here’s a simplified representation of how it typically unfolds:

  1. Decline in TVL: The influx of emission rewards or lack of token utility leads to the price depreciation of the project’s native token and a consequent decrease in TVL as the perceived value of the protocol diminishes.
  2. Migration of Liquidity Providers: Liquidity providers, in pursuit of better returns, relocate their capital to other, more promising ventures, leaving the initial one struggling to maintain liquidity.
  3. Desertion of the Protocol: With diminished liquidity and user engagement, the protocol is abandoned by LPs and borrowers, left struggling to attract new users and capital.

Utility, Incentives and Performance Value: The Minterest Difference

Now that we’ve introduced some of the pitfalls of everyday borrow/lend protocols, it’s time to ask an important question:

“What sets Minterest apart?”

MINTY Tokens, NFTs and the Buyback Mechanism

Let’s start by introducing $MINTY – Minterest’s native token. Liquidity suppliers and borrowers receive emission rewards in $MINTY for using the platform—in addition to supply and borrow APYs—and are incentivised to participate in protocol governance (voting and decision-making).

If holding one of Minterest’s yield enhancing NFTs, users will earn a further boost in $MINTY emissions ranging from 20% to 50%.

Finally, users who stake their $MINTY tokens and participate in governance earn additional buyback rewards—$MINTY tokens, acquired on-market by the protocol’s ‘buyback mechanism’ and accumulated in the treasury.

Here’s how it works:

  • 1. Deposit: Lucy deposits 5 $ETH into the Minterest platform.
  • 2. Earnings: Based on the 4% supply APY, Lucy earned 0.2 $ETH over the year. Additionally, she receives a 30% $MINTY APY. On top of this, Lucy holds a yield boosting NFT that provides a 40% boost, driving her $MINTY APY from 30% to 42%, earning her 1,000 $MINTY tokens.
  • 3. Staking: Lucy then stakes her 1,000 $MINTY tokens to participate in protocol governance.
  • 4. Value Accrual: Minterest generates value through fees from borrowing and lending.
  • 5. Buyback Mechanism: The protocol uses value generated to activate the buyback mechanism, purchasing 200 $MINTY tokens from the open market.
  • 6. Allocation: The bought-back 200 $MINTY tokens are then allocated to Lucy based on her contribution to staking and governance.
  • 7. Enhanced APY: This allocation of additional $MINTY tokens effectively enhances Lucy’s original 4% + 42% APY, providing her with increased overall yield from the platform.

This increases Lucy’s total holding to 1,200 $MINTY tokens and reduces the available supply of $MINTY on the market, creating scarcity. 

 Please note, that arbitrary numbers have been used for example purposes.

This strategic approach to tokenomics and reward distribution ensures that value is continually returned to the users, incentivising staking and enhancing the APYs the protocol provides to its users.

Solvency Management: A Focus on Stability and User Protection

Minterest stands out with its solvency management and liquidation approach, focusing on user protection and protocol stability. 

The protocol constantly checks the USD value of all borrower collateral positions against the utilisation ratio. This ratio is crucial—it represents the total value of all loans, including accrued interest, compared to the value of the collateral.

On other lending protocols, when the ratio reaches 1.0, external liquidators and bots buy up to 50% of under-collateralised borrow positions at market rate discounts, ranging from 5% to 15%. 

Instead, Minterest’s smart contracts handle the liquidation in-house via the Solvency Engine, affecting only the necessary amount of collateral to regain solvency—plus a small buffer to avoid recurrent liquidation events.

Minterest’s Balanced and Sustainable Economic Model

Minterest is not just about accumulating assets; it’s about creating a balanced and sustainable economic model that prioritises long-term value and user benefits over misleading metrics and short-term gains.

It addresses overlooked challenges in the sector, such as insufficient incentives and the detrimental cycle of rotating capital. This is achieved through features like $MINTY utility tokens with a buyback mechanism, a dynamic interest rate model, and a unique approach to liquidations and solvency management.

To learn more about the Minterest ecosystem and how you can get involved, check out the official documentation, follow us on Twitter, and drop by the Discord channel for a chat with the $MINTY community!

10, October 2023