What sets Minterest apart from other DeFi protocols?

The Minterest protocol captures 100% of the value generated through its activity, essentially a form of platform monetisation of its functions. This occurs as the protocol’s Treasury captures interest rate fees, as well as liquidation fees via the protocol’s internal auto-liquidation process i.e. this is not lost to external parties, plus flash loan fees (subject to governance processes enabling these).
The capturing of liquidation fees is significant since no other lending protocol does this. The result of Minterest’s value capture is that in a dollar-for-dollar liquidity comparison Minterest captures more value than its peers, and given the sheer quantum of liquidation fees in DeFi, quite possibly significantly more.
Other features:
  • Automated on-chain liquidation process.
  • The MNT governance token benefits from sustainable, long-term appreciation in value due to the protocol's token buyback process, which is then redistributed to users participating in governance.
  • Long term liquidity providers benefit from loyalty rewards, as they receive an increasing percentage of MNT tokens earned from the protocol's buyback, rewarding them for their long term participation.
To learn more, check out this awesome series of videos created by our CEO, Josh Rogers:

Is Minterest safe?

Security is paramount for Minterest. The protocol is audited by 3 audit firms, each with tier 1 reputations in the sector.
Flash loan exploits themselves tend not to be the issue in exploits, although they are often the mechanism through which exploits occur. In pure lending protocols like Minterest internal functions are difficult to exploit. To the extent that security flaws exist, they tend to be associated with functions external to protocol, like pricing oracles.
Minterest uses Chainlink as its primary pricing oracle, the biggest, most experienced, and widely regarded best in the business. Minterest will also integrate a portfolio of other pricing oracles for redundancy, which act as a fallback safety mechanism in the case of an attempted exploit. It’s why initially Minterest will manage its buyback swaps through its market maker, moving to a decentralised solution over time and once functionality has been heavily tested.
There will also be a very significant bug bounty program ,and pre-launch to enable Minterest’s community to also contribute to the protocol’s security.

How can users benefit from using Minterest?

There are several answers to the question.
  • Users earn APY, or average percentage yield, from interest on token assets they supply to the protocol’s various token pools.
  • They also receive emissions of MNT from the protocol for doing so, and for both supplying and borrowing.
  • Additionally, if they elect to participate in governance, users also receive MNT from the protocol’s buyback processes.

How does the the on-chain liquidation work in Minterest?

Here is how automated liquidation works in the Minterest protocol:
  • An automated bot array runs protocol solvency checks, replacing the external liquidator function in identifying under-collateralized borrower positions. Each bot database mirrors the chain, with portfolio provisioning ensuring security and redundancy.
  • Once an under-collateralized position is identified, the collateral required to be sold and the most efficient on-market liquidation strategy are both algorithmically determined. Sell pair calculations are finalized, the liquidation event is triggered, and the data is updated on the protocol.
  • A designated smart contract further validates if the user is under-collateralized, the existing loan amount, and newly required collateral position such that the user’s Utilisation Ratio will be below the required 1.0 position, and then executes the required liquidation.
  • The smart contract exchanges the liquidated collateral assets on-market to compensate the borrowed token pool and finally validates the user’s new position as being solvent again. If the smart contract determines any precondition or calculation to be invalid, the liquidation event is cancelled.
  • Upon confirmation, the user's borrow position is again solvent and the liquidation event is determined to have been completed.
To learn more about the auto-liquidations, check out this awesome video by our CEO Josh Rogers.

What is the common liquidation process in other protocols?

Lending protocols like Minterest operate over-collateralised borrowing. It means borrowers provide more collateral than they borrow. Liquidation events occur when the position of a borrower breaches the required thresholds of this collateral, or in other words the value of the collateral they have provided is no longer sufficient for the value they have borrowed.
Liquidations occur for 3 reasons:
  • The value of the collateral compared to the borrowed asset declines too much.
  • The value of the borrowed asset compared to the collateral increases too much, and outstanding interest accumulates so much the collateral provided is insufficient.
Liquidations are necessary as they ensure not just the solvency of individual borrowers but also the overall solvency of underlying token pools and so the solvency of the protocol itself.

Why do we need an auto-liquidation process?

There are several purposes of the auto-liquidation process.
The primary one is that it enables the protocol to capture the monetised value of the liquidation process instead of this being lost to external liquidators. It means the protocol earns the fees from liquidation and not other parties. This is significant because liquidation fees, while being a small fraction of total borrowing, is still very substantial in dollar terms given how fast DeFi is now growing. Capturing liquidation fee income is also very significant in contributing to the protocol’s buyback processes and how they then support the value of MNT over the long term.
Another purpose of auto-liquidation is that it resolves a misalignment in user agendas which occurs in current lending protocols. They must attract and maintain a permanent community of liquidators in order to maintain their solvency. In order to do this they have to ensure liquidations are significant enough to be economically attractive for liquidators. How they achieve this is by allowing liquidators to buy out very large percentages of the borrower’s collateral in the liquidation, and almost always far more than is actually needed to restore the borrower’s account to solvency. It results in the liquidator making more money than they otherwise would, but at the cost of the borrower, who has been punished more than is actually needed.
This doesn’t happen with Minterest’s auto-liquidation process because algorithms don’t require economic incentives in order to act. Minterest only liquidates the amount of collateral required to restore the borrower’s account to solvency, and no more, which is fairer and more equitable.

Minterest vs Aave (and others)

Other DeFi protocols, including Aave, use an external liquidator model to manage liquidation events. Liquidators maintain bots to scan the protocol and identify under-collateralized borrower positions. Every major lending protocol enables liquidators to buy out under-collateralized borrowers at price discounts, which can vary from 5% to 15%. This discount acts as the liquidator’s fee, and is their financial reward for undertaking this activity on behalf of the protocol.
Minterest does something very different; the protocol itself undertakes the liquidator role, and so removes the need for external third-party liquidators. This is the first time a protocol managed, and so purely automatic liquidation process, has been developed.

Minterest Buyback

The Buyback flow includes the following steps: Accumulation of fees: All leftover assets after liquidation events are swapped into stablecoins and stored in the protocol’s Preliminary Treasury. Surpluses captured from interest rate differentials applied to Minterest’s various token markets are stored directly in these pools and then later extracted and swapped into stablecoins. Exchanging assets for MNT tokens: Stablecoins accumulated in the Preliminary Treasury are swapped for MNT tokens on-market. The goal of these exchange events is to reduce holdings of stablecoins and accumulate MNT tokens in the Treasury ready for distribution to users. Distribution: Each month, a percentage of all fees accumulated in the Treasury go into the Buyback for distribution. The proportion to be applied to the Buyback is able to be determined by governance and is influenced by the current and predicted effectiveness of the protocol in executing its value capture mechanisms, as well as any historically accumulated balances. MNT is distributed to users who are participants in the protocol’s governance processes and is proportionally in accordance with: the amount of MNT they have staked, and the duration of time they have staked MNT, which is further defined below regarding MNT Loyalty Rewards.
The protocol triggers a Buyback Rewards Distribution event on a recurring basis. During each Buyback Rewards Distribution event, the protocol distributes the appropriate portion of the user’s MNT Buyback rewards. This forms a ‘dripping sequence’ of rewards instead of a single large distribution, which prevents gaming by users in the timing of their protocol interactions. Our CEO Josh Rogers covered the Buy Back mechanism in detail here:

What is current Buyback ratio?

Buyback is not fixed and is determined by the value captured by the protocol.

How does the protocol reward users for their loyalty?

The proportion of emissions rewarded to each user is determined by the user’s relative proportion of total MNT staked plus a loyalty reward adjustment determined by the duration of their MNT staking. When the Minterest protocol distributes Buyback rewards, each user’s proportions are adjusted to account for this Loyalty Reward. The Loyalty Reward creates an incentive structure for staking MNT and participating in protocol governance over time. Additionally, it creates a switching cost for users in transferring MNT out of the protocol and so financially incentivises them to be long term holders of MNT tokens which reduces on-market supply, further supporting its value and so as detailed above, the total APY the protocol is able to provide its users.