Minterest Network Effects
The value of any digital platform is almost solely determined by its ability to generate network effects, where each new user added generates increased value for all other users. Lending protocols are a type of digital marketplace platform. For the Minterest protocol to optimise value delivered to its users, it must generate network effects more powerful than sector peers, otherwise it will fail to compete. The protocol does this via an additional network effect to existing marketplace network effects and which is not exhibited by other lending protocols. All things being equal, it means Minterest has the capability to generate more powerful network effects than other lending protocols and in doing so has the potential to outcompete.
Despite the critical role they play in the ultimate success of the protocol, network effects are generally considered notoriously difficult to identify and quantify. Whether Minterest’s model employs a previously unknown, DeFi specific network effect, or if it is an extension of existing ones, is the purview of academia and outside the scope of this whitepaper. What is relevant, is how the protocol’s architecture generates this second network effect in order to further its performance. This revolves around breakthroughs in two aspects of lending protocol model architecture: value capture and liquidity mining.
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.
The protocol automatically exchanges this captured value for its native MNT token, doing so on-market via a portfolio of existing, deep liquidity DEXes. It then distributes this accumulated MNT to protocol users who elect to participate in the protocol’s governance processes.
The scale of Minterest’s value capture is determined by numerous factors, most of which can be determined by governance, but the two most important are the value of supplied liquidity and borrowing. Borrowing activity cannot occur without lending and it is the borrowing activity which causes the protocol’s value capture mechanisms to operate.
Simplistically, increased lending does not guarantee borrowing, but it does enable more borrowing, and more borrowing does not guarantee greater value capture but it does enable the protocol to capture greater value from interest, auto-liquidation, and potentially flash loan events.
The Buy Back process through which the Minterest protocol exchanges captured value for its native token, clearly supports MNT value to some degree, since the protocol is an acquirer in the market that otherwise would not be present. So unlike alternative protocols, for the Minterest protocol, a correlation does exist between the value of liquidity supplied to the protocol and the value of its native MNT token. While many factors influence the outcome, all things being equal, increases in liquidity supply correlates to increases in the Buy Back, which results in increased support for the value of the MNT token. At a high level, this Buy Back support for MNT token value has three direct positive impacts on the protocol’s functions and total APY for its users:
  • it increases the value of liquidity mining - as detailed above, this occurs because the value of MNT tokens emitted by the protocol to lenders and borrowers is higher than would otherwise be the case.
  • the protocol becomes more attractive to liquidity providers - because the increased value in liquidity mining is a constituent element of total APY.
  • loyal users receive additional increases in total APY - when users stake their MNT in the protocol’s governance processes (detailed later in this document), the value of both MNT tokens rewarded through the protocol’s Buy Back process and those already staked are positively supported.
In short, every new user supplying liquidity to Minterest generates a correlated benefit to existing and potential new users in the form of increased total APY than otherwise would be the case.
Such a behavioural mechanism is definitive of a same-side network effect. Importantly, at the time of writing this network effect is not found in any other lending protocol, which means Minterest’s competitive arsenal is potentially more powerful than its peers and so may enable it to outcompete.
Brief from Josh, CEO at Minterest.
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