Contributors: Mat / Riffi / Sylvia
Editing and proofreading: Punko
Special thanks: Thanks to the above partners for their outstanding contributions to the content of this issue
Project Overview
Mellow Protocol is a decentralized finance (DeFi) project that focuses on providing efficient and seamless liquidity solutions. Through its partnership with Lido, Mellow has launched a staking point acquisition campaign that allows users to stake ETH on the Mellow platform, acquire Lido's liquid Ethereum token stETH, and receive additional staking point rewards from the platform.
technology
Mellow is built on the Ethereum blockchain, and its core functions are implemented by smart contracts. Through integration with Lido, users can obtain stETH by staking ETH on the platform, and can also earn additional staking points on Mellow.
Technology Architecture
Smart contracts: manage liquidity pools, staking, and reward distribution.
Liquidity Pool: Users can provide liquidity and earn rewards.
Governance mechanism: Community voting determines protocol parameters and updates.
Market analysis
1. DeFi Development
There are many DeFi projects that provide liquidity, lending and staking services, such as Aave and Compound. These projects have occupied an important position in the DeFi field with their strong technology and user base. However, Mellow stands out in the fierce market competition with its unique mechanism, especially the innovative staking point reward mechanism.
With the rapid development of DeFi, users' demand for efficient and seamless liquidity solutions is also increasing. Under this trend, Mellow has great potential to expand its user base and the amount of funds managed. Through cooperation with Lido, Mellow provides an opportunity to stake ETH to obtain stETH and additional staking point rewards, further enhancing its market competitiveness and attracting more users.
2. The latest development of modular LRTs
Mellow also enables users to choose different risk profiles based on their needs by creating a modular LRT infrastructure. This infrastructure allows risk managers to create LRTs with different risk/return ratios, achieving flexible risk management and return optimization.
Source：Mellow Medium
- Modular LRT infrastructure
Provide flexible risk management and profit allocation.
Addressing the limitations of the current LRT market’s “one coin fits all” approach.
Provide different risk configuration and customization options for risk managers and depositors.
- Overall advantages of LRTs
Providing instant liquidity.
Realize compound returns.
Diversify your risks.
3. Mellow Protocol Key Advantages
- Flexibility: Users can choose the appropriate LRT based on their risk preferences.
- Modularity: Different risk managers can issue LRTs targeting different risk levels.
- Transparency: Risk management and reward allocation are open and clear.
Mellow Protocol Development
1. Integration with Lido
Source：Mellow Medium
Mellow Finance: As a member of the Lido Alliance, Mellow Finance works closely with Lido to support the creation of the permissionless Liquid Restaking Token (LRT) through an innovative restaking origin protocol.
Re-staking opportunities: Promote the development of Ethereum’s re-staking space and provide more re-staking opportunities.
Get Rewards: In partnership with Lido, Mellow Finance offers stETH holders the opportunity to earn LRT rewards, increasing liquidity and utility.
2. Relationship with Symbiotic
Restaking launch partners: Symbiotic and Mellow Finance and other partners provide decentralized restaking opportunities for stETH holders. Users can obtain Symbiotic Points to increase rewards and benefits.
Decentralized Re-staking: Allowing permissionless re-staking and launching DeFi strategies in conjunction with Lido, Symbiotic’s architecture and similar modular re-staking approaches can demonstrate Mellow’s strongest capabilities.
Immutable smart contracts: Service developers are not restricted by proprietary setups when locking in security frameworks, slashing mechanisms, and reward logic with a variety of operator sets. These features make it a perfect fit for Mellow’s LRTs (Liquid Restaking Tokens), providing the Mellow system with the flexibility it needs to bring diverse risk profiles to users.
Strategy Selection: Using Symbiotic’s Mellow LRTs, coupled with Mellow’s automated and modular approach, allows users to select appropriate LRTs based on their risk appetite, enjoying liquidity and returns without being limited to a single risk profile.
Participation Guide
Source：Mellow Medium
1. Process
1.1 Preparation
Prepare a compatible Ethereum wallet (such as MetaMask) and make sure there is ETH in the wallet.
1.2 Basic process of project participation
Connect your wallet to the Mellow website.
Navigate to the Stake page and select the Stake through Lido option.
Enter the amount of ETH you want to stake and the system will automatically transfer the ETH to Lido.
Users will receive stETH and can view and monitor staking points and their rewards on the Mellow platform.
1.3 Rewards
1. Users will receive stETH.
2. You can view the staking point rewards on the Mellow interface.
2. Requirements for claiming points
No capital threshold: Users can stake ETH on Mellow and receive 1 Mellow point and Symbiotic point for every wstETH staked per hour.
Current situation: Since the Symbiotic limit has been reached, currently staking only earns 1.5 times the Mellow points. When the Symbiotic limit is increased, staking users will be prioritized in the Symbiotic ranking.
Activity duration: Expected to last several months.
Mellow points redemption limit: Currently no limit.
3. Lock-up period and slippage after re-staking
Lock-in period: You can apply for withdrawal immediately after depositing. From time t to t+180 days, Curator can process the withdrawal, and the processing time is usually 24h-72h.
Emergency operation: If the Curator does not process within t+90 days, the user can use the emergency withdrawal function.
Slippage: Slippage is very low.
User Choice: If execution time exceeds 180 days and the request is not processed, the user can cancel and resubmit the request or create a new request.
4. Exit Mechanism
Visit the Dapp: Visit Mellow and visit the Dapp. Connect your wallet to continue.
Dashboard: Once connected, navigate to your dashboard to view your list of LRTs. Select the LRT you want to extract.
Light Rail Details: After selecting an LRT, tap on it to view its details and the withdrawal pop-up. The Request Withdrawal button will be inactive until you meet the necessary conditions.
Withdraw Amount: Enter the amount you want to withdraw. You can also click the "Maximum" button to set the maximum amount you can withdraw based on the LRT balance in your wallet.
Request a withdrawal: Once you have entered the withdrawal amount, the "Request Withdrawal" button will become active. Clicking on it will initiate the withdrawal process.
Source：WolfDAOTransaction Signature: Use your linked wallet to sign the withdrawal transaction.
Withdrawal Request: Once the transaction is successful, you will see a "Withdrawal Request" card in your dashboard. This card displays the LRT type, status, withdrawal amount, time of initiation, and the lock-up period before you can claim your funds.
Lock-in period: During the lock-in period, you will not earn any points for the LRT you withdraw. The points earned will be displayed on your dashboard.
Claim Withdrawal: Once the lock-up period is over, the "Claim Withdrawal" button in the withdrawal request card will become active. Click on it and confirm the transaction in your wallet.
Withdrawal Confirmation: Once the transaction is successful, you will see the amount of LRT tokens withdrawn, the claimed assets and their USD equivalent value on the LRT page.
5.5 Differences between different Curators
Source：WolfDAO
Risks and returns: There is no significant difference in the risks and returns of each Curator, but the joining time is different.
Overview of each strategy
Steakhouse Restaking Vaults: Designed from a fundamental perspective of network distribution, with wstETH as the liquid asset backing the strategy.
Restake Vault curated by P2P.org: Designed to maximize re-pledge opportunities. P2P.org is one of the global leaders in staking and re-pledge.
Amphor Restaked ETH (amphrETH): Protecting, promoting and monitoring the management of Restaked Networks in Symbiotic ecosystems.
Re7: Focuses on providing early liquidity for various DeFi protocols, providing liquidity in DeFi since 2019, deploying capital through yield strategies and liquidity ventures.
Source：WolfDAO
5.6 Points Update and Mechanism
Source：Mellow Medium
Symbiotic points are not diluted + Queue Mellow points are increased by 1.5 times
Since the Symbiotic wstETH limit has been capped, new deposits to the Mellow vault will not be redeposited into Symbiotic for the time being. This means that new deposits of ETH will not cause dilution of Symbiotic points, and all stakers will share the same amount of Symbiotic points.
To address this, Mellow has introduced an automatic queue and reward mechanism. Users who deposited before the Symbiotic limit was reached will continue to receive normal Symbiotic and Mellow points, i.e. 1x + 1x. New depositors after the Symbiotic limit is reached will receive points after the Symbiotic limit is increased, but will retroactively receive 1.5x Mellow points during the period when their liquidity was idle in the Mellow vault.
The end result is that for Mellow depositors:
Users who entered before the Symbiotic limit was reached: receive 1x Symbiotic and 1x Mellow points, no changes.
Users who enter after the Symbiotic limit is reached: temporarily do not receive Symbiotic points, but receive 1.5 times Mellow points, and become the first batch of users to enter Symbiotic after the limit is lifted.
This mechanism ensures the fairness and incentives of the system while minimizing the negative impact on depositors.
Risks and potential rewards
1. Smart Contract Risks
1.1 Contract Audit Status
Mellow is built on the Ethereum blockchain and relies on smart contracts to implement core functions. Vulnerabilities in smart contracts may lead to theft of funds or failure of contract functions. Currently, Mellow's audit is conducted by ChainSecurity and Statemind.
The Mellow LRT system audit, conducted from May 6 to May 27, 2024, mainly evaluated various components of the system, such as the treasury, various policy and module contracts, and oracles. The Mellow LRT system allows users to securely deploy and manage liquidity reward tokens (LRT), providing strong access control and strategic asset management.
1. Main findings
Total Issues Identified: 25 issues were identified in the code base.
Severity breakdown:
Medium severity: 4 issues (all fixed)
Informational severity: 21 issues (15 fixed, 6 acknowledged)
2. Specific issues and suggestions
Incorrect rounding in deposit calculations: An issue with rounding calculations was discovered that affected the minting of LP tokens. It is recommended to adjust the rounding method to prevent the discrepancy.
Stale price data in ChainlinkOracle: Prices are not updated frequently enough, which may result in stale data being used. It is recommended to set a unique update interval for each price feed.
Potential Blockage in Processing Withdrawals: An issue was discovered that could block the withdrawal process if the vault has zero balances for certain tokens. It is recommended to adjust the validation logic to better handle zero amounts.
Unauthorized deposit triggers: It was discovered that anyone could trigger a deposit of vault assets, bypassing intended restrictions. It is recommended to ensure that only authorized roles can initiate such actions.
1.2 Deployment Details
The audit report also includes details on the deployment of various contracts related to the vault and strategy on Ethereum, and provides the contract addresses for verification.
1.3 Evaluation and Recommendations
The audit showed a robust system with strong mechanisms for managing digital assets through the LRT. Although several issues needed to be addressed to ensure the safety and efficiency of operations, the majority of the identified issues were resolved during the audit, demonstrating the project team’s commitment to maintaining high safety and operational standards. The remaining identified issues indicate areas for future improvement, but do not appear to have an immediate serious impact on basic operations.
This audit demonstrates that while improvements can be made, the foundations of the system are solid and that, with continued monitoring and updates, Mellow LRT can effectively serve its intended purpose in the DeFi ecosystem.
2. Market volatility
ETH-related volatility: The price of the cryptocurrency market fluctuates drastically, and large fluctuations in the price of ETH will affect users' investment returns. This is true even if you hold stETH, because the value of stETH is linked to ETH.
Systemic risks: As a DeFi project, Mellow faces systemic risks in the entire decentralized financial industry and its ecosystem, such as liquidity depletion caused by large-scale sell-offs or hacker attacks.
3. Compliance and Security
Emphasizing the security of smart contracts, it has collaborated with ChainSecurity and Statemind to conduct audits.
Regulatory uncertainty: Regulations in the DeFi space are not yet fully clarified, and the positions and regulations of regulators in various countries may have a significant impact on Mellow. These regulatory uncertainties may bring challenges to the development and operation of the project, such as fund freezing, fines, or business restrictions.
There are future plans to introduce a dynamic rebalancing feature to optimize risk-adjusted returns and reduce potential losses caused by market volatility.
The security of smart contracts is one of the main risks facing DeFi projects. Although Mellow has worked with ChainSecurity and Statemind to conduct contract audits, there are still potential vulnerabilities that may lead to fund loss or system attacks. For this reason, regular security audits and contract updates are necessary.
4. Potential Returns
Reward mechanism: By staking ETH on the Mellow platform, users can not only obtain stETH provided by Lido, but also receive additional staking points rewards from Mellow. These points reward mechanisms are extremely attractive and can bring users a higher annualized rate of return (APY).
Innovative points mechanism: Mellow’s innovative staking points reward mechanism is a key factor in attracting more users to participate. Especially in cooperation with Lido, users can get double benefits by staking ETH - stETH and additional staking points rewards. This innovative mechanism is not available in other DeFi projects.
Market Trends: There are many similar DeFi projects in the market that provide liquidity, lending, and staking services, such as Aave and Compound, but Mellow's unique mechanism gives it a place in the fierce market competition. When the market environment is good, Mellow has the potential to grow its user base and the amount of funds under management.
High annualized return (APY): Through cooperation with Lido and its own staking points system, users have the opportunity to obtain a higher annualized rate of return. This high rate of return is very attractive to investors who seek to maximize their returns.
Summarize
Overall, Mellow Protocol is expected to stand out in the increasingly fierce market competition and attract more users and funds with its technological advantages and innovative reward mechanism in the DeFi field. The cooperation between the protocol and Lido and the unique staking points reward mechanism bring users a higher annualized rate of return (APY), enhancing the attractiveness of investment. However, users must also pay attention to and deal with potential risks, including smart contract vulnerabilities, market volatility, and systemic risks in the DeFi industry.
Through careful risk management and a deep understanding of the Mellow platform mechanism, users can more effectively utilize the investment opportunities provided by the platform and achieve considerable returns on investment. On this basis, the development prospects of Mellow Protocol are worth looking forward to, but it still needs to be continuously optimized and improved in terms of security and sustainable development.