Written by: Global Coin Research
Compiled by: Luffy, Foresight News
M^0 is a decentralized stablecoin protocol that enables licensed participants to mint M tokens based on protocol-approved collateral. M^0 users can earn yield on their collateral while using USD stablecoins. The protocol was initially launched on Ethereum and will be expanded to other L1 and L2 networks. The core members of the M^0 team come from projects such as MakerDAO and Circle.
M^0's Vision
The current stablecoin market is mainly dominated by two stablecoins supported by legal currencies, USDT and USDC. However, neither can verify collateral directly on the blockchain, resulting in a lack of transparency and putting reserves stored in the banking system at risk of contagion if something goes wrong at either bank. On the other hand, algorithmic stablecoins have not achieved significant growth due to decoupling events caused by mechanism flaws. In contrast, cryptocurrency-backed stablecoins have been operating successfully for some time, but the price of their collateral has been more volatile.
To address these issues, M^0 aims to provide an infrastructure for issuing self-custodial stablecoins based on blockchain technology. The protocol ensures the interchangeability of each minted M stablecoin, and the entities responsible for custody operate independently of each other to avoid contagion risks. To ensure trust and transparency in the protocol, the protocol will regularly perform on-chain verification of the reserves supporting the M supply to ensure that the M token has a stable value.
Ecosystem Participants
In the M^0 protocol, there are three main participants playing different roles:
Minters: Participants who have the ability to mint M tokens. Their responsibilities are similar to those of financial service providers, such as issuers of stablecoins. Minters should provide independent collateral and provide proof of reserves. In addition, they are required to update the on-chain collateral value to ensure that the balance is safe and sufficient to repay the debt. Minters are also required to pay fees to the protocol. In order to incentivize minters to participate in the M Protocol ecosystem, the minter's rate must be lower than the yield on the collateral (net income is also affected by the minting to collateral ratio parameter, because fees are charged based on the minted M balance rather than the deposited collateral value).
Validators: Responsible for confirming the validity of the minter's collateral by providing signatures and executing on-chain proof of reserves. Validators have an oversight role over minters and can take action to restrict minters' activities when systemic threats arise. The M^0 protocol does not provide incentives for validators, so they are expected to enter into binding agreements with minters off-chain, including some stipulated terms and compensation. The role of validators is similar to that of auditors in traditional financial and business environments.
Beneficiaries: Entities approved by the governance process and beneficiaries of the yield mechanism. Their yields depend on the yielder fee rate set by governance, with additional adjustments based on fund utilization (the ratio of M in circulation to total M in the yield mechanism), with the final fee being the lower of the two. The mechanism keeps yields proportional to the fees paid by minters to ensure system stability. Beneficiaries are the demand side of M tokens. Beneficiaries in the M^0 protocol include institutional holders and distributors of M tokens.
In addition, custodians, although less interactive with the protocol, also play a vital role. They are professional agents approved by the protocol governance body to custody the collateral backing the M token. They must have technical and operational capabilities and hold an operating license. All collateral custodians must operate independently of the minters.
All eligible participants mentioned above can be removed from the protocol ecosystem through a governance voting proposal. After being removed, they can no longer participate in protocol activities except for repaying their debts.
Asset characteristics of M
M is a permissionless ERC20 token that can be bought and sold by anyone through the secondary market. However, its creation, maintenance, and destruction are the responsibility of minters and validators approved by the governance body. While it is backed by certain assets, it is not a tokenized version of those assets; instead, those assets underpin its value and credibility. This makes M as secure as the collateral that backs it, but be aware that DeFi protocols bring additional risks.
The circulating value of M must not exceed the collateral held by the custodian, as this could cause M to depreciate and undermine the stability of the protocol. The peg of M to $1 is maintained through an arbitrage mechanism. If M is trading above $1 on the secondary market, minters may deposit collateral to mint more M. Conversely, if M is trading below $1, minters may buy M to redeem their collateral. For minters to mint M tokens, they must have sufficient off-chain collateral approved by the protocol and its value is verified. Minters present collateral value information and validator signatures proving its correctness to ensure the security and integrity of the protocol. Based on this, minters determine the number of M tokens they wish to mint, and the system verifies whether the collateral value multiplied by the minting ratio (the ratio of collateral to tokens) is greater than the total value of M tokens to be minted. In addition, the minting delay introduced by M^0 gives validators time to block transactions in the event of any violations. If no intervention is required, minters can complete the token generation process and send the tokens to their designated addresses. The minter can destroy the M tokens they own at any time and redeem the collateral.
Is M just another stablecoin?
In many ways, M is similar to the usual stablecoins currently on the market. Like other fiat-backed stablecoins, M is backed by cash equivalents such as treasury bills. However, unlike its competitors, M will implement on-chain verification of collateral, ensuring greater transparency, and independent entities storing collateral to minimize contagion risks. Another important difference is related to the process of minting new tokens. Stablecoins like USDT or USDC usually have a single entity that coordinates the creation of new tokens, which is too centralized. In contrast, the M^0 protocol allows an unlimited number of minters to participate, subject to governance approval.
The M^0 protocol does not include a blacklist feature, so an individual's tokens will not be frozen. This is in stark contrast to other stablecoins, where the blacklist feature is provided with good intentions to respond to fund theft. Delegating decision-making power on key issues in the M^0 protocol to governance bodies reflects a more flexible approach to management and project development. There are also some similar yield stablecoins in the crypto market that allow users to automatically earn interest simply by holding tokens. M itself does not provide this feature, but the underlying collateral generates passive income. Unfortunately, the solutions used in yield stablecoins involve regulatory restrictions because they are considered securities and are not allowed in some major markets such as the United States. But the design mechanism of M^0 is likely to avoid such restrictions. M requires overcollateralization, which is more similar to cryptocurrency-backed stablecoins, however, its collateral type is more price-stable, reducing the risk of decoupling while simplifying the mechanism of stablecoin value stability.
In summary, the M^0 protocol aims to provide a fully autonomous, secure, and transparent stablecoin that allows minters to earn returns on their collateral. All important decisions of the M^0 protocol are handled by the governance body, making the project more decentralized.
Governance
The M^0 protocol uses a governance mechanism called Two-Token Governance (TTG). The goal of TTG is to ensure the neutrality of protocol governance and prevent fraud and control by malicious actors, while also deciding key protocol parameters related to interest rates and the list of approved participants. The TTG mechanism in the M^0 protocol runs in 30-day cycles, called epochs, divided into two 15-day phases: Transfer Epoch and Voting Epoch. The Transfer Epoch collects proposals and allows voting rights to be delegated to other addresses, while the Voting Epoch focuses on voting on proposals. TTG contains two types of tokens responsible for basic decisions in the protocol: POWER and ZERO. POWER tokens are used to vote on active proposals, and holders are able to directly govern the protocol. In return for participating in voting, token holders will receive ZERO tokens, which are more passive in voting as they are only used for the most important updates. Both tokens have an inflation mechanism, with the supply of POWER tokens increasing by 10% every epoch, while the supply of ZERO tokens increases by a maximum of 5,000,000 tokens and is claimed proportionally. Any unredeemed POWER tokens are auctioned off via a Dutch auction, and the corresponding ZERO tokens are not minted.
In TTG, proposals are divided into three types. The most common is the standard proposal, which follows the simple majority principle. POWER holders must participate in the vote, otherwise it will result in a reduction of voting rights and loss of ZERO rewards. Another type is the POWER threshold proposal, which requires reaching a specified POWER threshold and is used for emergencies. The last category is the ZERO threshold proposal of ZERO token holders, which is used for reset functions and key changes in the protocol.
cost
Fees are the main source of income for protocol participants. The M^0 protocol has two main types of fees: minting rates and penalties.
Minter Fee: collected from the minter rate fee, mainly used for distribution to yield earners, part of which is redistributed to ZERO token holders. This will encourage entities (such as CEX) to hold M tokens and earn yield. But the entity must be whitelisted and approved by governance. The minter fee rate should be lower than the yield earned by minters to incentivize them to generate tokens. Therefore, it is expected that the minter rate needs to be kept below the US federal funds rate.
Penalty: This is a penalty for minters failing to maintain an appropriate collateral to M balance ratio or failing to update the balance within a specified time. Unlike the minter fee, the penalty rate is charged once at the time of the collateral check.
Fees from the M^0 protocol incentivize ecosystem participants, but it is important to note that validators are not included as the protocol does not coordinate this aspect and their work will be compensated according to the off-chain agreement with the minters. For governance proposal fees, users can choose between M and WETH tokens, which will serve as the protocol's internal funds and are also used for POWER token auctions.
Risks and Mitigation Strategies
M^0 is subject to risks common to blockchain protocols, including those associated with smart contract vulnerabilities, hacker attacks, and infrastructure issues. Due to its functionality, the protocol is also subject to financial risks from market factors. M^0 is sensitive to changes in interest rates, particularly U.S. Treasury rates. Monetary policy changes can impact the profitability and attractiveness of the protocol to minters and yield earners. Another risk is volatility in the value of collateral, although the choice to use U.S. Treasury bills can mitigate this risk. Additionally, changes in the supply and demand of M tokens may lead to liquidity challenges and temporary price instability until arbitrageurs act to restore the value of M to the peg.
The project also faces risks directly related to ecosystem participants. The reliability and trustworthiness of partners, such as custodial solution operators, are critical to collateral security. While M itself is self-custodial, its collateral is not, which means that custodial operators carry a certain level of risk. Therefore, they should be reputable and regulated entities that operate within the law.
M^0 implements solutions designed to prevent inappropriate minter activity. In addition to fines, the protocol has other measures to address minter behavior that could threaten the operation of a stable system. In such cases, validators can step in to cancel proposals to generate M tokens and freeze the ability of a specific minter to generate M tokens for a specified period of time. If the minter's behavior is particularly severe or repetitive, further measures can be taken, including removing the minter from the system through a proposal in the TTG. An important risk mitigation feature is the reset function, which ZERO token holders can execute to completely reset system governance and redistribute POWER tokens proportionally. After the reset, all active and pending proposals will be canceled. This allows proposals that could introduce malicious actors into the system to be immediately invalidated. The reset function allows for rapid response to threats and acts as a protection mechanism in critical situations.
Financing
M^0 raised $35 million in a Series A round led by Bain Capital Crypto in June 2024. Other notable investors in this round include Galaxy Ventures, Wintermute Ventures, GSR, Caladan, and SCB 10X. This round of financing includes equity and tokens, and M^0 provides investors with two governance tokens, POWER and ZERO, but with a lock-up period. The previous round of financing was a $22.5 million seed round led by Pantera Capital in April 2023. M^0's total financing amount has now reached $57.5 million. The project valuation has not yet been disclosed.
at last
M^0 proposes a new solution in the stablecoin space that is more flexible and less centralized, providing governance members with greater decision-making autonomy. Key protocol parameters and actors are determined by other actors in the ecosystem, opening up new possibilities for project development and integration with existing products. Due to its significant similarity to widely used fiat-backed stablecoins, perhaps the most critical factor in determining M^0's success will be the ability to verify the collateral backing M's supply on-chain, thereby increasing trust in the protocol.
However, this system is much more complex than currently popular stablecoin systems, which in turn makes protocol management more complex and introduces higher risks. Due to the decentralized nature of the protocol, it must be able to incentivize ecosystem participants to act if it is to be sustainable in the long term. A major challenge is balancing the incentives for voting with ensuring that the governance token is not over-inflated. Another issue is properly incentivizing validators, as the protocol does not directly coordinate this aspect. Although yield is very important in an ecosystem, it should not be the main determinant of success.
The M^0 protocol has the potential to significantly impact the stablecoin industry by providing a more transparent, decentralized product that uses collateral that is at least as secure as the most popular stablecoins. The success of M^0 will be influenced by the decisions of the governance body, which provides an opportunity to quickly adjust protocol parameters based on market demand.
