The Evolution of Mento: Direct Distribution and Modularity for Enhanced Stability
November 22 2023
by Nadiem Sissouno
TL;DR
Mento, the upgraded stablecoin protocol, introduces exciting new features. You now are able to mint and redeem with various collateral assets making the protocol more tailored to your needs. Experience seamless almost 1:1 minting and redemption of cUSD/USDC and cEUR/EUROC without slippage, ensuring a straightforward and accurate process. The integration of Squid Router adds an extra layer of convenience, making transactions smoother and more user-friendly. Mento is all about providing stability, transparency and flexibility for a seamless user experience.
Stablecoins are digital assets that aim to maintain a stable value relative to a reference currency, such as the US Dollar or the Euro. Stablecoins have many potential applications in the decentralized economy, such as facilitating cross-border payments, enabling low-cost remittances, providing access to financial services, and hedging against volatility.
However, not all stablecoins are created equal. There are different ways to design and distribute stablecoins, and each approach has its own advantages and disadvantages. In this blog post, we will provide an overview of the new version of the Mento stablecoin protocol that the community has recently migrated to via governance. The protocol enables the direct distribution of decentralized stablecoins through a redemption and issuance mechanism. We will explain how this differs from other projects, such as USDC or USDT, which only distribute through institutional distributors. We will also highlight the benefits and challenges of the Mento approach, and how we have improved the protocol over time using best practices of the traditional financial industry.
What is Direct Distribution?
Direct distribution means that anyone can create or redeem stablecoins directly from the Mento protocol, without relying on any intermediaries or third parties. This is different from external distribution, where stablecoins are issued and redeemed by a centralized entity, such as a bank or a company, and then distributed to the users through various channels, such as exchanges, wallets, or platforms.
The advantage of direct distribution is that it eliminates the need for trust and reduces the risk of fraud or manipulation by intermediaries. Users have full control and transparency over their stablecoins, and can verify the underlying collateral and the protocol rules at any time. Direct distribution also enables greater accessibility and inclusivity, as anyone with an internet connection and a compatible device can participate in the protocol, regardless of their location, identity, or financial status.
Example
To give a concrete example, consider redeeming / selling cUSD on Celo for USDC on Ethereum. The Mento platform allows you to mint or redeem cUSD directly from the protocol, without needing any intermediaries or permissions. To facilitate this you can use Squid Router. Squid Router is a user interface that allows you to connect your wallet, such as MetaMask, and access the Axelar bridge, which is a system that connects different blockchains and enables cross-chain communication and transfers. Squid Router allows you to select the asset that you want to send and the asset that you want to receive, and it shows you the exchange rate, the estimated amount, and the fees that you have to pay. The Squid Router also guides you through the steps that you have to follow to complete the exchange, such as approving the transaction, confirming the transfer, and waiting for the confirmation.
Assume you sell 100,000 cUSD on Celo. Here are the steps that you have to follow using the Squid Router:
- Connect your wallet to the Squid Router, and make sure that you have enough cUSD and CELO in your wallet. CELO is the native currency of the Celo blockchain, and it is used to pay for the network fees.
- Select cUSD as the asset that you want to send, and enter 100,000 as the amount. Select USDC as the asset that you want to receive, and choose Celo as the destination blockchain. Squid Router will show you the exchange rate, which is 1 cUSD = 0.9999 USDC, the estimated amount, which is 99,990 cUSD, and the fees, which are 61.5 CELO.
- Click on the “Swap” button, and approve the transaction in your wallet. The Squid Router will transfer your USDC from your wallet to the bridge Axelar, and show you a confirmation message.
- Wait for the confirmation from the bridge Axelar, which may take a few minutes. The Axelar bridge will convert your cUSD to USDC, and transfer your USDC to your wallet on the Ethereum blockchain.
As you can see, using the Squid Router is a very easy and fast way to exchange digital assets across different blockchains, and to mint or redeem cUSD from our stable protocol. You can also use the Squid Router to exchange other assets, such as CELO, ETH, or BTC.
What is Market Efficiency?
Market efficiency is a measure of how well the market prices reflect the true value of an asset. A market is efficient if the prices are close to the fair value, converge across different marketplaces, are independent of the traded amount, and are available at all times. Market efficiency is important for stablecoins, as it ensures that users can buy and sell stablecoins at a consistent and predictable rate, and that the stablecoins can maintain their peg to the reference currency. High market efficiency cultivates trust by creating an environment that is fair, transparent, reliable, and accessible.
The challenge of direct distribution is that the protocol has to provide an infrastructure of supply chain tooling for those services that are mediated by intermediaries in external distribution models. For example, in order to create or redeem decentralized stablecoins, users need to have access to the collateral asset, such as CELO or other supported assets, and be able to transfer it to and from the protocol. Users also need to have access to liquidity providers, such as market makers or exchanges, who can offer competitive prices and volumes for stablecoins. These services are not trivial to provide, and require a lot of coordination and optimization.
How We Improved the Protocol
Therefore, we have improved the Mento protocol over time to provide a better service and experience for users and the market. We have learned from the best practices of traditional finance, and we have separated the functions and responsibilities of the smart contracts into different units, similar to how a brokerage firm operates. We have also implemented a governance system, which allows users and stakeholders to have a voice and a vote in the protocol parameters, and to participate in the decision-making process of the protocol. Here are some of the features and improvements that we have added to Mento:
Smart Contract Architecture Redesign: We have redesigned the smart contract architecture to make it more modular, scalable, and upgradable. This allows adding new features and functionalities to the protocol more easily and securely, and to adapt to the changing needs and preferences of the Mento users and the market. We have also separated the functions and responsibilities of the smart contracts into different units, such as the broker, the price manager, and the risk department, which we will explain in more detail below.
On-chain Security Features: We have implemented various on-chain security features, such as circuit breakers, to protect the protocol and users from potential attacks or malfunctions. Circuit breakers are mechanisms that can pause or limit certain actions in the protocol, such as creation or redemption of stablecoins, in case of emergency situations, such as extreme price fluctuations, network congestion, or protocol bugs. The circuit breakers are part of the risk department, which we will explain in more detail below.
Redemption and Issuance via Assets is Configurable: We have made the protocol more flexible and interoperable by allowing users to create and redeem stablecoins using different collateral assets. This gives users more options and convenience, and also increases the diversity and resilience of the collateral pool. By allowing other less volatile assets as collateral, throughput can be increased, as less volatility means less uncertainty and market risk. This can also reduce slippage and price impact of exchange transactions, and improve market efficiency and liquidity of the stablecoin. The broker smart contract, which is explained in more detail below, handles the exchange of collateral and stable tokens with the users.
Increased Redemption and Issuance Throughput: We have optimized the protocol to increase speed and efficiency of creating and redeeming stablecoins. This reduces transaction costs and the waiting time for users, and also improves responsiveness and stability of the stablecoin. The broker smart contract, which is covered in more detail below, is the one that executes the exchange transactions with the users.
Modular Supply Chain Toolkit (MATE): This is a tool, currently under development, that will allow users to streamline chains of transactions that involve moving or swapping digital assets. For example, an on/off ramp from fiat that would require multiple manual transactions can be automated and simplified using the tool. M.A.T.E defines and manages asset flows and steps, which are sequences of operations that either transfer or exchange digital assets. For example, a flow can consist of withdrawing crypto from an exchange, swapping it for another asset on a decentralized exchange, and depositing it to another account. Each step is tailored and configured to ensure seamless asset management. The tool will enable the execution of various functionalities, such as:
- Withdraw Crypto from an Exchange: This enables the transfer of assets from a crypto exchange to an account on a specified blockchain.
- Deposit Crypto to an Exchange: This enables the movement of an asset from an on-chain account back to a crypto exchange.
- Fiat Onramp: This provides a mechanism for users to move fiat from a given bank account to a specified exchange.
- Fiat Offramp: This allows users to convert a specific digital asset into fiat and transfer it from a crypto exchange to their bank account.
- Rollback Mechanism: This automatically rolls back or reverses any operations that were successfully executed in the event of a failed operation.
- Configuration Validation: This validates the structure and data types of configurations against predefined expectations. It provides clear, actionable error messages when discrepancies or mismatches are detected, enabling quick resolution.
We believe that a stable protocol that relies on direct distribution has to provide more than just smart contracts, but additionally also on-chain and off-chain supply chain software tools that allow users to interact with the market efficiently. In a way, the protocol does not live on the blockchain only, but has an extended sphere into the software tools that run on the local machines of the user.
Now, let us explain in more detail how each of the smart contract units works, and how they interact with each other and with the users.
Broker: This contract is akin to a broker and is responsible for executing exchanges with clients, ensuring the accurate and secure execution of stable token issuance and redemption. It is the main interface for the users to interact with the protocol and allows users to create or redeem stablecoins by exchanging collateral assets, such as Celo or other supported assets. The broker smart contract uses the price manager to determine the exchange rate, and checks the trading limits and requests the status on the circuit breaker from the price manager to ensure the validity and safety of the transaction. The broker smart contract also handles the minting and burning of the stable tokens. Pricing Department / BiPool Manager: This unit, analogous to a quantitative or pricing department, manages trade pricing. It provides the pricing information for the assets that are involved in the exchange. The price manager ensures that the exchange rate is fair and accurate, and reflects the market conditions and the supply and demand of the assets. The price manager also updates the exchange rate periodically, and communicates with the broker smart contract to provide the latest pricing information. The price manager is responsible for providing a reliable and transparent pricing service for the users, and for ensuring the market efficiency of the stablecoin. Risk Department / Circuit Breaker: This is the unit that oversees and controls the risk exposure of the protocol. It sets the trading limits and the circuit breakers for the protocol, which are parameters that regulate the amount and frequency of the exchange transactions. The trading limits are set per time interval, such as 5 min or daily, and can be changed via on-chain governance. The circuit breakers are mechanisms that can pause or limit certain actions in the protocol, such as creation or redemption of stablecoins, in case of emergency situations, such as extreme price fluctuations. The risk department monitors the market movements and the protocol performance, and can intervene or adjust the trading parameters if necessary. The risk department is responsible for providing a safe and stable service for the users, and for protecting the protocol from potential threats or disruptions. For a more detailed and technical description of the circuit breaker refer to DeFi Security: Inside the Mento Protocol's Circuit Breaker.
Conclusion
We are very proud of the recent improvements and upgrades, and we believe that Mento offers a unique and valuable solution for the decentralized economy. We are also very grateful for the support and feedback of our community, and we are always looking for ways to improve the Mento protocol and our service. We hope that this blog post has given you a better understanding of the vision and our work, and we invite you to join us in the journey to create a more efficient and inclusive stablecoin ecosystem. Thank you for reading!
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