- MLN token is a utility token that accrues value by charging protocol fees; token inflation is used to fund protocol maintenance & development.
- Fees began for the first time with the launch of Enzyme v4 in March 2022. All v4 vaults now pay a 25 basis points (bps) fee on AUM. The protocol also accrues referral fees from various integrations with DEX’s and DeFi protocols.
- Network fees assure investors that maintenance, development and security practices are upheld to a high standard.
- Enzyme has shown tremendous growth in both absolute and relative terms vs its peers over the last 12 months, so it is crucial to keep the protocol standards higher than ever.
- Our goal through the market is to grow AUM in ETH terms so that we are nicely positioned for the next DeFi Summer.
- At our last AUM peak of $230m (assuming all vaults on v4), Enzyme would be annualising $575K-$1.15m in AUM based fees without including any referral fees.
- On 9th August, 2022, the Enzyme council approved the burn of 54,669 MLN tokens, worth approximately $1,500,000.00 at the time of writing
- To date, the Enzyme council has burned 382,125 MLN tokens. This figure can be tracked here.
Enzyme was first deployed to main-net (as Melon) three and a half years ago. The protocol’s governance methodology and its token’s economic utility have evolved over that time. This blog post will serve to aggregate the latest state of tokenomics and governance in one place.
Part I: Utility & Network Value
In essence, MLN is a utility token. The network collects fees that are paid in MLN and the Council burns them at the end of each year.
From v4 onwards, each Enzyme vault is charged annualised fees for interacting with the network. There is an incentive to pay these fees in MLN because you get a 50% discount if you do (ie. user ends up paying 25bps instead of 50bps). This also encourages managers to hold MLN tokens in their vaults, thus reducing the circulating supply. Once the MLN fees are collected, they are burnt and permanently removed from overall circulation. For those fees collected in other currencies, they’ll eventually be converted to MLN and then burnt.
This is an exciting update for MLN token holders and the wider ecosystem, since the value of the MLN token is now directly linked to growth in assets under management on the network. As the total value of asset-under-management increases on Enzyme, the more MLN will be burned.
Referral & Partner Fees
Since Enzyme is integrated with many third party protocols, it is sometimes entitled to protocol referral fees. These fees accrue to this gnosis safe and will be converted into MLN and burnt whenever they accrue an aggregate value greater than $250,000.
Most DEX’s have trading fees embedded in the protocol, however, Paraswap allows its users to decide what this fee is and then share that with their own network.
The Enzyme Council has always opted against trading fees on Ethereum, given that there is already enough friction with gas costs being so high. However, with Enzyme’s Polygon deployment in March 2022, this is no longer the case and the Enzyme Council opted for a 50bps fee on trading here on Paraswap. Polygon fees can be tracked in this Polygon safe here.
The aggregation of fees and monitoring can be tracked here.
The introduction of fees is currently very new, and many vaults are still in the process of upgrading from v3 to v4. However, if we assume that all vaults migrate to v4 and AUM at this year’s peak of $230m, Enzyme would be annualizing a range of $575K- $1.15m in fees without including any extra upside from referral fees.
Growing AUM in ETH terms during this bear market will set us up very nicely for the next bull market where we should be able to make new USD highs in AUM.
Part II: Development, Maintenance & Security
The minter can taketh away, but it can also giveth. On the other side of the burn equation is the ability for the minter contract to mint new tokens. Enzyme’s supply began with a low number of tokens, and the minter contract allows it to mint a maximum of 300,600 tokens every March.
The Enzyme Council DAO can review grant applications and allocate those funds to projects, developers, maintainers and auditors who they believe can add value to the Enzyme ecosystem. Some example of grantees over the last year include Avantgarde Finance who pitched to take over core development of the protocol in the last bear market, Exponent who are building treasury management products on top of Enzyme, Theo who built the PoolTogether adapter, Atlantis DAO who are adding Enzyme to their Metaverse and many more. Earlier this year we moved many of the Council decisions to Snapshot for greater transparency.
The belief is that funding needs will be higher in the early years of the project but will reduce drastically over time. Some guidelines that the Council has provided in the past about reducing this inflation number include the following:
- Less frequent protocol upgrades
- Reaching 10,000 users
- Reaching $1 billion in AUM
Part III: Governance
The original Enzyme Council was appointed by Melonport before it wound down the company and handed over governance to the DAO. However, over the years, membership has gradually grown by the consensus of the council. As the first protocol in DeFi history to decentralise our governance, this has not come without some pain points and frustrations which have forced us to iterate. Information on the various iterations we have made along the way is scattered and difficult to find, so we’re currently in the process of updating our statutes to reflect the most current state of affairs. These statutes will be published and linked here once they are finalised and signed off by vote.
Two major initiatives in recent months are worth highlighting:
- An improvement proposal was voted in to delegate specialised responsibilities to various council members. The background and rationale behind this decision can be found here.
- The introduction of minimum participation requirements for the council members. Many metrics are easily measurable and therefore subject to easy implementation of minimum requirements. The Council has self-imposed a minimum requirement of participating in at least 33% of all votes and attending at least 50% of all calls. The goal is to leverage tooling to automate these metrics, make them more transparent and review them periodically. Members of council who fall below the minimum threshold for a period of 3 months will be warned and, after 6 months, removed from the council if no improvement is seen.
The most up to date information on who is on the council can be found in our docs here.
Part IV: $MLN Token Burns
MLN is a disinflationary token, since only a maximum amount of up to 300,600 MLN can be minted per year. This means that, as a function of total market cap, the percentage of new tokens minted each year will continually decrease over time.
In other words, the percentage of new tokens (as a function of total market cap) that are minted in year 10 of the project’s existence will be dramatically lower (by several multiples) than it was in year 1 of the project.
But there are other factors at play, too:
i) While the Enzyme council can mint up to 300,600 MLN per year, this is only intended to fund critical development, maintenance and marketing activities. As the protocol matures, the funding needs should theoretically also decrease in MLN terms. Excess tokens are reviewed by the council on an annual basis, deleted from the token balance and burned, thus reducing the total supply by that amount.
ii) Now that the AUM based fee has kicked in, the MLN fees generated will be collected and burnt.
Both of these factors remove more supply, which in theory should benefit token holders and investors. Eventually, with enough usage, the hope is that the protocol becomes deflationary (ie. overall supply decreases in absolute terms year on year).
On Tuesday August 9th, 2022, the Enzyme council voted in favour of an additional token burn in the amount of 54,669 MLN tokens (an approximate value of $1.5M at the time of writing). You can view that transaction on Etherscan here.
Since MLN’s token migration in 2019, the Enzyme council has burned a total of 382,125 MLN tokens. You can track and monitor this figure here.
This means that, in three years, the Enzyme council has effectively burned 18.2% of the total circulating supply of MLN tokens.
MLN tokens burned = 382,125
MLN circulating supply = 2,093,198
MLN tokens burned / MLN circulating supply = 18.2%
Part V: Maintaining AUM Growth through the Bear Market
We’ve seen phenomenal growth over the last 18–24 months, whichever way you look at it. Our TVL was hit quite hard recently due to the fact our largest user since March has been Celsius. These redemptions were unfortunately a result of the liquidity conditions which Celsius found itself in. Importantly, Celsius’ on-chain product (the Celsius-X bridge) was never compromised and the cxTokens remained transparently and verifiably 1–1 backed with Enzyme and Chainlink’s Proof of Reserve at all times.
Despite being well into a bear market now, this is not our first. Enzyme and its ecosystem of builders are well funded which will enable us to focus on building and growing for the next DeFi summer.