KIP Draft: Yield generation on Maple Finance (wETH pool)

Introduction

Following the successful partnership between Keeper, Maven 11 and Maple Finance, the following documentation is a proposal to invest a portion of the wETH currently inactive in Keeper’s treasury fund into the soon-to-launch wETH pool managed by Maven 11 on the Maple Finance protocol. On a mission to redefine capital markets through digital assets, Maple Finance is a decentralized corporate credit platform that provides undercollateralized lending for institutional borrowers and fixed-income opportunities for lenders. KYC’d institutions can borrow funds from the lending pools managed by Pool Delegates, who are asset managers (such as Blackrock in TradFi) with credit expertise that assess the borrower’s credit worthiness and set up the terms of the loans such as interest rate and collateral ratio.

Maven 11 is a digital asset investment firm that combines deep roots in the DeFi ecosystem with professional expertise in finance. Maven 11 was one of the earliest believers in Maple Finance which resulted in our investment in the project. Furthermore, we, as Maven 11, decided to take a proactive approach in our engagement with Maple and become the second pool delegate on the platform. Currently, we are managing one of the four pools on Maple Finance denominated in USDC where KeeperDAO deposited 3,500,000 USDC following the successful result of KIP-6 after the voting process on Snapshot. Considering the success of the USDC pool, which was launched in July 2021 and has grown from $21 million TVL to over $180 million TVL in December 2021, we are looking to roll out a new liquidity pool denominated in wETH. Maven 11 would be the first Pool Delegate to launch a pool on Maple Finance with wETH as asset base. Our target launch date is mid February 2022. To bootstrap the new pool, we are offering the possibility to whitelisted lenders, such as KeeperDAO, to deposit 5,000,000 USD in wETH (~2000 wETH at the time of writing) of its treasury.

In the last proposal we mentioned how, as we wanted to have all the competences and tools to successfully launch and manage the first pool, we opened a brand new lending division within our firm. For this purpose, we dedicated one quantitative analyst with a risk management background and hired an external advisor who you had the occasion to meet during the latest AMA session held on KeeperDAO’s server on Discord with Maven 11’s and Maple’s representatives. Moreover, after our successful launch, we also added a junior with credit background and a director spearheading our institutional sales with over 15 years experience in capital markets, of which he spent 8 years in New York and was in managerial roles in institutional sales and trading at Kempen & Co, KBC Securities and NIBC.

The whole team behind the role of Pool Delegate of the USDC pool will manage the wETH pool as well. Therefore, Maven 11 is committed to further scale its lending division and we are continuously looking for new talents in the space that share our passion for DeFi and want to decentralize the future of lending together with us.

The numbers in the proposal for the USDC pool were last updated on the 18th of January 2022, so we cannot guarantee that they are up-to-date by the time of posting or reading. Pool specification on the wETH pool follows the same rules as for the USDC pool and will be discussed in the proposal section.

AMA session

Maven 11 and Maple Finance have successfully organised and held active AMA sessions with the Keeper community as well as other DAO communities across the space. We would be happy to schedule another AMA session with Maven’s and Maple’s representatives to walk the Keeper community through our new wETH pool and to discuss the proposal more in depth. We invite you to read through the proposal as we are looking forward to any feedback, comments, suggestions, and concerns!

Rationale

Why Invest?

Currently, assets in the KeeperDAO treasury are valued at approximately $85 million, of which $9 million is kept in ETH, $14.8mln in kwETH and $14.8mln in kETH.

The main purpose of utilizing a portion of the Ether in a wrapped version held by the Keeper’s treasury to provide liquidity on Maple Finance is to generate an additional yield on now-idle assets. This will enhance the capital efficiency of the treasury, the value of which will ultimately find its way back to the members of the DAO.

The yield generation on Maple Finance on the USDC pool managed by Maven 11 can still be considered a success, considering how the protocol has regularly provided yield in USDC and MPL to its LPs, without incurring in any of the possible risks in taking part of the lending process at the basis of its mechanisms.

We are still aware that the risk appetite for the majority of DAOs is relatively low as the treasury assets are viewed as a buffer for potential adverse scenarios such as a bear market and as operational resources. However, we think that increasing the size of the invested amount on Maple Finance by depositing wETH instead of stablecoins might be appealing for DAOs ( and other LPs ) that do not want to lose exposure on Ether while farming yield, also considering the current opportunities available in the space that do not propose this kind of risk/reward perspective. Exactly like for the USDC pool, this lending opportunity presents a solution that combines a relatively moderate risk profile while simultaneously offering a generous yield based on wETH and MPL.

Why Maple Finance?

To reiterate, the lending opportunity presented in this proposal is for KeeperDAO to use (a part of) their treasury’s Eth in wrapped form to provide liquidity in the Maple Finance protocol, specifically in the new pool denominated in wETH and managed by Maven 11.

Maple Finance’s platform is currently allowing KYC’d institutions to borrow USDC on an undercollateralized basis based on legally enforceable loans agreements. Maven 11 would be the first Pool Delegate to manage a pool completely denominated in wrapped ETH - exactly as for the USDC lending pools, these are semi-permissioned: liquidity provision is fully permissionless, i.e. any participant can freely deposit collateral, but borrowing is fully permissioned as ensured by a Pool Delegate (PD). Pool Delegates are parties with credit and fund management expertise; they use a compelling strategy to find approval by Maple governance to launch a pool contract, attract capital, and commit loans. They perform diligence and set terms with borrowers - the process starts with identifying and reaching out to potential borrowers, assessing their credit profile, and lastly negotiating the interest rate, duration, and other terms required for the issuance of the loan.

It is important to stress the strong incentive alignment between the PDs and the collective of depositors of the liquidity pool. As explained in the previous proposal, PDs stake USDC/MPL governance token as a protection mechanism which would take full hits until fully wiped out in case of loan defaults, ensuring that the PD has skin in the game as well as LPs have a security buffer before their capital would be affected by a default in any form. The wETH pool will be covered by the same protection mechanism, with Maven 11 providing part of the wETH composing the junior tranche. Exactly as for the USDC pool, there is a target for the pool cover of the wETH pool to be equal at least to the 10% of the pool size.

The borrowers currently utilising the USDC for their business strategies, as well as each single loan’s characteristics, from the durations to the interest rates, are transparent and can be viewed on Maple Finance. Since the last proposal, the list of KYC’d borrowers has increased as Maple is always incrementing its reputation as the new go-to for under collateralized loans for institutional borrowers.

For the initial bootstrap of the pool, we are targeting between 30 to 50 mln USD worth of wETH to be deposited by whitelisted lenders, including other DAOs as part of their treasury diversification efforts. After the launch, the pool will be completely open to investors of the DeFi space, as Maple Finance and the Maven 11 pools want to grant access to such crypto-native, top-notch borrowers, which cannot be directly dealt with in an equally institutionalised and safeguarded process elsewhere.

To summarize, following the success of the investment made by Keeper in the USDC pool, we think that lending to the new wETH pool as whitelisted lenders will give the possibility to generate an attractive yield on idle ETH in the treasury with a protocol that has been already proved to be successful. Also, the lending opportunity in wETH will increase treasury diversification while maintaining exposure to the asset lent for yield generation.

Statistics of Maven 11 USDC pool

The following is a summary to provide some context on the performance of the Maven 11 liquidity pool.

  • The Maven 11 liquidity pool with USDC as base asset has grown from $21 TVL to over $180 million TVL from mid July when we launched the pool.
  • We have funded 37 loans as of January 18th 2021, at a total value of over $181.6 million.
  • 6 loans already matured and were repaid, 31 are active.
  • The pool has faced 0 payment defaults.

The total composition of the USDC pool consists of market making/trading companies as well as yield funds. We are aiming at reaching a similar borrower type composition for the wETH pool and, exactly as in the USDC pool, we are dealing only with borrowers that are considered as market neutral (i.e. they do not have directional exposure to the market).

The distribution of the borrowers in terms of their size is very wide and ranges from 10M USD to as large as 10B+ USD.

The geographical distribution of the borrowers is also very spread. As we can observe on the pie chart, almost 30% of our borrowers are registered on the Cayman Islands while the rest is spread rather uniformly among other jurisdictions such as the US, Australia, Hong Kong or the UK.

The loan amount per borrower varies from $2 million to as much as $20 million. We are working hard to reduce the pool concentration with a target of maximum 10% of the pool size per borrower. We are close to achieving this goal, however it is worth noting that in the early phase of the project, larger counterparties require relatively larger loans compared to the smaller participants. Once the pool size grows substantially, the borrower base will follow, which will drastically reduce the exposure to a particular counterparty. Furthermore, the main blocker of the inflows towards the staking cover is the inability of single sided staking. This limitation will be solved at the end of Q1 when single sided staking will be enabled with various assets such as MPL, wBTC, wETH and stablecoins.

As we can observe on the following chart, the interest rates are hovering around the 10% mark, in fact, the average interest rate is currently 9.83% for our USDC pool. We expect the average interest rate for the wETH pool to be at around 5%-6%.

We started the pool with the loans set for 90 days to build a credit history with our borrowers and bootstrap the pool in a shielded manner. Currently, our loans in large majority have a tenor of 180 days. We are also exploring longer term (360 days) as well as super short term loans (30 days) to better fit into our borrowers’ needs. All the initial loans for the whitelisted borrowers for our wETH pool will have a tenor of at least 90 days and up to 180 days.

For more statistics, please refer to the Dune Analytics dashboard or to the Maple Finance page 1.

Proposal

Amount and Duration of Investment

The proposal is for KeeperDAO to invest $5,000,000 (~1600 wETH) in the new liquidity pool where Maven 11 is a Pool Delegate. This amount of wETH would represent ~13% of the total ETH in Keeper’s treasury and ~6% of total value of all treasury assets. Providing this amount of wETH to the liquidity pool would maintain risk at an appropriate level with negligible risk for the overall financial health of the DAO.

Parameters

Amount of asset to be invested: $5,000,000 (~1600 wETH)

Minimum lock up period: 180 days (after 90 days you will be technically allowed to leave the pool but if the majority of the initial loans will be set for 180 days, you will miss significant amount of interest payments which will affect your APY)

Rewards

Below are listed the rewards for Keeper and other whitelisted lenders:

  • Lenders will receive yield in wETH and MPL tokens.
  • Target range APY = 8-12% which includes 4-6% of wETH and remainder in MPL token dependent on the market conditions.
  • Lenders commit their capital for 180 days with a 10-day cooldown period.
  • Interest is distributed each time borrowers make their interest payments.
  • MPL rewards are released on a block-by-block basis (no lock-up period).

Lenders receive 80% of the interest payments from the borrowers in wETH, while the remaining 20% is distributed in a 50:50 split to the Maple Finance treasury and the PD. On top of that, Maple Finance provides incentives to the lenders in their native governance token MPL which can be used for staking (i.e. providing capital of last resort in case of defaults) and for governance of the protocol and the treasury. In the future, it is also expected that the value capture of the MPL token will expand. The most prominent example of this would be to enable a pro-rata revenue sharing scheme between the Maple Finance protocol and token holders as well as the ability to boost a chosen pool with rewards (refreshed tokenomics are in works).

To summarize, depositing wETH in the Maven 11 liquidity pool on Maple Finance will generate two different types of yield: yield in wETH, and yield in the MPL governance token.

  • wETH yield, as reported, has a target at 4-6% APY. This yield is released on an ongoing basis as the interest payments are paid.
  • MPL reward token yield, boosting expected total APY to 8-12%. These MPL rewards are released on a block by block basis.

The APY itself is dependent on 3 factors:

  1. Interest rates - when the interest rates among the borrowers in the pool are increasing, the wETH part of yield is increasing as well (and vice versa).
  2. Amount of liquidity in the pool - when the pool increases in size, the rewards in MPL are decreasing proportionally as the number of MPL tokens needs to be distributed among a larger number of participants (and vice versa).
  3. MPL price - when the price of MPL is increasing, the rewards in MPL are higher in $ terms, effectively increasing the APY (and vice versa).

Risks

Smart contract risk

Participating in DeFi protocol comes with an inherent risk of smart contract vulnerabilities and bugs. In the case of participation in Maple Finance, a few mitigating factors can be noted. Firstly, the contracts used by Maple Finance have been thoroughly audited by Peckshield 2, Code Arena and Dedaub (please refer to the Maple Finance Github for more details). Secondly, the contracts are characterized by their relatively low complexity which leads to a low probability of exploits. Third, the utilization rate of funds in the liquidity pool will be very high as the one reported in the USDC pool, as we aim to keep as little cash as possible in the pool in order to consistently lend out the asset to borrowers and provide yield to our LPs (of course, keeping in mind that proper risk management practices are in place). Therefore, the smart contracts of Maple Finance become highly unattractive targets for hackers as the potential reward is very small.

Default risk

As Maple Finance facilitates undercollateralized lending, the protocol faces an inherent risk of borrowers defaulting. To mitigate this, Maven 11 together with other protocol participants provide the capital of last resort for our pools. This capital is liquidated first when the default of the borrower occurs, therefore it should be treated as a “junior tranche”. As a result, LP capital - the “senior tranche” - is affected on a pro-rata basis if the junior tranche does not cover the loan amount in full. On top of that, the borrowers are facing legal consequences on their defaults. They are obliged to sign a Master Loan Agreement 3 (enforceable by NYC law) as well as to go through the full KYC 5 process. Lastly, they are facing reputational risk, as a default on Maple Finance will likely translate into a complete drought of credit facilities for the borrower. It is relevant to note that the protocol has faced 0 defaults thus far.

Even considering the current deposit made by Keeper on the USDC pool, there will be a certain level of diversification among borrowers as Maven 11 will actively research for borrowers that will request loans especially only on one of the two pools - maintaining a certain level of diversification against default risk even among different pools.

MPL price risk

As mentioned previously, a portion of the yield generated on wETH deposits will come from MPL governance token rewards. This means that price appreciation of these tokens will lead to increased APYs, but naturally also means the same vice versa. The accumulation of these governance tokens will provide Keeper with further voting power inside the Maple Finance project, also considering the current accumulated MPL tokens from the USDC pool. As mentioned also in the USDC proposal, the value of these tokens is dependent on the growth and adoption of Maple Finance in the broadest sense.
Alpha leak: we are actively working on new MPL tokenomics, proposal will be released very soon.

Liquidity pool growth (decrease in APY)

As the liquidity pool grows in size, the liquidity incentivization through MPL governance tokens rewards will decrease proportionally as the total amount of MPL tokens emitted is distributed over a larger number of participants. We anticipate moderate, gradual growth in the pool.

Market conditions (decrease in interest rates on stablecoins)

If market conditions were to deteriorate, a low volatility period where our target borrowers i.e. market makers are less profitable, it would be sensible to assume that the demand for leverage would also decrease. This could lead to a decrease in interest rates, and thus a decrease in the APY for depositors.

Specification

The proposal outlined here is to be put through the Keeper governance process in order for the community to be able to review the proposal and provide feedback where necessary. If the proposal is approved by the DAOs governance process, the implementation of the proposal should follow these steps:

  1. On Maple Finance, approve wETH to spend.
  2. Deposit $5 million ~in wETH to the Maven 11 liquidity pool and receive Maple Pool Tokens (MPT), to be eligible for receiving wETH rewards
  3. Approve MPT to spend.
  4. Stake MPT in Maple Finance, to be eligible for receiving MPL governance token rewards (do not confuse with staking for the pool cover, staking MPT is purely to receive MPL rewards and it is a technical requirement).

Final thoughts

We are really happy and thankful to the KeeperDAO community for the support received during the last voting process. We would really love to engage in discussion about our new offer in another AMA session and we hope to receive the same active participation as the last time on Keeper’s Discord server.

If you have some initial questions about the proposal, you can check our FAQ Institutional Lenders. Here you will be able to find answers to common questions that institutional lenders may have before depositing in a pool managed by Maven 11. The covered arguments are:

  • Borrower Selection
  • Credit Risk Assessment
  • Pool coverage
  • Portfolio Management
  • Expected returns
  • Guide to deposit
  • Reporting
  • Regulations

Additional links:

KeeperDAO Treasury

Maple Finance app

Guide to lending on Maple

Maple Finance Dune Dashboard

Maple Finance AML KYC procedure

Master Loan Agreement (MLA)

Maple Finance API docs

Credit Memo

1 Like

No thank you, too long didn’t read. The only way this would be viable for KD is if CG keepers could be whitelisted to take out flash loans on unloaned capital in the pool

2 Likes

Hey,

Thank you for some feedback, sorry to hear the proposal is too long for you. Keeper already deposited 3.5mln USDC to our existing pool so the rules would be the same here for wETH. Interesting proposal on the flash loans. We will discuss it internally with the Maple team.

Really great proposal and appreciate the time/effort you put into this. I would be hesitant to move forward with this proposal for these main reasons:

  1. Poor macro/market conditions
  2. I am very close to developing a framework/process that we use to vet our fund allocation. I would prefer this to be analyzed under that systematic approach vs. the informal one we have now.
  3. We are trying to start prioritizing investing our funds in protocols that are looking to integrate us into their infrastructure

Some other concerns I had are as follows:

  1. During a time of poor market conditions, locking our funds for 180 days limits our ability to make big moves if the market continues to declines. For example, if things got really bad in the market, we may go out there and try to snag up some cheap protocols/assets.
  2. There is a fair concentration of credit risk in Hong Kong which has a higher risk of macro/political conditions having an impact
  3. I don’t see too much information around how credit risk is actually assessed for borrowers. I looked in this document but I still don’t have the full picture or may be missing it: FAQ Institutional Lenders - Google Docs
  4. The fact that an audit is not required is not preferred
  5. Because we already have a decent amount of (USDC) funds deposited with you guys, we would be increasing our concentration of funds which is never ideal.

With all that being said, I think there is a huge opportunity for us to deepen our relationships to where 1+1=5. I look forward to collaborating further on this proposal.

2 Likes

Hey DaddyMatty,

We appreciate your feedback. Happy to clarify the points you’ve raised:

  1. We agree that the macro and market conditions are far from ideal at the moment, but the truth is that the funds you are keeping in ETH are sitting idle in your treasury. We guess that you will not be fully selling your ETH especially if the prices are going to continue to go downwards. The time for such move was rather at the end of 2021. Therefore, we think that increasing your ETH holdings in a passive way makes a lot of sense even in a bear market. Another solution could be decreasing the size of the deposit that would make you more comfortable.

  2. We fully support more decentralized framework and are happy to assist with it.

  3. We are happy to help with onboarding the best market makers in the industry to Keeper. Given our job, we talk with them on a basis and hold close ties with them. We would be very keen to shed light on what Keeper is building. We are also open for other ideas for cooperation.

  4. The funds are technically locked for 90 days, however it is our recommendation to stay in the pool for 180 days as then you will participate in all of the interest payments paid from initial batch of borrowers. If you prefer to leave after 90 days, we do not have any issue with that. Furthermore, given the risk aversion towards the treasury funds, passive strategies such as Maple Finance seem more suitable than trading altcoins.

  5. We think that geographical distribution is widely spread and we do not perceive it as a major risk to our operation.

  6. We would be happy to answer more about our credit risk assessment which we already addressed during the previous AMA. We are keen to organize another one if the community feels like some questions have been unanswered.

  7. We receive audited financials from our borrowers but these take time to prepare and are backward looking. Therefore, to stay in the loop, we ask for updates very frequently and this information cannot be audited that fast. On top of that, we are in the process of integrating X-Margin which will allow us to monitor the positions of the borrowers live which will increase the visibility even further.

  8. It is a valid argument, if the exposure seems to be too high for the community, we are happy to discuss smaller allocation.

One more time, thank you for the feedback. We are open to work with community on crafting the proposal to your needs. We also propose to make another AMA if that is the wish of the DAO.

It has been brought to light in the community that there have been instances of TVL pumping by Maple’s own borrowers. This was a fairly lazy job too - a slightly more determined borrower might borrow, withdraw to a CEX, and deposit on Maple once again. Maple’s emissions/economics design has been criticized previously for being broken.

This shows that the due diligence process by pool delegates such as yourself is lacking. Who knows what percentage of borrowers are re-depositing their capital on Maple who put in a little more effort in cleaning their tracks? This, combined with your point:

  1. We receive audited financials from our borrowers but these take time to prepare and are backward looking. Therefore, to stay in the loop, we ask for updates very frequently and this information cannot be audited that fast. On top of that, we are in the process of integrating X-Margin which will allow us to monitor the positions of the borrowers live which will increase the visibility even further.

is concerning. Shows that the process is opaque, and the pool delegates who’re meant to serve as the proxies for the entire community for risk assessment are kind of hand waving through this as well. I strongly oppose this proposal.