DeFi, Meet Smart $M

The M^0 Foundation, in close coordination with the engineering team at M^0 Labs, is excited to release our next-generation wrapper contracts for the $M stablecoin – or as we like to call it, “Smart $M”.

Current stablecoins like USDT and USDC do not share any yield with their users. If they do, it’s through a commercial agreement with their counterparties and is not settled in an automated way. Because of this paradigm, many DeFi protocols are not built to handle native yield from a stablecoin in their integrations. Some stablecoins such as DAI and USDM, do have native yield and have built simple v1 wrappers for such integrations, which use an internal “exchange rate” to continually increase the value of the wrapped asset over time. For example, 1 sDAI today is redeemable for 1.10 DAI but in a month may be redeemable for 1.15 DAI. 

This constant increase in price is not desirable for DeFi integrations for a number of reasons. First, a continually shifting exchange rate in the denominator asset of a lending market or liquidity pool will cause user experience distortions and force users to factor this implicit deflation into otherwise simple accounting. Another undesirable feature of this wrapper construct, from the perspective of the protocol, is that it is indiscriminate and pays yield to all holders. This strategy conflicts with M^0’s B2B2C model, where accrued yield is redirected to market participants like liquidity providers, market makers, or even redistributors and rewards programs with their own discretion on how to pass this yield on to their users.

The question we set out to answer when designing Smart $M was: Can we retain the benefits of commercial distribution agreements without sacrificing the advantages of credibly neutral on-chain yield distribution? We are happy to say that we have found a solution, and we are proud to introduce the Smart $M wrapper contract.

To understand the Smart $M architecture, it’s essential to first examine how $M itself functions and pays yield when not in a wrapper contract. This process leverages M^0’s innovative Two Token Governor (“TTG”) to curate a global “Earner List” for $M and its various cross-chain integrations (currently in progress). Once an address — whether it be a smart contract or an EOA — is on this Earner List, it is able to call startEarningFor() and then begins to earn the Earner Rate. It is worth noting that an address holding Smart $M that is not on the Earner List will not earn yield. The Earner Rate, determined through TTG governance, is currently set to 5%. It should roughly track the US Federal Funds rate given the current $M collateral composition. Once startEarningFor() is called, the user’s balance will “rebase” upwards by referencing a protocol index. However, since most DeFi smart contracts (a) cannot call an external method like and (b) cannot support assets that rebase, a wrapper contract is needed to support these integrations.

The Smart $M wrapper contract always maintains a 1:1 exchange rate between $M and Smart $M. If you wrap 1 $M today, it will be redeemable for 1 Smart $M at any point in the future. For users on the Earner List the rebasing functionality is replaced with a claim() function that can be executed manually, and is executed automatically on transfers. For example, if your address is on the Earner List and has accrued 5% additional yield over a year, rather than this simply being reflected in your balance, you will need to call claim() to extract the yield. For smart contracts that cannot call startEarningFor() or claim() directly, like the above mentioned DeFi smart contracts, we have allowed anyone to call startEarningFor() on behalf of an address on the Earner List, and anyone can trigger a claim() for an earning account. Similarly, since most DeFi smart contracts are not equipped to handle the increase of their balance outside of expected user interactions, M^0 governance can override the primary Earner List – the “Claim Override” – and direct the yield to a different address. This other address can be either an EOA or a smart contract.

To highlight how this works, imagine an example where a Uniswap v3 pool is added to the Earner List. This pool is Smart $M/$USDC ($wM being the on-chain ticker symbol for Smart $M). In parallel, we add a second contract to the Claim Override, which overrides the Uniswap pool address as the destination of any claimed yield – let’s call this the “override contract”. Since the exchange rate of Smart $M/$M is always 1, LPs don’t need to worry about the implicit deflation of yield impacting the exchange rate of the pool, making implementation and management much simpler. Anyone can call  for the specific pool and cause it to begin to accrue yield. Any time yield is claimed, either due to normal interactions with the pool or directly triggered by anyone, the accrued yield is sent to this override contract, where it may distribute this yield in any arbitrary fashion, such as proportionately rewarding LPs in the Uniswap pool based on the liquidity they have provided. 

The Smart $M wrapper gives integrators unprecedented control over the yield earned on assets within their protocols and systems. Current stablecoins either require cumbersome off-chain commercial agreements that are antithetical to crypto innovation or, at the other extreme, pass 100% of the yield to users through a simple v1 wrapper design that diminishes user experience. Only Smart $M puts total control back into the hands of the integrator, allowing them to fully automate yield distribution in an upgradeable, crypto-native way. If you are a stablecoin user interested in integrating Smart $M into your protocol or system, please do not hesitate to reach out.  

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By Greg Di Prisco, Co-Founder and Chief Architect of M^0

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About The M^0 Ecosystem

M^0 is money middleware for the internet age. It is a decentralized, on-chain protocol, as well as a corresponding set of off-chain standards and APIs, that powers a federation of cryptodollar issuers. With M^0, any number of independent institutions can tap on turnkey middleware to become the minter of a fungible cryptodollar asset.