MRC 23: Fortifying Morpheus: The Critical Role of Protection Fund Diversification
Status:
April 1st, 2024: PENDING
Comments: Awaiting technical dependencies. Please make comments and pull requests on Github. For informal chat see this Discord link: https://discord.com/channels/1151741790408429580/1219753230746124418
Introduction
This paper aims to highlight the critical role of a diversified Protection Fund in the long-term strategy of the Morpheus ecosystem. Proposed is a refined approach to the existing Morpheus model that not only enhances its current framework but also opens pathways for broader diversification.
As a quick background, the Protection Fund serves to provide financial support for payments related to audits, bug bounties, compensation resulting from attacks, etc. Additional details can be found via: https://github.com/MorpheusAIs/Docs/blob/main/!KEYDOCS%20README%20FIRST!/Protection%20Fund%20Details.md.
Morpheus serves as a hub for a diverse group of participants, including Code, Capital, and Compute providers, Community builders, and users, facilitating a variety of interactions within its ecosystem. To ensure these participants can engage with confidence and security, it is essential to establish a well-diversified Protection Fund. Such a fund can provide a robust safety net, fostering a secure environment for all involved, regardless of market conditions. In its current implementation, the fund's holdings are expected to consist solely of 4% of the MOR emissions, which results in a lack of diversification.
The Problem
The singular reliance on MOR as the sole asset in the Protection Fund's holdings reduces its optionality and introduces a significant vulnerability in scenarios requiring substantial payouts. In the event of a large-scale payout, especially when the payout is not denominated in MOR, the perceived necessity to liquidate MOR assets could itself precipitate a decline in the MOR market price. This is due to the increased supply of MOR in the market coinciding with the fund's attempts to meet its payout obligations, potentially exacerbating market pressures and leading to a devaluation of the asset at the very moment its value is most needed. Diminishing its capacity to provide adequate support and protection to the ecosystem's participants.
Strategic Solution
To enhance the resilience and stability of the Morpheus ecosystem, this MRC proposes a multifaceted approach to diversifying the assets held within the Protection Fund. This strategy is designed to mitigate risks and ensure a robust safety net for all ecosystem participants. The following outlines the proposed diversification mechanisms:
Emissions-Based Diversification: It is proposed to allocate 25% of the MOR received by the Protection Fund from its share of total MOR emissions (4% of the total emissions) towards diversifying its holdings. Specifically, this allocation will be split into stETH and stablecoins (DAI), with 12.5% of the Protection Fund's MOR allocated to each asset class. This diversification process will be conducted on a weekly basis, ensuring a consistent and strategic approach to asset allocation. Please refer to Appendix B for an analysis on the market impact of emissions-based diversification.
MRC 20 Standard Earnings: As a further measure to bolster the Protection Fund, it’s suggested to retain 25% of the earnings accrued to Morpheus through the MRC 20 standard directly within the Protection Fund. This approach aims to capitalize on the expansion of the MRC 20 standard generated by the ecosystem's activities, reinforcing the Protection Fund’s capacity to support the ecosystem in times of need. Please refer to Appendix C for deeper analysis and supporting documentation.
New Yield-Generating Assets: In anticipation of future growth and the integration of new yield-generating assets into the Morpheus ecosystem, it is proposed that 5% of any yield earned from these new assets be retained within the Protection Fund. This policy is designed to automatically enhance the fund's diversification of assets in which Morpheus operates and financial health as the ecosystem expands and evolves. Please refer to Appendix D for deeper analysis and supporting documentation.
End Result: Operational Framework
The operational framework for enhancing the Morpheus ecosystem's financial resilience and stability is structured around three core strategies: diversification through asset allocation, retention of earnings, and integration of yield-generating assets. Here's how each component is mechanized:
Emissions-Based Diversification: The Protection Fund will allocate 25% of the MOR it receives from its share of total MOR emissions (4% of the total emissions) towards diversifying its holdings. This strategic allocation aims to balance the fund's asset composition, thereby mitigating risks associated with the volatility of MOR's price. The process is broken down as follows:
The allocated 25% will be evenly split between stETH and stablecoins (DAI), dedicating 12.5% of the Protection Fund's MOR to each asset class. This diversification targets both growth and stability by investing in Ethereum (via stETH) and the reliable value of stablecoins.
This diversification process will be carried out on a weekly basis and executed through the Protection Fund smart contract, an automated on-chain swap via Uniswap, originating from the main location of the Protection Fund, which is currently on Arbitrum.
MRC 20 Standard Earnings: To further reinforce the Protection Fund, 25% of the earnings generated through the MRC 20 Standard activities within the Morpheus ecosystem will be retained within the fund. This strategy leverages the economic activities and expansions driven by the MRC 20 standard, ensuring a portion of the generated value directly contributes to the ecosystem's safety net. As yield is earned by Morpheus through the MCR 20 Standard, 25% of the yield will be retained in the Protection Fund before the remainder is allocated to the liquidity pool, as currently proposed in the MRC 20 standard. This allocation will follow the same cadence adopted for adding that yield to the liquidity pool.
New Yield-Generating Assets: With the anticipation of Morpheus ecosystem's growth and the integration of new yield-generating assets, a policy is proposed where 5% of any yield earned from these assets is retained within the Protection Fund. This approach is designed to organically enhance the Protection Fund’s diversification and financial health as new assets are adopted and as the ecosystem evolves.
A native Protection Fund contract will be established on any new platform to which Morpheus expands. Additionally, 5% of the yield generated by new yield-generating assets will be retained in the newly established Protection Fund smart contract, following the same cadence adopted for yield collection on that platform.
Value Proposition: Advantages of the Proposed Solution
Risk Diversification
Incorporating stETH and other assets, alongside MOR within the Protection Fund, serves as a fundamental strategy for mitigating the fund's exposure to the price volatility of MOR. This diversification is crucial for enhancing the overall stability of the ecosystem. By balancing the asset composition of the Protection Fund, ensuring a more resilient financial foundation capable of withstanding market fluctuations, thereby safeguarding the ecosystem's integrity and the interests of its participants.
Ownership in Underlying Platforms and Expansion Ecosystems
Strategic Exposure: Actively acquiring stakes in essential assets and technologies within the ecosystems Morpheus enters. This diversification not only broadens the Protection Fund assets, but also integrates Morpheus into the core of these burgeoning platforms, securing a vested interest in their success and governance mechanisms.
Ecosystem Integration: Owning assets in the ecosystems Morpheus ventures into not only secures a strategic position but also offers valuable insights and influence over the development trajectories and governance of these platforms. This proactive involvement allows Morpheus to contribute to and benefit from the innovation and growth within these ecosystems.
Asset Matching for Payments in Event of Exploit
One type of payment that the Protection Fund is created to cover is user losses in the case of an exploited Morpheus Smart Contract (refer to https://github.com/MorpheusAIs/Docs/blob/main/!KEYDOCS%20README%20FIRST!/Protection%20Fund%20Details.md). Having a diversified set of assets in the Protection Fund allows Morpheus to payout the correct asset in the event of an exploit. For example, if there is an exploit on a JitoSOL capital contract, then Morpheus can directly reimburse JitoSOL. Without having the corresponding assets, the Protection Fund would either be required to sell MOR for JitoSOL, or establish a snapshot ratio for how much each JitoSOL is worth in terms of MOR. As we have seen with large scale exploits and bankruptcies across the industry, this often results in a process that is overly complicated due to establishment of ratios, snapshot dates, changes in asset price/ratios over time, and a variety of other factors.
Payout Scenarios
Incorporating a contingency plan for potential payouts, the Protection Fund is uniquely positioned to leverage its structure in the event of insufficient MOR holdings to meet payout requirements. A pivotal advantage underpinning the fund is its guaranteed receipt of 4% of MOR emissions, a steady inflow that provides a reliable source of assets. In scenarios where the fund's current MOR holdings are not sufficient to cover required payouts, this ongoing emission allocation can be strategically earmarked to fulfill the payout obligations as it accrues. This mechanism ensures that, despite the immediate shortfall, the Protection Fund can commit to compensating the required payouts, offering a layer of financial resilience and stability that is essential for maintaining confidence within the Morpheus ecosystem. This forward-looking approach not only enhances the fund's capability to manage its liabilities but also underscores the robustness of its financial planning and risk management strategies.
The diversification of the Protection Fund also puts Morpheus in a stronger position when determining payouts. Morpheus can offer payments in multiple currencies and work with the developer, audit company, etc. to negotiate favorable terms if there is a preferred asset designation.
List of Morpheus Reference Implementations Effected
Protection Fund
Smart Contracts on Ethereum / Arbitrum / Future venues
TCM / MOR20 Token Standard for Fair Launches
Dependencies
“Morpheus Protection Fund Proposal” in the Key Docs repository. MOR emissions as noted (4% of total daily) would be impacted as 25% of these would need to be traded for stETH and DAI.
“TechnoCapitalMachineTCM” in the Key Docs repository and MRC20. Both of these developments will impact directing 25% of Morpheus’ earning from this process towards the Protection Fund.
Integration with new yield-generating assets. These are less dependencies, but more so MRCs that will be impacted if this Protection Fund MRC gets accepted as 5% of these new assets’ yield would be directed to the Protection Fund:
MRC15: Asset Integration Framework
MRC12: stMATIC
MRC13: JitoSOL
MRC17: Solana
Time to Complete
Completed: Primary research and analytics on diversification approaches and strategies.
3 weeks: MRC published and strategy refinement based on community discussions.
3 weeks: Technical development and integration consisting of the emissions-based diversification where a smart contract will be developed to sell 25% of MOR on a weekly basis in Protection Fund: 12.5% for stETH and 12.5% for stablecoins.
Ongoing: Collaborate with discuss and development around MRC20 Standards and rollout so that 25% of earnings can be allocated to Protection Fund
Ongoing: Collaborate and discuss with yield-generating asset integration frameworks to align with the implementation of the 5% of new asset yield directed to the Protection Fund.
Conclusion
This MRC articulates a comprehensive strategy aimed at fortifying the Morpheus ecosystem through the diversification of the Protection Fund. By addressing existing vulnerabilities and enhancing operational processes, we endeavor to establish a secure, liquid, and well-diversified ecosystem that confers benefits to all participants. This document serves as a foundational blueprint for these critical improvements, laying the groundwork for future refinement and optimization. Through collective dialogue and in-depth analysis, we invite the community to engage in this evolutionary process, ensuring that our ecosystem not only thrives but also remains resilient against the challenges ahead. Together, we are setting a new standard for ecosystem security and stability, ensuring that Morpheus continues to be a beacon of innovation and collaboration in the blockchain space.
Appendices
The information provided is strictly hypothetical and is for visualization and general informational purposes only. All information on the charts is provided in good faith, however, we make no representation or warranty of any kind, express or implied, regarding the accuracy, adequacy, validity, reliability, availability, or completeness of any information on the charts. The data presented in the charts, including but not limited to staked values, yields, USD yields, and allocations to protection funds, are hypothetical and should not be considered as financial advice. The outcomes are based on theoretical scenarios and should not be taken as predictions of future performance.
Appendix A: Future Considerations
This appendix serves to encompass relevant topics that can be evaluated in the future. Since there are a vast number of unknowns regarding the future, this section means to highlight areas to keep in mind based on future decisions for Morpheus as well as future market conditions. None of these are to be completed during the development and implementation of this particular MRC, but can serve as a starting point for future maintenance or separate MRCs.
Re-balance Protection Fund: as future prices are unknown, there is a chance that due to increase or decreases in a particular asset price from the time of acquisition, the Protection Fund could be overly weighted in one direction or another. This could present an opportunity to perform trades to balance asset allocations towards a defined percentage breakdown. For example, if MOR appreciates in price and crosses a threshold of 80% (or 90%, 95%, 99%, etc), then it could trigger a mechanism to sell some MOR for stETH, DAI, or other assets to bring down over-weighting on MOR.
Evaluate different stablecoins beyond DAI. DAI was selected as it best aligns with Morpheus’ ideals. In the future, it may make sense to hold other (USDC, USDT or other) stablecoins in some capacity. It also is worth evaluating holding yield generating versions of stablecoins.
Allocate 5% of stETH yield to the Protection Fund starting after 1 year
Adjust the % of yield from staked assets over time. Initially set at 5%, but could increase in the future as liquidity deepens and the need for additional protocol owned liquidity is less pronounced.
Evaluate over time if 12.5% of emissions should continue to go towards stETH, or if a different asset makes sense. For example, if a different yield generating asset overtakes stETH in total contribution, then the 12.5% could get directed to that asset to encourage alignment of the Protection Fund diversification with the capital contribution and ecosystem activity.
Consider how to manage the assets within the Protection Fund. One consideration could be to participate in MRC20 Standard via the TCM model as new projects onboard. This would allow the Protection Fund to gain exposure to native tokens of the new protocols that align with Morpheus.
Adjust some percentage of stETH to ETH to avoid Lido risk.
$20
$11,160
$2,790
$1,395
$1,395
$40
$22,320
$5,580
$2,790
$2,790
$60
$33,480
$8,370
$4,185
$4,185
$80
$44,640
$11,160
$5,580
$5,580
$100
$55,800
$13,950
$6,975
$6,975
$120
$66,960
$16,740
$8,370
$8,370
$140
$78,120
$19,530
$9,765
$9,765
$160
$89,280
$22,320
$11,160
$11,160
$180
$100,440
$25,110
$12,555
$12,555
$200
$111,600
$27,900
$13,950
$13,950
Appendix B: Emissions-Based Diversification Market Impact
Over the first year, an average of 558 MOR will be emitted to the Protection Fund on a daily basis. The table below shows the impact of selling 25% of those emissions for diversification, based on different prices of MOR. Please note, all amounts below are on a daily basis.
$100,000,000
5%
$5,000,000
$17,500
$4,375
$200,000,000
5%
$10,000,000
$35,000
$8,750
$300,000,000
5%
$15,000,000
$52,500
$13,125
$400,000,000
5%
$20,000,000
$70,000
$17,500
$500,000,000
5%
$25,000,000
$87,500
$21,875
$600,000,000
5%
$30,000,000
$105,000
$26,250
$700,000,000
5%
$35,000,000
$122,500
$30,625
$800,000,000
5%
$40,000,000
$140,000
$35,000
$900,000,000
5%
$45,000,000
$157,500
$39,375
$1,000,000,000
5%
$50,000,000
$175,000
$43,750
Appendix C: MRC 20 Standard Earnings
The table below provides an outline of the estimated amount contributed to the Protection Fund based on various levels of staked assets participating via MRC 20. To keep numbers easily referenced, the table assumes a 5% yield on the delegated asset. Per the MRC 20 Standard, 0.35% of this yield would be directed to Morpheus. Per this MRC, 25% of that amount going to Morpheus would be allocated to the Protection Fund. Please note, all amounts below are for an annual period.
$100,000,000
5%
$5,000,000
$250,000
$685
$200,000,000
5%
$10,000,000
$500,000
$1,370
$300,000,000
5%
$15,000,000
$750,000
$2,055
$400,000,000
5%
$20,000,000
$1,000,000
$2,740
$500,000,000
5%
$25,000,000
$1,250,000
$3,425
$600,000,000
5%
$30,000,000
$1,500,000
$4,110
$700,000,000
5%
$35,000,000
$1,750,000
$4,795
$800,000,000
5%
$40,000,000
$2,000,000
$5,479
$900,000,000
5%
$45,000,000
$2,250,000
$6,164
$1,000,000,000
5%
$50,000,000
$2,500,000
$6,849
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