As you might have seen, we are in the middle of upgrading to an entirely new Mento system, called Multi-Collateral Mento, which can be expected to significantly increase liquidity and usability of cUSD, cEUR and cREAL, and potential future currencies launched by the community on Mento, while adding additional safety features like on-chain circuit breakers (for details on the upgrade, see Mento Upgrade #1 deployment timeline). The entire Mento Labs team has worked very hard over the last few months to get to this point and we are really grateful for all the support we have received from the wider Celo and Mento community in the process.
The Mento protocol has been an integral part of the Celo blockchain from day 1 and has been bootstrapped and continuously supported by the Celo community. Over the last few months, we have worked tirelessly on achieving an independent and self-sustaining Mento - together with cLabs, the Celo Foundation and Celo community members, we worked on creating an independent Mento project and brand - see our Hello World forum post. We are proud to announce that Mento is now ready to stand on its own feet and we would like to take the chance to give back to the Celo community.
The Mento Reserve has received 120M CELO in the Celo genesis block to bootstrap the cUSD reserve. It speaks for the efficiency and robustness of the Mento system that, despite the market crash, the Mento reserve today holds more CELO than it initially received (~134M CELO as of Feb 27, 2023) while cUSD, cEUR and cREAL are about 135% collateralized in non-CELO assets alone (>100% in DAI and USDC plus an additional ~15M USD in BTC and ETH). Since cStables are significantly over-collateralized through external assets, most of the reserve CELO are, at this point, not required anymore as collateral safety cushion.
This gives us the opportunity to propose that the Mento Reserve returns the 120M CELO it received in the genesis block to the On-Chain Celo Community Fund. These CELOs could then be used where they are needed the most - for example to bump up epoch rewards for validators and stakers and to support Celo community projects with additional grants.
Please let us know below how you feel about this and share additional thoughts and considerations you might have. Additionally, we are looking forward to discussing this more deeply in the Celo Governance Call tomorrow.
Freeing up Celo tokens from Mento reserves would help support ecosystem growth elsewhere and affirming the over-collateralised nature of cStables (as opposed to algorithmic) whilst being more regulatory resilient following the catastrophic failures of 2022.
Thank you all for the thoughtful feedback and also for the great discussion in yesterdays governance call. Some first gut reactions from my side on the remarks above.
The Mento Labs team is made of a bunch of early Celo core contributors so there is a pretty natural incentive alignment between Mento and Celo. But even when looking at Mento in isolation: I think what Mento needs right now is additional usage (cXXX supply has been going doing continously), not excessive reserve collateral. Therefore strengthening Celo and Celo Community Projects via excess reserve funds makes lots of sense for Mento I believe.
From my perspective, the 120M CELO just idle in the reserve and are not put to any effective use right now. They are not contributing much to stablecoin holder protection either as selling a large share of those 120M would not be feasible at currently CELO market liquidity levels. We lately realized, similar to what was mentioned by @untangled-finance, that the large CELO allocation in the reserve actually creates the impression with some folks that cStables are similar to Terras UST as it appears as if the stability mechanism relies on significant backing in native utility tokens. This is not the case as cStables are (and always shall be) overcollateralized with external collateral. So even from a pure appearances perspective, there might be a benefit of reducing the CELO allocation in the Mento reserve.
Agreed that some folks could feel less confidence about the system simply due to the lower collateral ratio. But folks who make the effort to look a bit closer should realize that the CELO collateral is not the collateral the stability mechanism is relying on in the first place (that’s rather the 1:1 backing in USDC an DAI and the additional external collateral in BTC and ETH).
Regarding 1.: Every venue out there has their own methodology of calculating circulating supply but if I understand correctly, most of the prominent ones (like coinmarketcap) include the reserve in their circulating supply estimate.
Regarding 2.: My guess is that not much would change as most venues are considering it circulating already (see 1.)
Regarding 3.: I do not think this is the case (see 2.)
Thank you very much for the answer which clarifies the issue perfectly.
In that case, this would be a very right step for Celo.
Mento has been making great strides lately. Continuing on its way as a separate entity completely independent of CLabs will speed up this process much more. I wish you all the best in this new restructuring.
If there’s another crash and the collateral ratio goes down, or if there’s a lot of newly minted cStable that causes the ratio to go down, is there a mechanism to claw back this 120M celo?
This sounds like a one-way street where the collateral get taken out of the reserve, but no automated recourse to bring it back if it’s needed in the future.
Is the community fund running low on Celo? Does it need to be topped up with ALL 120M reserve Celo immediately? How about a gradual release on-demand as needed to the community fund, and only when the reserve ratio is above some threshold?
So far a claw back was not discussed. I guess the community could at any point decide via governance to send back some CELO if it wanted to. However, with cStables backed >100% by USDC and DAI, it’s not clear to me that a market crash would require such action - unless of course USDC and/or DAI depeg significantly while the market crashes. Newly minted cStables should not lead to a need for a claw back either when the reserve mandate of >100% backing in USDC and DAI is fulfilled as the inflow of value due to expansion of cStables supply should lead to an equivalent increase in USDC or DAI backing.
Certainly something we could consider as well and I would love to hear how others feel about it. I believe I prefer a one-off transfer though coupled with the clear mandate for the community to decide how to use those funds as I fear that a stepwise approach could be slow, full of overhead (multiple CGPs) and could easily lead to nothing happening at all.
One other thought is exploring from a community governance standpoint deploying this CELO on chain into DeFi protocols to bolster on-chain liquidity. The returns from this could go back to the community fund as well while also helping people move around the ecosystem and use dapps. For example, with the Aave governance proposal up, we could explore deploying some of this CELO into Aave as liquidity (not rewards). Similarly something like an stCELO / CELO pool on Uniswap.
And then in case the community needs this funding for other purposes, this could be removed from the DeFi protocols as needed.
Bootstrapping 120M into the Aave pool sounds like a good way to kickstart the liquidity and earn yields.
It keeps the optionality of bringing this back into the reserve in the future and generates yields to boost the community fund.
Feels like optically, as levels of abstraction are slowly being peeled away cStables could very easily be considered as basically bridged USDC.
We saw this week that DAI is very strongly correlated to USDC due to the large vaults of USDC backing it, and given that cStables are backed by both these assets, functionally one could argue that cStables are effectively USDC wrappers, which is probably not the original intention of the protocol.
I wonder if there’s a more Celo-like manner to add backing to cStables? Like natural asset backing, or investing the 120M Celo in a climate fund that purchases real-world assets or similar? Everything feels like a shell game this week.