Overview
The Mento reserve (https://reserve.mento.org/) consists of a diversified set of crypto assets. The core mandate of the reserve is simple:
- Preserve the 1:1 peg of the outstanding Mento stablecoins against this reserve at all times.
- Maintain high liquidity for on-demand redemptions.
- Generate a safe and sustainable yield where possible without compromising stability.
No. 3., the safe and sustainable yield, is an important component of platform revenue. We would like to start the discussion and the governance process on this component, so that we can support sustainable growth of Mento, while not risking No. 1, the 1:1 peg, and No. 2, liquidity for redemptions.
To achieve this, we would like to propose to split reserve assets into risk tiers—from safe(r) stablecoins to higher-volatility crypto assets. Each tier has clear guidelines on allocation, liquidity, and yield expectations, ensuring that the lowest risk tiers can be liquidated immediately. In parallel we are proposing to move forward on the technical transfer of governance control as approved by governance in CGP #180.
On the split of reserve assets into risk tiers we would like to introduce the following structure:
Tier 0 – Liquidity (Low Risk)
- Assets: USDC, USDT, axlUSDC etc, available for immediate redemption against Mento stablecoins
- Role: Immediate redemption liquidity
- Yield: 0% - might be some fees
- Liquidity: Real-time
- Allocation: ~30%+ Allocation, approx. 100% of the outstanding stablecoins at the current overcollateralization (in agreement with prev. governance proposals on 100% collateralization with low risk assets)
Tier 1 – Liquid Core (Low Risk + ~1-5% yield)
- Assets: Primarily top stablecoins like USDC, USDT, DAI. Possibly staked in low-risk savings (e.g. DAI Savings Rate) or blue-chip lending.
- Role: Immediate redemption liquidity. Near-zero volatility, minimal smart contract risk.
- Yield: ~1–5% (low, but very liquid).
- Liquidity: T+0 to T+1 (basically same-day availability).
- Allocation: ~20%+ Allocation, so that Tier 0 and Tier 1 approx. make up 50% of the overall Allocation.
- Sub-categories: Yield-Bearing Stablecoins:
Overview Sub-Categorie:
Yield-bearing stablecoins are digital assets designed to maintain a stable value, typically pegged to fiat currencies like the US dollar, while simultaneously generating passive income for holders. Unlike traditional stablecoins, which do not offer returns, yield-bearing variants integrate mechanisms that accrue interest or rewards over time.
Examples and Mechanisms Sub-Categorie:
- USDY by Ondo Finance: Backed by short-term U.S. Treasuries and bank deposits, USDY automatically accrues yield without requiring users to stake or lock up their tokens.
- aUSDC and aDAI (Aave): Users deposit USDC or DAI into the Aave protocol and receive aTokens that accrue interest over time, reflecting the yield generated from lending activities.
- cUSDC and cDAI (Compound): Similar to Aave, Compound allows users to earn interest by supplying USDC or DAI, receiving cTokens that increase in value as interest accrues.
Risk Considerations Sub-Categorie:
- Smart Contract Risk: Yield-bearing stablecoins rely on smart contracts, which may contain bugs or be vulnerable to exploits, potentially leading to loss of funds.
- Liquidity Risk: In times of market stress, liquidity may deteriorate, impacting the ability to redeem or exit positions in a timely manner.
- Regulatory Risk: The regulatory environment for yield-bearing stablecoins is still evolving, with possible implications for their legal classification, usage restrictions, and the activities of issuers.
- Allocation Risk: Active monitoring of allocations is essential, not only due to the aforementioned risks, but also in response to shifts in issuer quality, market conditions, or protocol design — all of which can change rapidly in this dynamic sector.
Tier 2 – Yield Reserve (Moderate Risk)
- Assets: Still USD stablecoins but deployed in DeFi protocols offering higher returns (e.g. stablecoin LP pools on Curve, mid-tier lending platforms, Yearn strategies).
- Role: Enhanced yield on stable holdings while preserving moderate liquidity.
- Yield: ~3–10% (higher than Tier 1, with some smart contract or liquidity risk).
- Liquidity: T+1 to T+2 (aim to exit within ~48 hours).
- Allocation: ~30% Allocation
- Sub-categories: Subject to further research
Tier 3 – Growth / Volatile Assets (High Risk)
- Assets: Major cryptos (ETH, BTC, CELO), staking derivatives / derivatives (e.g. stETH, selling covered calls on reserve assets) and staking platforms (Falcon.Finance).
- Role: Long-term upside and diversification. Limited to protect peg stability if markets crash.
- Yield: 5–15%+ (staking rewards in volatile coins).
- Liquidity: T+2 or more, subject to price swings or unbonding periods.
- Allocation: ~20% Allocation
- Sub-categories: Falcon Finance: Multi-Strategy Yield Protocol
Overview Sub-Categorie:
Falcon Finance is a decentralized finance (DeFi) protocol that offers a synthetic stablecoin backed by a diverse range of collateral, including both stable and volatile crypto assets. Its primary objective is to generate sustainable yield through a combination of strategies, such as positive funding rate arbitrage, negative funding rate arbitrage, cross-exchange price arbitrage and native staking returns. By employing a dynamic collateral selection framework, Falcon Finance aims to optimize yield while managing risk exposure.
Sources:
Gate.io
Falcon Finance
Risk Considerations Sub-Categorie:
- Market Competition: Falcon Finance operates in a highly competitive DeFi landscape. Falcon employs delta-neutral basis and funding rate arbitrage (which can perform well in bull markets), and Falcon employs negative funding rate arbitrage, cross-exchange arbitrage, altcoin yield farming, and insurance fund strategies that are more focussed on performance during bear markets.
- Regulatory Uncertainty: The evolving regulatory environment poses potential risks, especially concerning the classification and treatment of synthetic stablecoins.
- Technological Risks: As with any DeFi protocol, Falcon Finance is susceptible to smart contract vulnerabilities and other technological threats.
- User Education: The complexity of Falcon Finance’s yield strategies may present barriers to entry for less experienced users, necessitating comprehensive user education initiatives.
Transparency and Security:
Falcon Finance provides regular audits and maintains a transparency page detailing reserve allocations and yield performance. Security measures include the use of Multi-Party Computation (MPC) wallets and integrations with custodial services like Fireblocks to safeguard assets.
Risk Tiers - Overview
| Tier | Risk | Allocation | Yield | Liquidity | Example Assets |
|---|---|---|---|---|---|
| 0 | Very Low | ~30% | ~0% | Real-time | USDC, USDT |
| 1 | Low | ~20% | 1–5% | T+0 to T+1 | sDAI, DSR, Aave |
| 2 | Moderate | ~30% | 3–10% | T+1 to T+2 | Curve, Yearn |
| 3 | High | ~20% | 5–15% | T+2+ | stETH, Falcon |
Key Principles
In order to execute on the 3 key mandates of the reserve as outlined in the beginning with these new risk tiers, the reserve should adhere to the following key principles:
- Denomination Preservation: Assets should maintain their original denomination to reduce unnecessary risk. Stablecoins should remain in stablecoin form (e.g., DAI → sDAI), and cryptocurrencies should remain in their native or staked versions (e.g., ETH → stETH). This approach avoids introducing foreign exchange (FX) or peg risk, which could otherwise create misalignment between reserve assets and stablecoin liabilities.
- Cross-Chain Availability: The reserve must support seamless, low-latency redemptions also in cases where redemptions will be supported across ecosystems. This is achieved by either maintaining local liquidity in each ecosystem or using fast, secure bridging infrastructure to ensure that users can exit their stablecoin positions without delay, even in stressed market conditions.
- 80% in T+2 Liquidity: A minimum of 80% of reserve assets—comprising Tier 0 (highly liquid assets), Tier 1 (liquid, low-risk yield assets), and Tier 2 (diversified, risk-adjusted assets)—should be unwindable within T+2 (two trading days). This ensures that in the event of a market shock or sudden redemption event, the protocol can mobilize a large majority of its reserves quickly and without excessive slippage.
- Diversification & Risk Caps: Exposure to any single asset—whether stablecoin or volatile—must be capped to reduce systemic and counterparty risk. The reserve avoids concentration by spreading risk across multiple issuers and chains. While the inclusion of higher-growth or volatile assets (Tier 3) can boost long-term sustainability, they are limited to a small allocation (e.g., 20% maximum) to ensure that the value of the reserve is not overly sensitive to market drawdowns or asset-specific failures.
Governance & Future Automation
With a forthcoming CGP based on a revised reserve strategy as outlined here, the reserve relies on a governance-led framework decided on by the Celo and in future Mento community, based on both automated and manual execution, while laying the groundwork for full automation and resilience over time. For this forthcoming CGP we are happy for feedback here and/or in a future governance call. Mento Labs will remain one of the service and development companies supporting the community by building out automation, safety features and tools for the reserve and the Mento platform.
1. Reserve Rebalancing by Governance, Mento Labs and Multisig members
Reserve strategy and allocation guidelines are determined and periodically updated by the governance community. Governance decisions include setting target allocations across tiers, defining risk thresholds, and whitelisting eligible protocols and assets. Based on these parameters, Mento Labs (and in future potentially also other whitelisted service providers) monitor reserve composition and in cases where fully automated execution is not available support rebalancings when assets deviate from target weights or exceed risk caps.
As part of a proposal, assets and protocols mentioned within the text—such as sDAI and Falcon.Finance— can be whitelisted for reserve allocation for max. a one-year period, subject to periodic reporting and risk review and then have to be brought back to governance voting. This enables immediate deployment while ensuring continued oversight.
2. Emergency Powers for Rapid Response
In the event of significant disruptions such as stablecoin depegs, protocol exploits, or systemic market stress, Mento Labs (and in future other whitelisted service providers subject to community governance) are authorized—under governance-approved emergency powers—to take immediate action. These powers allow for swift movement of assets into Tier 0 (native stablecoins) or Tier 1 (highly liquid and secure yield-bearing stablecoins), in order to preserve reserve integrity and maintain the stablecoin peg. These actions follow the core mandate of the reserve (preserve the peg, maintain liquidity, and when possible without compomising stability generate a safe and sustainable yield).
Emergency actions will be transparently reported post-execution and subject to retrospective community review.
3. Path Toward Automation
While the initial implementation involves manual monitoring and intervention, the long-term vision includes automated on-chain reserve management. Inspired by systems such as MakerDAO’s Dynamic Savings Rate (DSR) controller, smart contract-based agents could dynamically rebalance assets across tiers based on predefined risk models and liquidity needs. This would further reduce operational overhead, improve reactivity, and allow for 24/7 cross-chain reserve optimization without constant human input.
4. Path Toward Mento Governance
Via CGP#180 “Mento Spin-off and Launch of the MENTO token” the Celo Community approved the transfer of governance over the Mento Protocol (smart contract, reserve, etc.) from CELO to MENTO token holders. As outlined in CGP#180, the technical transfer of governance control over the Mento smart contracts was postponed to allow for the prior distribution of MENTO tokens and thorough testing of the MENTO governance system before executing the transfer at the smart contract level. The distribution of MENTO tokens, as agreed upon in CGP#180, is now complete, and the MENTO governance system has been thoroughly tested and refined. As part of this, a first mainnet MENTO Governance Proposal was successfully completed and executed on November 4th, 2024. In parallel to a community vote on the new “Yield on Mento Reserve” guidelines as described above a parallel CGP will be issued to complete the transfer of governance over the Mento Protocol on the smart contract level.