Analysis of Mantle LSP Dual-channel yield aggregator supported by RWA and ETH PoS

Investigating the Effectiveness of Mantle LSP Dual-channel Yield Aggregator with RWA and ETH PoS Support

Author: Wu Shuozuo | defioasis

Editor: Colin Wu

On December 4th, L2 network Mantle announced the launch of its ETH liquidity staking protocol, Mantle LSP. This core product is deployed on Ethereum L1 and managed by Mantle. As of December 14th, after being online for 10 days, Mantle LSP has a total value locked (TVL) of over 120,000 ETH, worth approximately $274 million, with over 3,700 validators and an APY of 3.92%. (All data in this article is as of December 14th, 18:00 UTC+8).

Development History of Mantle LSP

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On June 14th, 2023, Mantle Builder, core contributors, and advisor Cateatpeanut initiated the first discussion about Mantle LSD (predecessor of Mantle LSP) on the Mantle governance forum. They proposed the introduction of the liquidity staking protocol, Mantle LSD, deployed on the Ethereum mainnet. Users, including Mantle Treasury, could deposit ETH and receive mntETH (previously mETH) tokens that accumulate staking rewards.

On July 29th, 2023, Cateatpeanut and the Mantle core team officially launched MIP-25: Mantle Economic Council and ETH Staking Strategy Proposal to the community, which received 100% support through voting.

On October 6th, 2023, the mainnet contract for Mantle LSP was deployed, but only core contributors on the whitelist with a maximum of 1,000 mETH were eligible to participate.

On December 4th, 2023, the ETH liquidity staking protocol, Mantle LSP, was officially launched to all users.

Although Mantle LSP has achieved billions of dollars in ETH staking in just a week, the process from community discussion to proposal to official launch took nearly half a year, following the governance flow established by the Mantle community. Mantle LSP adopts a simple and user-friendly design based on Ethereum Shanghai upgrade, emphasizing the integrity of mETH running on L1 without adding complexity with other PoS tokens and chains.

mETH Distribution

mETH, as the staked ETH token of Mantle LSP, reveals the composition of the staking entities, user preferences, and protocol adoption based on its distribution.

Data source: https://etherscan.io/token/0xd5f7838f5c461feff7fe49ea5ebaf7728bb0adfa#balances, as of December 14th, 18:00

The largest holder of mETH is the Mantle Treasury, with a total of approximately 97,200 mETH, accounting for about 81.4%. During the initial proposal discussion stage in June, it was allowed for the Mantle Treasury to participate as part of the users in Mantle LSP. Unlike most LSD protocols without staking limits, Mantle LSP ultimately established a cap of 250,000 mETH, which means that important partners of the Mantle ecosystem, including Mantle Treasury, institutional partners, and ecosystem supporters, can benefit from its services. The Mantle Treasury can also use its mETH to provide liquidity support for on-chain DeFi protocols, expanding its use cases.

mETH, the second largest holder, is from Mantle Network. Mantle LSP and L2 Mantle Network work together to expand the adoption of mETH on L2 and establish partnerships with DeFi protocols. In the coming weeks, mETH will begin to be used as ETH in various Mantle DeFi protocols. In the future, mETH will also explore becoming the gas fee for L2 Mantle Network.

Both Uniswap and Bybit secondary markets allow you to buy and sell mETH, but the price on the secondary market is determined by price discovery, and large transactions may face higher slippage. It is worth mentioning that mETH is also listed on the on-chain exchange SideShift ai, which does not require account registration.

The largest non-exchange EOA users of mETH are two DeFi players. One user participates in the Convex USDT+crvUSD staking, and the other player may have a close relationship with the venture capital firm Taureon Capital, which has invested in the important LSD trading protocol Maverick. (Arkham data shows that the address has transferred over 150 wstETH to the suspected Taureon Capital address.) Apart from the institutional identity, this user is also a senior DeFi Degen player, injecting 375.4 stETH into the LSD stablecoin protocol Prisma Finance, borrowing 383,000 mkUSD, and using mkUSD for Farming mining, which has accumulated approximately $7,000 in rewards; and participating in Ethena USDe staking. The more efficient the Degen players are, the more they can utilize the composability of mETH to penetrate various major DeFi protocols and applications in the Mantle Network, earning profits while providing efficient liquidity for the protocols.

Ecological stablecoin and the dual drive of Mantle LSP

One month before the launch of Mantle LSP, in early November, Mantle and Ondo Finance announced the launch of the RWA-supported stablecoin USDY and the rebasing version mUSD on Mantle Network. Currently, Ondo Finance has a USDY TVL of over $35 million with an APY of 5.2%, with an issuance of over $3.7 million on Ethereum and over $29 million on Mantle. Stablecoins USDY and mUSD provide another stable source of income for the Mantle ecosystem.

USDY is overcollateralized and is essentially a tokenized note secured by short-term US Treasury bonds and bank demand deposits. It is significantly different from stablecoins issued by centralized entities:

(1) Bankruptcy isolation entity. Most stablecoins have specific issuers, such as Tether and USDT, Circle and USDC, and if the issuer goes bankrupt, stablecoin holders may not be able to redeem them. However, USDY adopts a financial design structure that isolates bankruptcy entities, enabling it to avoid assets being involved in bankruptcy proceedings in the event of the bankruptcy of the initiator or related party. This means that even if the operating company, Ondo USDY LLC, goes bankrupt, its financial structure isolates and protects the assets of USDY holders, avoiding direct impact due to the bankruptcy of the operating company.

(2) Stablecoin holder income. Most stablecoins are non-interest-bearing assets, meaning holders do not earn interest. However, holders of RWA-backed USDY will receive income generated from underlying assets such as short-term US Treasury bonds (minus management fees). USDY is a variable interest rate stablecoin that is adjusted in advance by Ondo on a monthly basis. The interest rate compounds automatically, meaning the value of USDY that can be minted and redeemed for dollars grows slowly every day.

(3) Holder-beneficiary redemption mechanism. When stablecoin issuers are unable to fulfill redemption requests within a specific timeframe, they often employ delay withdrawal strategies to handle runs. Most stablecoin holders do not have the right to passive breach or automatic liquidation. However, USDY holders have the right to proactive liquidation. If Ondo USDY LLC fails to meet redemption requests on time, they can demand that a third party, Ankura Trust ComLianGuainy, act as a clearing agent and liquidate the investment portfolio for repayment.

(4) Private stablecoins often exist in a regulatory gray area, whereas USDY complies with US federal securities laws and anti-money laundering regulations.

RWA-backed USDY has been widely adopted in the Mantle Network ecosystem.

In Agni Finance, Mantle’s largest DEX with a Total Value Locked (TVL) of $53 million, USDY has a TVL of $2.2 million, making it the fifth-largest asset in the protocol. In addition, the USDC/USDY 0.01% LP Pool is the third-largest LP Pool in the protocol, with over $4.5 million in liquidity.

In FusionX Finance, the second-largest DEX with a TVL of over $27 million, the USDC/USDY 0.01% LP Pool has the highest liquidity among all stablecoin trading pairs, reaching $5.2 million.

Mantle’s first liquidity management tool, Range Protocol, launched a strategy pegged to USDC-USDY on November 14th, offering a Vault APY (including transaction fee APY and incentives) of 5.1%. The current TVL is approximately $63,000. Although the protocol’s scale is still relatively limited at the moment, it is not difficult to see the potential for USDY to increase income. USDY itself has an automatic compounded income of 5.1% backed by RWA. If USDY’s adoption rate for on-chain transactions expands, it can significantly increase LP transaction fee income. Furthermore, with the addition of other incentive measures, it can unlock even greater income potential.

Based on stablecoins USDY/mUSD and Mantle LSP mETH, Mantle Network has effectively formed a dual-channel yield optimizer supported by RWA and ETH PoS.

In addition, the Mantle Economic Committee will continue to seek high-quality sustainable income products and deploy ecological applications to serve the Mantle ecosystem. A recent example is the committee’s approval of a $10 million investment in Ethena-USDe. Ethena has built the stablecoin USDe, collateralized by Ethereum derivatives, to eliminate the price instability of underlying collateral assets by holding staked ETH long positions and ETH perpetual contract short positions. In July of this year, Ethena completed a $6 million seed funding round led by Dragonfly and was selected for Binance Labs’ sixth-season incubation program in September. Once USDe is launched on Mantle in the first quarter of 2024, the Mantle Economic Committee will inject $10 million in liquidity support into major DEX liquidity pools, giving USDe the same advantage as mUSD over other general stablecoins in the Mantle ecosystem.

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