Monarch Finance: Peg Management for DeFi Governance Aggregators
Introduction
In DeFi, maintaining the stability of token pegs presents a significant challenge, especially for protocols dealing with tokens with liquid wrappers. This is where Monarch Finance steps in, offering an innovative solution to a problem faced by many, including protocols like Convex.
The Challenge
Governance aggregators like Convex add significant utility to the protocols whose governance power they aggregated by creating a liquid wrapper around ve-locked tokens, such as veCRV. However, maintaining a stable peg between the wrapped and native tokens is a hurdle. This instability can lead to inefficiencies and loss of trust in the DeFi ecosystem.
Monarch Finance’s Approach
Monarch Finance addresses this challenge head-on. The core of their strategy revolves around leveraging Monarch DAO’s treasury assets to incentivize liquidity. This innovative approach ensures the stability of pegs for Vassal DAO versions of the wrapped tokens.
The Significance of Vassal DAOs
Vassal DAOs play a crucial role in the Monarch Finance ecosystem. These DAOs are instrumental in aggregating governance power from Partner protocols (a la Convex) and creating a liquid derivative of the Partner protocol’s ve-locked token.
Monarch DAO plays a critical role in the success of Vassal DAOs by managing the pegs of their respective wrapped tokens.
By employing strategic liquidity incentives from the Monarch DAO, Vassal DAOs can effectively maintain the pegs, thus ensuring the stability and reliability of the tokens they oversee.
How It Works
- Asset Incentivization: Monarch Finance uses assets from the Monarch DAO treasury to incentivize liquidity in Vassal DAOs.
- Stability Mechanism: By injecting liquidity, Monarch Finance reduces the volatility of the wrapped tokens, maintaining a stable peg to their native counterparts.
- Community Participation: Holders of Monarch Finance tokens can participate in governance, influencing decisions on liquidity incentives and stability strategies.
Benefits for Partner Protocols and Tokenholders
- Enhanced Trust: A stable peg increases trust in wrapped tokens, attracting more users and investors to the DeFi space.
- Reduced Volatility: With stabilized pegs, users face lower risks associated with price fluctuations.
- Governance Power: Token holders have a say in the ecosystem, democratizing financial decisions.
The Alignment of Interests
Monarch DAO’s treasury holds and locks 20% of the total supply of each Vassal DAO. Effectively, this is the Vassal’s tax for Monarch DAO’s Knights (vlMNRC holders) using their assets to manage the Vassal DAO’s pegs and liquidity.
Knights are compensated by the yield generated by exercising Monarch DAO’s governance power, which flows back to the Knights via the Vassal DAO’s locked tokens in the Monarch DAO treasury.
Aligned Interests and Incentives
While the Velodrome model (ve 3,3) is different than the ve-tokenomics Monarch DAO employs, this is still a useful reference. In this case study, the Velodrome team shows how Thales uses protocol owned liquidity and protocol owned voting power to incentivize liquidity for key trading pairs. But most important to note is that if you own the liquidity and incentivize that liquidity with coordinated governance votes, the outcome can be very profitable for the protocol that owns the liquidity and the votes.
Conclusion
Monarch Finance is pioneering a path towards greater stability in the DeFi ecosystem. By addressing the peg stability challenge through innovative liquidity incentivization and the unique structure of Monarch and Vassal DAOs, Monarch Finance is not just solving a technical problem but is also enhancing the overall trust and efficiency of the DeFi market. As the DeFi landscape evolves, Monarch Finance’s model could very well become a standard for other protocols facing similar challenges.
