Mugen Finance operates as a yield aggregator using a two token system in order to help individuals gain access to a more diverse set of yields. There are 3 key parts to the protocol. The Mugen and xMugen tokens and the treasury.
The protocol operates with two primary goals in mind
To allow individuals to gain exposure to multiple yields from multiple chains in a simple way with Layer Zero's messaging protocol and native treasuries on the respective chains
To help individuals learn more about the space and become confident in their abilities to use tools without the need for a typical interface. This includes tools like etherscan, github, and more.
The reasoning behind this stems largely from the motivation to start the project in the first place. Many projects have strayed away from the original ethos of the space. We want to help guide individuals to understand why it was set up in this way in the first place and to gain the confidence that they can use the tools that move the space back in that direction.
In Mugen, this looks like decentralized governance and a wide array of guides to help users slowly move in that direction. Over time we will slowly take the "training wheels" off.
Mugen and the Treasury
Mugen is the vanilla ERC20 token built on top of Layer Zero. Participants are able to deposit whitelisted assets into the treasury to mint new Mugen or acquire Mugen on the open market. Users can also send their tokens to any chain which Mugen is launched on. This allows for flexibility in services provided outside of the Mugen ecosystem. When users deposit into the treasury they are adding to the POT (Protocol Owned Treasury) which is used to generate yield. Once users deposit into the treasury they will not be able to withdraw those assets and they become owned by the protocol. All of the treasury is governed by the DAO, which is free to choose how and where they wish to disperse it. Deposits into the treasury increase the price to mint new tokens. The price of minting new tokens is set to increase according to a negative exponential bonding curve.
The price will increase in this manner indefinitely or until the protocol is unable to generate enough demand to increase the market price of Mugen over the designated mint price. Individuals are still able to deposit if they want to, but it will come at a higher price than they can get on the market. There is no supply cap on Mugen and supply is intended to match demand.
Generated yield is then returned to Mugen stakers. xMugen, the protocols staking token, is minted and burned when participants enter and leave the staking vault. When users leave the staking vault they will receive their original Mugen tokens as well as any rewards earned during the time when they were staked. As of right now, there is no lockup period for staking.
xMugen is built on top of the ERC4626 token standard and is an interest bearing token similar to xSushi or xMPL. However, instead of paying out native Mugen tokens as rewards individuals will earn weth. This reward is paid out in a vested manner in order to prevent manipulation of staking and unstaking right before and after reward deposits. The vesting design is shown in the picture below and explained with a short example.
The initial deposit is at T0 and is set to vest until T2. At T1 a second reward deposit is made and is set to vest until T3. The green line and yellow line represent the reward rate after the first and second deposits.
In the example shown in the chart, we start at t0 with the first deposit, which is set to vest linearly until t2. Let's say that at t0 the treasury deposits 100 USDC as the reward and sets the vesting time to 100 blocks. This will be shown by the green line. Then at block 50, the treasury deposits another 100 USDC to be paid out and again sets the vesting period to 100 blocks. At this point in time, the vesting schedule is now updated so that all remaining tokens that have not vested and the additional deposit of 100 USDC will finish vesting at block 150 which is represented by the yellow line.
The protocol takes a 10% fee for these services. This fee will come from the yield generated by the treasury and will be sent to the foundation wallet which will be responsible for funding development, paying team members, and handling business expenses.
Market vs Bond Price
Due to the fact that the market price is not determined and set by the protocol, there are times when the two will diverge from one another. Please be aware of this element.