What is Malt Protocol?

The Malt Protocol is a system built around a decentralized stablecoin. The system aims to grow its collateral and create sustainable return for liquidity providers by capturing and distributing profits from on-chain activities such as arbitrage and trading fees.

How does the Malt stablecoin maintain its peg?

The Malt stablecoin maintains its peg through automated supply changes executed by the protocol in response to price imbalances in stable pools on MaltSwap. Any global supply imbalances will get "communicated" to the stable pools via arbitrage and the stable pools will adjust the Malt supply to correct the imbalance. The supply change themselves are executed directly into the stable pools allowing the rest of the pools to rebalance themselves against the freshly balanced stable pools.

What is MaltSwap?

MaltSwap is an automated market maker (AMM) that supports both stable swap pools and floating (uniswap v2 XYK) pools. MaltSwap affords the arbitrage system some benefits like not playing trading fees, increasing its edge over other arbitrage bots. Liquidity providers on MaltSwap can stake their LP tokens to earn a share of the protocol's cashflow.

How does Malt generate profit?

Malt generates profit through various means, including trading fees, arbitrage, seigniorage from supply changes, and market-making activities. It is possible to add further profit generating strategies in the future to increase the cashflow of the protocol and therefore APRs paid to liquidity providers.

How can users earn yield in the Malt ecosystem?

Users can stake their MaltSwap LP tokens to receive a share of the protocol's cashflow, paid in the paired token of the pool. This allows LPs who are bullish on (for example) ETH, to earn yield in ETH. This allows the market to express preferences for different assets and the protocol to dynamically adjust its collateral to reflect those preferences. Higher TVL in the ETH pool will naturally result in the protocol holding more ETH compared to other assets. Higher TVL also correlates with higher activity which could lead to more opportunities for the protocol to profit by arbitraging that asset.

What is the GRN token?

GRN (Malt Grain) is a token that provides fee reduction on MaltSwap for accounts that stake it in the fee reduction contract. GRN tokens are distributed fairly over a 3 phase halvening schedule pro-rata to accounts that have staked MaltSwap LP tokens. Further utility for GRN is expected to be added in the future.

Is Malt audited?

Malt has undergone 2 code4rena audits since we started building the project. We plan on conducting more audits on the protocol in the future. We will also be rolling out a bug bounty program to further ensure the security of the protocol. To further our confidence in the technical implementation as well as the economic incentives of the protocol we have also started working on a suite of simulations to test the protocol under various conditions.

What chains is Malt currently available on?

Right now Malt is available on Polygon. However, we are in the process of planning a migration to another chain that has more activity now that we are confident in the protocol's stability and security.

How does Malt's collateral system work?

Malt's collateral is held in a diverse basket of assets including other stablecoins and other assets like ETH and WBTC. Holding many diverse assets to be more resilient to isolated market events. The exact composition of the basket is driven by user activity in all of the pools on MaltSwap. Any asset tradeable on MaltSwap could be part of the collateral basket. Each asset in the collateral has an associated "risk factor" that determines how much of its value counts towards the collateral. This gives the protocol a way to manage the risk of the more volatile assets in the basket.

How can developers build on top of Malt?

There are two main ways developers can get involved with Malt. The first is building experiences and features on top of Malt staking using the delegation system. The second is building searcher strategies for the arbitrage system.

Building on top of the delegation system can be things like other projects building incentives for MaltSwap LPs to improve liquidity on their token in a way that can reward LPs with the standard Malt cashflow as well as additional incentives offered on top. It could also be novel ways to use fee reduction or to repurpose the yield.

Some simple ideas:

  • A lottery system. MaltSwap LPs delegate their LP rewards for a given token and receive "tickets" pro-rata their share of total delegated rewards. A fair random ticket is selected and the winner receives all of the reward pool. Alternatively, the reward pool could be split between multiple winners.

  • A meme coin that gets users to delegate their Malt/MEME LP rewards to the meme coin. The memecoin could then use x% of the rewards to buy back the memecoin to create supply contraction. The rest of the rewards are paid as yield. The yield in this case is lower then the standard Malt yield but the memecoin supply is shrinking creating another dynamic for the memecoin. This is opposed to the historical method of using transfer tax to create the supply shrink.

  • Staking strategies. You delegate your yield from a particular pool and all rewards are invested into a strategy. This simplest form of this is an autocompounder that reinvests into the same pool. More complex strategies could involve moving the rewards to other pools or even other protocols.

  • Adapters to automatically pay off debt. For example contracts that users can deploy that would use Malt yield to pay off loans you have on AAVE.

  • Games that offer in game perks to users who delegate their yield to the game. This could be anything from in game currency to special items or even NFTs.

What are the risks associated with using Malt?

Malt is a new protocol and as such there are risks associated with using it. The main risks we have identified are:

  • Smart contract risk. There is always chances that there are bugs in the smart contract code. This is why we have had the protocol audited and plan to offer a bug bounty program. The longer the protocol is live the more confident we can be in the security of the protocol.

  • Market risk. The protocol is exposed to the market risk of the assets in the collateral basket. This is why we have a risk factor associated with each asset that determines how much of its value counts towards the collateral. This allows the protocol to manage the risk of the more volatile assets in the basket. However, it is still possible that market events could cause issues with the protocol. The main risk initially is a peg issue with one of the major stablecoins that will make up the majority of Malt's initial collateral. The system is designed to diversify over time to reduce this risk over time, but it is a real risk on the table in the early days.

  • Liquidity risk. The protocol is reliant on liquidity in the MaltSwap pools. If liquidity dries up in the pools the protocol will not be able to adjust the Malt supply to maintain the peg. This is why we have incentives like offering a share in protocol cashflow and GRN distribution to liquidity providers. The more liquidity in the pools the more robust the protocol is to market events.

How does Malt's governance system work?

Malt does not yet have a governance system. One is actively being researched and developed. We do not simply want to launch a governance token as that offers to much scope for individuals to buy power. We are looking into ways of not only count capital invested but also time invested to determine overall governance power. This should work towards aligning governance power with the long term health of the protocol.

What makes Malt different from other stablecoins?

The aim of Malt is to eventually completely stand on its own without any centralized oversight. To achieve this Malt needs to be dynamic to changes in the market and be able to diversify its collateral and update its distribution over time. Centralized stablecoins like USDC and USDT always need a central authority. On-chain stablecoins like DAI don't have good incentives to decentralize the collateral base and they generally still have a central authority that can change the rules. Most other stablecoins today suffer from either centralized authority or difficulty in diversifying the collateral or both. We have spent a lot of time putting together a design that we believe can operate autonomously while also being dynamic enough to diversify the collateral base over time through different market conditions.

What is Malt's long-term vision for stability?

Right now Malt is pegged to the dollar. The protocol uses oracles to price its various collateral assets and will interact with MaltSwap stable pools to use collateral to buy/sell Malt to keep prices in line with that dollar peg. Our long term vision is to move away from a dollar peg and towards a more crypto-native form of stability. We need to prove out the rest of the protocol before we start tackling this problem. We have some ideas on how to do this but we need to make sure the rest of the protocol is stable and secure before we start working on this properly.

How does Malt's arbitrage system work, and how does it benefit the protocol?

The arbitrage system allows any searcher to find arbitrage opportunities and submit them to the protocol for a small share in the profit. Many of these opportunities exist only to the protocol because it does not pay fees on MaltSwap trades. This means the searcher could not profitably execute the trade themselves as they would have to pay those fees. So the rational thing to do is to submit the trade to the protocol as that is profitable for the searcher. This is only true when the profitability of the opportunity is less than the total fees paid. For opportunities that are more profitable than the total fees paid the searcher could execute it themselves, but they will make less profit than the protocol would, so it still may be more profitable to submit the trade to the protocol.

It benefits the protocol as every time an opportunity is captured by the protocol it goes towards growing the collateral and rewarding LPs. This profit is coming at no risk to the protocol. It is purely growing the protocol's capital and rewarding LPs. Growing the collateral value is an obvious benefit here but the system also contributes to the diversification of the collateral. As different pools capture arbitrage, those assets will now make up a part of the protocol collateral. The protocol may choose to discount them to 0, but they are still there and can be useful in the future.

What is the Swing Trader?

The swing trader is a component in the Malt system that helps absorb price deviations on MaltSwap stable pools. This effectively deepens the liquidity of those pools as capital is injected on either side of the market when needed to bring the pool back into its most efficient trading zone. The swing trader is doing a similar job (although in a much simpler manner) to a traditional market maker. The swing trader uses protocol collateral to buy Malt back below its intrinsic underlying value and sells it above its intrinsic underlying value. This process is carried out in a manner that also attempts to keep the stable swap pools balanced. This process produces cashflow for the protocol which is then distributed via the regular Profit Distributor system.

What is the "Malt cost averaging" system mentioned in the roadmap?

In a paper a few years ago Paradigm introduced the idea of a TWAMM. Since then it has been implemented by a few protocols like FRAX. In essence it is a system that can efficiently convert a large amount of one asset into another with minimal market impact. Using the MaltSwap hook system we can implement a TWAMM into MaltSwap. This would allow users to set up "Malt Cost Averaging" where they can average a large amount into an asset (eg ETH) over a long period of time. User experience can be set up to allow simply "topping up your balance" and it just continues to average you into assets.

There are further implications to the protocol itself. Having a TWAMM in place could allow for the introduction of collateral rebalancing strategies that can efficiently convert collateral between assets. In the simplest case this could be used to implement the concept discussed in the docs where excess collateral in assets with lower risk factors can be converted into Malt to increase the collateral ratio and potentially create cashflow. This could be done in a way that is not only efficient to market pricing but also profitable for the protocol.

The Swing Trader helps the protocol maintain its peg while also generating cashflow in the process.

How does the target APR for staking rewards get determined and adjusted over time?

The goal of the protocol is to set a target APR that is sustainable for each asset. This means we need to make more than we need and store it during times of high cashflow to pay out during times of low cashflow. The target APR is set by the reward throttle based on historical cashflows. Every 6 hours the APR target gets adjusted up or down depending on how the cashflow has been. If the cashflow plus some buffer has been higher than expected then APR is adjusted up. If the cashflow has been lower than the target APR then the APR will be adjusted down. This allows each pool to independently set an APR that is sustainable for itself.

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