How They're Made: M^0

We continue our series about stablecoins, and today's focus is the M^0 Protocol. This project sits between fully custodial stablecoins like USDT/USDC and "pure" algorithmic stablecoins, maintaining their peg through the activity of permissionless market makers. We aim to review this project to demonstrate a simpler stablecoin design that employs governance-controlled actors for price oracle and validation purposes. This approach enables the use of real-world assets (RWA) as collateral and primarily depends on the actions of Validators and Minters, validated by protocol governance, rather than market activity.

The design of such protocols is much simpler than that of typical algorithmic stablecoins as it only requires honest decisions by Validators and protocol governance regarding the amounts and prices/amounts of collateral assets. This simplicity strengthens these protocols against algorithmic vulnerabilities, as they do not rely on complex mathematical models, distribution, or incentivization schemes. The security of these protocols rests mainly on the integrity of protocol management.

This makes such projects highly attractive for operating at the intersection of "CeFi" and "DeFi." If there is, in any case, a connection to RWAs, the resulting stablecoin can also interact with RWAs, sharing the same risks associated with the centralized financial world. Additionally, this kind of protocol offers a straightforward and reliable method to issue stablecoins backed by RWA assets on any verifiable market. It serves as an effective solution for stablecoins pegged to various national currencies, leveraging financial markets of different countries as a source of collateral.
Let's explore how the protocol works.

Higher level design

articipants in the M^0 Protocol assume one of three main roles: Minters, Validators, and Earners. Minters create M stablecoin (MToken), backed by collateral that is verified and approved by Validators. In essence, this is similar to the stablecoin backing and minting process seen in USDT/USDC, but managed by Validator approvals and operational delays, which enable Validators to intervene at every step. Minters are required to update the amounts of their collateral, with penalties imposed for failing to provide timely updates. An additional mechanism in the protocol allows Earners (M token holders, approved by governance) to earn M tokens, generating income from minting fees.

Read the full article here:

Link: https://mixbytes.io/blog/modern-stablecoins-how-they-re-made-m-0