Mellow Ultimate Guide: The Perfect Combination of High-Yield Stake and Liquidity Optimization

Contributors: Mat / Riffi / Sylvia

Editorial Proofreading: Punko

Special thanks: Thank you to the above partners for their outstanding contributions to the content of this issue.

Project Overview

Mellow Protocol is a decentralized finance (DeFi) project that focuses on providing efficient and seamless liquidity solutions. Through its partnership with Lido, Mellow has launched a staking campaign that allows users to stake ETH on the Mellow platform, earn Lido’s liquidity Ethereum token stETH, and receive additional staking rewards from the platform.

Technology

Mellow is built on the Ethereum blockchain, and its core functionality is implemented by smart contracts. By integrating with Lido, users can stake ETH on the platform to earn stETH and also earn additional staking rewards on Mellow.

Technical Architecture

• Smart Contract: manage liquidity pools, stake, and reward distribution.
• Liquidity Pool: Users can provide liquidity and earn rewards.
• Governance mechanism: Community voting determines protocol parameters and updates.

Market Analysis

1. DeFi Development

There are currently many DeFi projects that provide liquidity, lending, and stake services, such as Aave and Compound. These projects have gained important positions in the DeFi field with strong technology and user base. However, Mellow stands out in the fierce market competition, especially with its innovative stake point reward mechanism.

With the rapid development of DeFi, the demand for efficient and seamless liquidity solutions is also increasing. Under this trend, Mellow has great potential to expand its user base and managed funds. Through cooperation with Lido, Mellow provides an opportunity to stake ETH to obtain stETH and additional staking rewards, further enhancing its market competitiveness and attracting more users.

2. Latest Developments in Modular LRTs

Mellow also enables users to choose different risk configurations according to their needs by creating modular LRT infrastructure. This infrastructure allows risk managers to create LRTs with different risk/return ratios, achieving flexible risk management and return optimization. Risk Management

Source：Mellow Medium

- Modular LRT Infrastructure

• • Provides flexible Risk Management and profit distribution.

• Solve the limitations of the current LRT market’s “one coin fits all” approach.
  • Provide different risk allocation and customization options for risk managers and depositors.

- The overall advantages of LRTs

• • Provides instant liquidity.

• Achieve compound returns.
• Diversify risks.

3. Key Advantages of Mellow Protocol

• • Flexibility: Users can choose the appropriate LRT according to their risk preferences.
• • Modularization: Different risk managers can release LRTs targeting different risk levels.
• • Transparency: Risk management and reward distribution are open and clear.

Mellow Protocol Development

1. Integration with Lido

Source：Mellow Medium

• Mellow Finance: As a member of the Lido Alliance, Mellow Finance maintains close collaboration with Lido to support the creation of the permissionless Liquid Restaking Token (LRT) through innovative re-staking protocols.
• Staking Opportunities: Promote the development of Ethereum staking space and provide more staking opportunities.
• Reward Acquisition: In cooperation with Lido, Mellow Finance provides stETH holders with the opportunity to acquire LRT rewards, enhancing liquidity and utility.

2. Relationship with Symbiotic

• Launch partners of Restaking: Partners such as Symbiotic and Mellow Finance provide decentralization staking opportunities for stETH holders. Users can earn Symbiotic Points to increase rewards and benefits.
• Decentralization and stake again : Allows unauthorized re-staking, jointly launched with Lido DeFi strategy, Symbiotic architecture and similar modular re-staking methods can showcase Mellow’s strongest features.
• Immutable Smart Contract: Service developers are not limited by proprietary settings when locking in the security framework, slashing mechanism, and reward logic with various operator sets. These features make it highly suitable for Mellow’s LRTs (Liquid Restaking Tokens), providing the flexibility needed for the Mellow system to offer users diversified risk configurations.
• Strategy Selection: By using Symbiotic’s Mellow LRTs, combined with Mellow’s automated and modular approach, users can choose suitable LRTs based on their risk preferences, enjoy liquidity and returns, without being limited to a single risk allocation.

Participation Guide

Source：Mellow Medium

1. Process

1.1 Preparation

• Prepare a compatible Ethereum wallet (such as MetaMask) and make sure there is ETH in the wallet.

1.2 Project Participation Process

• Connect the Wallet to the Mellow website.
• Navigate to the “Stake” page and select the “Stake through Lido” option.
• Enter the amount of ETH you want to stake, and the system will automatically transfer the ETH to Lido.
• Users will receive stETH, which can be viewed and monitored on the Mellow platform for staking points and their rewards.

1.3 Rewards

• 1. Users will receive stETH.
• 2. The Mellow interface displays the reward for staking points.

2. Requirements for claiming points

• No capital threshold: Users can stake ETH on Mellow and earn 1 Mellow point and Symbiotic point per wstETH every hour.
• Current situation: Due to the full limit of Symbiotic, the current stake only obtains 1.5 times Mellow points. After the limit of Symbiotic is increased, the staking users will have priority access to the Symbiotic ranking.
• Event Duration: Expected to last for several months.
• Mellow Points Redemption Limitation: Currently no limitations.

3. Lock-up period and slippage after staking again

• Lock-in period: Withdrawal can be applied immediately after deposit, from time t to t+180 days, Curator can handle the withdrawal, usually processed within 24h-72h.
• Emergency operation: If Curator does not process within t+90 days, users can use the emergency withdrawal function.
• Slippage: Slippage is very low.
• Users can choose to cancel and re-submit the request or create a new request if the execution time exceeds 180 days and the request is not processed.

4. Exit Mechanism

1. Access Dapp: Access Mellow and visit Dapp. Connect your Wallet to continue.
2. Dashboard: After connecting, navigate to your dashboard to view your LRT list. Select the LRT you want to extract.
3. Light Rail Detailed Information: After selecting LRT, click on it to view its detailed information and the withdrawal pop-up window. The ‘Request Withdrawal’ button will be inactive until you meet the necessary requirements.
4. Withdrawal Amount: Enter the amount you want to withdraw. You can also click the “Max” button to set the maximum amount that can be withdrawn based on the balance of LRT in your wallet.
5. Withdrawal Application: After entering the withdrawal amount, the “Request Withdrawal” button will be activated. Click the button to initiate the withdrawal process.Source: WolfDAO
6. Transaction Signature: Use your associated wallet to sign the withdrawal transaction.
7. Withdrawal Request: After a successful transaction, you will see the “Withdrawal Request” card in the control panel. This card displays the LRT type, status, withdrawal amount, initiation time, and the lock-up period before you can claim the funds.
8. Lock-up Period: During the lock-up period, you will not receive any points for extracting LRT. The earned points will be displayed on your dashboard.
9. Withdrawal Application: After the lock-up period ends, the ‘Claim Withdrawal’ button in the withdrawal request card will be activated. Click on it and confirm the transaction in the wallet.
10. Withdrawal Confirmation: After the transaction is successful, you will see the amount of LRT tokens withdrawn on the LRT page, as well as the claimed assets and their equivalent value in US dollars.

5.5 The difference between different Curators

Source: WolfDAO

• Risk and return: There is no significant difference in risk and return among various Curators, only the difference in the time of joining.

Overview of each strategy

• Steakhouse Restaking Vaults: designed to allocate from the perspective of underlying network and use wstETH as the support strategy for liquidity assets.
• Restake Vault planned by P2P.org: Designed to maximize opportunities for restaking. P2P.org is one of the leaders in global staking and restaking.
• Amphor Restaked ETH (amphrETH): Protect, promote, and monitor the management of Restaked Networks in the Symbiotic ecosystem.
• Re7: Focus on providing early liquidity for various DeFi protocols, providing liquidity in DeFi since 2019, deploying capital through yield strategies and liquidity risk investments.

Source: WolfDAO

5.6 Points Update and Mechanism

Source：Mellow Medium

Symbiotic points are not diluted + Queue Mellow points increase by 1.5 times

Due to the current limit of Symbiotic wstETH, new deposits into the Mellow vault will not be redistributed to Symbiotic for now. This means that new deposits of ETH will not dilute Symbiotic points, and all stakers will share the same amount of Symbiotic points.

To address this issue, Mellow introduces an automated queue and reward mechanism. Users who deposit before the Symbiotic limit is reached will continue to receive normal Symbiotic and Mellow points, i.e., 1x + 1x. For new deposit users after the Symbiotic limit is reached, they will receive points after the Symbiotic limit is increased, but while their liquidity is idle in the Mellow insurance pool, they will retroactively receive 1.5 times the Mellow points.

The final result is that for Mellow insurance depositors:

• For users who entered before the Symbiotic limit is reached: Receive 1x Symbiotic and 1x Mellow points, no changes needed.
• Users who enter after reaching the Symbiotic limit: temporarily do not receive Symbiotic points, but receive 1.5 times Mellow points, and become the first batch of users to enter Symbiotic after the limit is lifted.

This mechanism ensures the fairness and incentives of the system, while minimizing the negative impact on depositors as much as possible.

Risk and Potential Returns

1. Smart Contract Risks

1.1 Contract Audit Status

Mellow is built on the Ethereum blockchain, relying on Smart Contract to implement core functions. Vulnerabilities in Smart Contracts may lead to fund theft or contract malfunction. Currently, Mellow’s audit is conducted in cooperation with ChainSecurity and Statemind.

The Mellow LRT system audit conducted from May 6 to May 27, 2024 mainly focuses on the evaluation of various components of the system, such as the treasury, various strategy and module contracts, and oracles. The Mellow LRT system allows users to securely deploy and manage liquidity reward tokens (LRT), providing powerful access control and strategic asset management.

1. Main Findings

• Total number of identified issues: 25 issues identified in the codebase.
• Severity Decomposition:
• • Moderate Severity: 4 issues (all fixed)
    • Severity of Information: 21 issues (15 fixed, 6 confirmed)

2. Specific issues and suggestions

• Incorrect rounding in deposit calculation: Found issues with rounding calculation, impacting the minting of LP tokens. Recommend adjusting the rounding method to prevent discrepancies.
• Stale price data in Chainlink Oracle: Infrequent price updates may result in using outdated data. It is recommended to set unique update intervals for each price summary.
• Potential blocking of withdrawal processing: A problem was discovered where the withdrawal process may be blocked if the vault has a zero balance for certain tokens. It is recommended to adjust the validation logic to handle zero balances better.
• Unauthorized Deposit Trigger: It has been found that anyone could trigger a deposit of assets in the vault, bypassing expected restrictions. It is recommended to ensure that only authorized roles can initiate such operations.

1.2 Deployment Details

The audit report also includes details of the deployment of various contracts related to the treasury and strategy on Ethereum, providing contract addresses for verification.

1.3 Evaluation and Advice

The audit revealed a robust system with strong mechanisms for managing digital assets through LRT. Although several issues need to be addressed to ensure the security and efficiency of operations, most identified issues were resolved during the audit, demonstrating the project team’s commitment to maintaining high security and operating standards. The remaining confirmed issues indicate areas for future improvement but do not appear to have an immediate significant impact on basic operations.

This audit demonstrates that while there is room for improvement, the foundation of the system is solid, and through continuous monitoring and updates, Mellow LRT is able to effectively serve its intended purpose within the DeFi ecosystem.

2. Market Volatility

• ETH Associated Volatility: The price of cryptocurrencies in the market fluctuates dramatically, and significant fluctuations in the price of ETH can affect users’ investment returns. This applies even if you hold stETH because the value of stETH is linked to ETH.
• Systemic Risk: As a DeFi project, Mellow faces systemic risks in the entire decentralized finance industry and its ecosystem, such as liquidity depletion caused by large-scale sell-offs or hacker attacks.

3. Compliance and Security

• Emphasizing the security of smart contracts, audits have been conducted in collaboration with ChainSecurity and Statemind.
• Regulatory Uncertainty: The regulations in the DeFi field are not yet fully clear, and the positions and regulations of regulatory agencies in various countries may have a significant impact on Mellow. The uncertainty of these regulations may pose challenges to the development and operation of the project, such as fund freezing, fines, or business restrictions.
• Future plans include the introduction of dynamic rebalancing functionality to optimize risk-adjusted returns and reduce potential losses caused by market fluctuations.

The security of smart contracts is one of the main risks facing DeFi projects. Despite Mellow’s collaboration with ChainSecurity and Statemind for contract audits, there are still potential vulnerabilities that could lead to fund losses or system attacks. Therefore, regular security audits and contract updates are necessary.

4. Potential Return

1. Reward Mechanism: By staking ETH on the Mellow platform, users can not only receive stETH provided by Lido, but also obtain additional staking points rewards from Mellow. These point rewards have strong appeal, and can bring users a higher Annual Percentage Yield (APY).
2. Innovative point mechanism: Mellow’s innovative staking point reward mechanism is a key factor in attracting more users to participate. Especially in cooperation with Lido, users can obtain dual benefits by staking ETH - stETH and additional staking point rewards. This innovative mechanism is not possessed by other Decentralized Finance projects.
3. Market Trend: Currently, there are many DeFi projects in the market that provide liquidity, lending, and staking services, such as Aave and Compound. However, Mellow’s unique mechanism enables it to carve out a place in the fierce market competition. In a favorable market environment, Mellow has the potential to increase its user base and assets under management.
4. High Annual Percentage Yield (APY): Leveraging cooperation with Lido and its proprietary staking system, users have the opportunity to earn a higher annual percentage rate. This high return rate is highly attractive to investors seeking to maximize returns.

Summary

Overall, Mellow Protocol is expected to stand out in the increasingly competitive market and attract more users and funds with its technological advantages and innovative reward mechanism in the DeFi field. The protocol’s collaboration with Lido, along with its unique staking point reward mechanism, brings higher Annual Percentage Yield (APY) to users and enhances investment attractiveness. However, users must also pay attention to and address potential risks, including smart contract vulnerabilities, market volatility, and systemic risks in the DeFi industry.

Through careful Risk Management and a deep understanding of the Mellow platform mechanism, users can more effectively utilize the investment opportunities provided by the platform and achieve substantial investment returns. Based on this, the development prospects of the Mellow Protocol are promising, but continuous optimization and improvement in security and sustainable development are still needed.