Midas Fasanara mF-ONE in Morpho Onchain Repo
Private Credit in DeFi at Institutional Scale
1. Executive Summary
This document is to provide an overview of mF-ONE as a collateral type. We are proposing to onboard the mF-ONE/USDC market1 to the Smokehouse USDC vault. Users of this vault have the timelock period to veto the onboarding proposal through the Aragon Guardian.
mF-ONE is a tokenized private credit (TPC) product issued by Midas and managed by Fasanara Capital, designed specifically for integration in DeFi.
mF-ONE addresses some inherent limitations of TPC products for integration into on-sight repo facilities such as Morpho. Its design includes an instant liquidity sleeve composed of on-chain US treasury bills (mTBILL), intermediate liquidity management and a core allocation to Fasanara Capital’s F-ONE fund which provides diversified exposure to fintech lending and digital asset arbitrage strategies.
The market itself is configured at an effective 84.5% LTV, achieved by setting the underlying Morpho market to 91.5% and using a NAV oracle price discounted by 7.7%. This helps provide:
a larger liquidation bonus to incentivize curing liquidatable loan positions as fast as possible
a competitive LTV ratio that can offer attractive lending rates to the allocating vaults
The initial borrow cap in Smokehouse USDC will be set to $20m and scaled conservatively in line with borrow demand.
TPC creates significant maturity mismatches between on-sight repo borrow/lend on Morpho and the effective duration of private credit, particularly when it is combined with off-chain legal structuring. Through extensively reviewing the structure of the token and the underlying fund and collaboratively addressing our feedback to make the product more suitable for use in on-sight repo, our proposed market onboarding aims to address the different tradeoffs in sensible ways.
2. Unlocking on-chain liquidity for tokenized private credit
As a company, we have specialized in DeFi by tackling large and hairy issues, such as how to allocate a decentralized stablecoin’s reserves to US treasury bills prior to the prevalence of tokenized formats. Today, we have issuers as large as BlackRock issuing tokenized money market funds like BUIDL, which is now a keystone of the backing of Sky USDS (through the Spark Grand Prix, a process managed by Steakhouse) and Ethena USDe.
Moving further along the risk curve, we are seeing an emerging trend of tokenized private credit instruments. Among a few examples are Janus Henderson with JAAA, Apollo with ACRED and Fasanara Capital with mF-ONE. In our latest memo, The Curious Case of On-Chain Private Credit Repo2, we described three benefits of repo transactions through venues such as Morpho for users of tokenized private credit (TPC, for brevity):
Law of Large Numbers: Pooling loans dulls the impact of exogenous risks
Standardization: Increased liquidity
Product Market Fit: Ability to exploit a spread between funding costs and lending rates
However, TPC is not just ‘plug-and-play’. Legal structures and tokenization formats are not standardized to each other, making comparison and trade between different types of TPCs difficult. Furthermore, by their nature, private credit instruments pose even greater new challenges when integrated in money markets like Morpho.
Lenders on a money market require strong liquidity of their assets while private credit is, by its essence, a quite illiquid asset class. In particular, unlike its traditional finance counterparts, DeFi money markets are very short-term in nature. The overwhelming majority of borrow/lend volume in DeFi is on a variable rates basis, with interest rates that can spike significantly if available liquidity is borrowed for a period of time. There is therefore a significant and material mismatch of duration between a private credit instrument and a DeFi money market. Many private credit funds offer, at best, intermittent or capped liquidity at the issuer, often gating redemptions to a quarterly basis in optimistic cases.
Furthermore, liquidity and redemption has never been tested on TPCs in a liquidation context at scale. In the ideal case, redemption for a collateral asset can be done instantly, so that if the price of the collateral declines (through impairment or increase in overall interest rates in the market) or the borrow position is impaired (the amount of USD borrowed is greater than the LTV parameter), the loan can be quickly repaid by seizing the collateral and liquidating it. If an impaired on-chain repo loan is not cured completely, it can begin to accrue what is known in DeFi as ‘bad debt’, i.e. a nominally higher amount of ‘owed’ USD that the borrower has no financial incentive to ever repay.
We would not be satisfied with simply taking an out-of-the-box TPC and sticking it in Morpho, as we prefer not to lay kindling down for a fire. Fortunately, we have had the opportunity to work closely with a private credit behemoth, Fasanara, and their tokenization partner, Midas, to create durable fixes to these issues that can help make TPCs more usable as collateral in on-chain repo.
Midas is an asset tokenization platform building institutional-grade financial products for the open web. Its ERC-20 tokens are structured to track dedicated strategies with verifiable on-chain performance, combining TradFi-grade standards with DeFi composability.
Fasanara Capital is a global $5bn private credit fintech lending specialist headquartered in London. Their approach to fintech lending is both across direct-origination of loan books as well as lending to fintech marketplaces.
The diversified nature of the strategy in the flagship Fasanara F-ONE fund addresses structurally the ‘Law of Large Numbers’ point mentioned earlier by diversifying the pool of credit exposures. Diversification of strategies enables a consistent long-term return on which speculators can carry a spread between funding costs and lending rates. By standardizing an approach to intra-fund notes and adding a minimum liquidity sleeve, additional buffers can be created for rapid subscription and redemption that you could expect to result from DeFi interactions. Finally, by customizing the market parameters on Morpho, sufficient liquidation bonus can be created to incentivize rapid repayment of underwater positions by arbitrageurs who are happy to wait a little bit longer to close their positions, minimizing risk to lenders in the Morpho vault without compromising on returns.
When we pushed tokenization to the fore through our work as contributors to MakerDAO, now Sky, we helped catalyze a new cottage industry of tokenized money market funds or US treasuries. By sharing our findings here, we similarly hope to provide a roadmap for future TPC issuance that aspires to become highly integrated in the on-chain economy. We view this underwriting and structuring work as a v1.0 on which we will continue iterating as the economic, legal and on-chain landscape evolve. We propose high-level signposts for integrating TPC in DeFi money markets and we follow that roadmap for the first time with Fasanara and Midas to bring this blueprint to the market.
We’re greatly appreciative of the Fasanara and Midas teams for their deep dedication to making this process work well for a DeFi native context. No financial consideration was received from any third party in connection with this report.
3. mF-ONE product description
The following information is derived from investment materials for the underlying Fasanara funds, Midas Software GmbH documentation, extensive interviews with both the Fasanara and Midas teams, during which we relayed suggestions for improvements and changes in the legal structuring of the notes and provision for liquidity and on-site manager interviews with the respective Fasanara investment managers.
The mF-ONE token is designed to give exposure to a diversified credit fund, deploying multiple dynamically allocated strategies that balance target returns with liquidity needs. Since the core allocation to Fasanara’s F-ONE fund is subject to monthly subscriptions and quarterly redemptions, the mF-ONE structure incorporates two additional layers of liquidity, without suffering from cash drag.
mF-ONE ports Fasanara’s decade-long track record in private credit and digital-asset management into a DeFi native context, leveraging Midas’ composable tokenization infrastructure that makes it more suitable for speculating within a “leveraged loop” strategy on Morpho.
Diversification of sources of credit return stack on a further diversification of yield between credit and market-neutral active trading strategies to mitigate yield volatility. Credit risk is mitigated through the use of short-dated over-collateralized cash-flows from a globally diversified pool of 140+ originators. Liquidity risk to lenders in Morpho vaults is mitigated through a three-layer liquidity stack (atomic redemptions, discount-window liquidity and monthly redemptions) to mitigate price slippage even under “bank-run” stress and minimize the possibilities of accruing bad debt to lenders.
Finally, Fasanara is an FCA-regulated manager with over 10-years track record in private credit. Its flagship fund, the Global Diversified Alternative Debt Fund, launched in November 2017 and totaling over $985m million in AUM as of the end of April 2025, is rated a(f) by ARC Ratings3.
3.1. Instant Liquidity Sleeve
At the lower end of the risk spectrum is the built-in liquidation pool invested in Midas mTBILL, a pool of tokenized US treasuries. This structure offers two key benefits: (1) atomic redemption, enabled by the tokenization of money market funds (BUIDL, FAST, USTB, JTRSY), within the limit of the available liquidity, and (2) the US Government Money Market yield transmission to the portfolio, minimizing cash drag. The pool targets an allocation of 10% of mF-ONE’s TVL, allowing for instant redemptions by withdrawing USDC from the pool. If mF-ONE subscriptions in a given month exceed the liquidity pool target, funds are allocated on-chain to Fasanara Digital’s Pareto vault until F-ONE shares can be subscribed.
3.2. Fasanara Digital’s Delta Neutral Pareto Vault
Pareto is an on-chain private credit marketplace that connects institutional lenders and investment managers. The Pareto vault is structured as a loan agreement between the user and the borrower, in this case, Fasanara Digital. Excess liquidity from mF-ONE, in the event of large subscriptions within a month, is deposited as USDC into Fasanara Digital’s Pareto vault4, and channeled into the underlying traditional fund structure during London market trading hours.
The vault is exposed to a digital asset basis trading strategy managed by Fasanara Digital’s investment team. The vault price reflects the BTC open interest-weighted funding rate5, with a 1.2x performance multiplier, a minimum return of 5% net APY, and a maximum return cap of 30% net APY, as defined in the loan agreement’s variable interest calculation.
Interest is distributed weekly to liquidity providers, with the option for weekly redemptions. The notice period to withdraw liquidity is 7 days. The Midas team is responsible for managing the excess liquidity investments and withdrawals to and from Pareto’s vault to ensure timely monthly subscription of F-ONE shares.
3.3. Fasanara’s F-ONE Private Credit Fund
The main holding of mF-ONE consists of Fasanara’s F-ONE shares held by an intermediary note structure involving TradFi service providers and a securitization structure. F-ONE is the Fasanara’s Multi Asset Fund, built upon its historical flagships. The fund is targeting 15% yearly net return by opportunistically allocating to short-term private credit, digital assets market-neutral and market-making strategies, and liquid global macro. Its diversified approach enhances the fund’s liquidity profile, stabilizes volatility, and allows leverage of 1.3x to 1.5x.
3.3.1. Fintech Lending
The core strategy of F-ONE - typically 30% to 80% of exposure within F-ONE - is the short term Fintech Lending, active since 2014. All credit exposures are sourced through a curated network of over 140 fintech platforms that originate and underwrite the underlying loans. Unlike direct lending that relies on a borrower’s credit worthiness, an asset-backed lending model ensures each note is secured by tangible, short-duration, self-liquidating collateral. The strategies include:
Receivables Financing: diversified SME credit invoices, with individual exposures averaging 0.02% of the NAV and a duration under 90 days. This segment has returned 8.9% since inception on a current $3.4B AUM.
Consumer Loans: average maturity between 8 and 12 months, with yields ranging from 12% to 15%
Real Estate Bridges: short-term loans backed by real estate commitments, yielding 6% to 8%.
Sports Receivables: loans and receivables backed by European football clubs, offering 10% to 13% returns.
Generally, the strategies orient around financing working capital for operating companies with high-quality or investment-grade obligors. This enables invoice recipients to rapidly turn around their working capital at competitive rates from non-bank players and a better risk exposure (by having a higher-quality obligor due to pay the invoice) compared to directly financing debtors. Where direct loan exposure exists, the strategies typically take on more of a wholesale funding role with seniority through originators or marketplaces.
Each originator operates in a distinct loan market, with unique exposures to country risk, credit quality, industry, and duration. These loans are priced accordingly, creating a broad spectrum of risk-return profiles that F-ONE will dynamically allocate to as market opportunities evolve.
3.3.2. Digital Assets
The second bucket of the fund is the Digital Assets Arbitrage strategy, an uncorrelated and consistent driver of excess performance. It is a fully systematic, delta-neutral approach using high-frequency trading algorithms to exploit price inefficiencies with high turnover and minimal market exposure. Active since July 2019, it manages over $230M in AUM and has delivered a 19.7% yield since inception.
The primary alpha strategies are executed on centralized exchanges, where robust infrastructure enables high-speed trading. The team may also capture alpha and leverage positions at lower borrowing costs through DeFi applications, by interacting directly with on-chain smart contracts.
3.3.3. Quantitative Strategy
A smaller portion of the fund is allocated to market-neutral and global macro strategies, leveraging liquid listed assets and derivatives to implement relative value positions with exposures ranging from 0% to 10%.
4. Sources of Risks
We rely on an internal evaluation process to weigh the main risks lenders in Smokehouse USDC and other vaults would be exposed to through mF-ONE. Our aim is to understand the degree of exposure to risk to underlying solvency and liquidity (both inherent in the strategy and for lenders to ‘leverage looping’ borrowers).
The mF-ONE token is a composite of three main strategies: a liquidity sleeve with instant subscription and redeemability, a standalone digital assets delta-neutral strategy to allocate pending subscription and an active allocation to the Fasanara F-ONE fund.
F-ONE is a multi-strategy private credit fund offering diversified exposure to SME private credit, as well as market-neutral trading strategies across digital and traditional asset classes. Below, we highlight key risks associated with both this exposure and the mF-ONE structure. While not exhaustive, these are the primary considerations to keep in mind, as they reflect the quality of the tokenization process and the ongoing monitoring and mitigation efforts by the investment teams.
4.1. Credit, Counterparty and Solvency Risk
Every sleeve of the mF-ONE token embeds a different type of credit risk.
mF-ONE carries exposure to the token issuer, Midas Software GmbH; however, this is mitigated by the recourse mechanism of the beneficiary agreement, which ensures proper matching of the assets and liabilities within the note structure.
mTBILL tokens are subject to the same issuer risk, in addition to the structural risks associated with the issuance of the underlying tokenized assets (BUIDL, USTB), and the creditworthiness of the United States Government, as the underlying assets are Treasury Bills.
Fasanara Digital’s Pareto vault employs a loan structure to channel investments to Fasanara’s team and embeds direct credit risk on Fasanara. The following analysis also applies to the Digital Asset sleeve of the F-ONE fund. Digital assets are held in custody with Fireblocks and Copper, and are primarily traded on centralized exchanges such as Kraken, Bybit, Binance, Deribit, OKX, LMAX, BitMEX, and Coinbase. Decentralized applications such as dYdX, Aave, and Compound are also used - the latter two primarily to reduce borrowing costs. The fund trades approximately 20 of the most liquid crypto assets.
F-ONE fund shares are issued through a bankruptcy-remote vehicle, which operates as a sub-fund of a Luxembourg RAIF. The fund’s assets are composed of variable-interest loans issued by the private credit SPV, as well as feeder fund shares of the digital asset and quantitative strategies. Since it constitutes the core allocation of the mF-ONE token and is responsible for the highest performance generation, its invested assets are subject to a broader range of risks, varying by underlying strategy.
4.1.1. Focus on Fintech Lending risk management
Source: ARC public credit reports, and insights gathered from onsite due-diligence interviews
Fintech lending carries the risk that a debtor may fail to repay part or all of the debt. This can result from various situations, including financial distress, payment disputes, issues with delivered goods or services, fraudulent invoices, or complexities in the transfer of receivables.
Fasanara has a longstanding track record in financing SMEs through technology-enabled origination platforms. It launched its invoice financing activity in 2014 and established its flagship fund in 2017 - the Global Diversified Alternative Debt Fund (GDADF).
To date, Fasanara has integrated 141 originators from a pool of over 1,300 identified in the market. Originators are onboarded following a rigorous due diligence process and the development of a shared, comprehensive underwriting framework aligned with Fasanara’s risk and return objectives.
Invoice financing refers to a cash advance provided to the seller, backed by an unsecured invoice payable by the debtor. Fasanara addresses the financing gap left by traditional banks by offering capital to small companies while gaining exposure to larger SMEs, on which it has greater access to data to assess credit risk. As of April 2025, in GDADF, the majority of financed invoices are below €150k, and over 80% are below €500k, while the average annual turnover of debtors exceeds €100 million.
Credit analysis
Fasanara collects both debtor’s quantitative and qualitative data from originator platforms and third-party services. The data include company financials, trading activity, alternative market data, and credit ratings.
Fasanara has standardized data communication with its originators and purchases missing data from third-party providers when it is not supplied directly.
Each originator has developed a proprietary credit rating methodology, which Fasanara reviews during due diligence. These internal ratings are used as one of many inputs to assess debtor quality. Credit ratings may be collected at the issuer level and/or for specific transactions. The most frequently used external credit rating agencies include Modefinance, Orbit, Cerved, Cribis/Crif, Amadeus, Creditsafe, Euler Hermes, Wiserfunding, and D&B. Larger companies may also have ratings issued by Moody’s.
Fasanara reconciles credit ratings for the same debtor across different sources and then applies its proprietary Credit Quality Models to compute a unified probability of default. This results in the assignment of a Fasanara Debtor Rating, which ranges from C to AAA.
Internal track records for each debtor are compiled by aggregating available trading data from originators in Fasanara’s portfolio management system. Key indicators, such as delayed payments, transaction volumes, yields, recovery rates, and defaults, are incorporated into the credit rating framework.
Underwriting Terms
During the originator onboarding process, and following Fasanara’s assessment of the portfolio quality, a detailed Term Sheet is issued and subsequently formalized through legal documentation. This outlines the loan exposure parameters the originator is permitted to underwrite, enforces exclusivity on all qualifying loans to prevent adverse selection, and establishes key covenant terms.
Each originator remains the lender of record and transfers its loan portfolio into a SPV, where it also serves as the servicing agent for the underlying loans. Originators are compensated via a success fee, paid retrospectively, which may be deferred in the event of issues related to covenants, counterparty relationships, or the originator’s financial health.
Covenants impose limits on key metrics of the underlying loans - such as delinquency rates, defaults, prepayments, yield, and excess spread (relative to the equity tranche). Breaches of these limits may trigger soft early amortization at the first level of recourse or more stringent liquidation procedures at the ultimate recourse level.
Fasanara invests in the senior notes issued by the SPV, while the originator retains the junior tranche, which serves as a first-loss protection layer.
Default Rate
The annual historical default rate for the flagship GDADF has remained below 1% for most years, peaking at 2.19% in 2020 during the COVID crisis due to widespread business closures. The recovery rate has exceeded 58% every year, keeping crystallized losses below 1%, even during the COVID year.
Moreover, additional layers of protection are available to help mitigate credit risk in Fintech Lending, such as first-loss pieces, insurance, government or corporate guarantees, and multiple forms of collateral. Approximately 80% of the credit exposure is enhanced by insurance mechanisms.
As of the end of April 2025, the current F-ONE fund exposure shows an average position size of 0.003 basis points (across more than 4,000,000 positions), with the largest debtor representing 1.27% of the NAV. On the same date, the fund was allocated 39.3% to receivables loans, 27.8% to digital assets, and 19.9% to consumer loans, with an average investment yield of 14.77%.
4.2. Liquidity risk
mF-ONE embeds three layers of liquidity and two methods for asset disposal.
Liquidity sleeve: invested in US Treasury Bills, the underlying assets are highly liquid and can typically be sold within a day. Their tokenized issuance is designed to enable instant redemption for mF-ONE holders
Fasanara Digital’s Pareto fund is invested in digital assets across centralized and decentralized exchanges. Liquidity is available on a weekly basis through primary market redemptions. Excess liquidity allocated to this temporary sleeve can be used to replenish the liquidity sleeve.
F-ONE fund ensures 5% of the fund's NAV is available for redemption each quarter. However, most of the fund's assets sit further along the maturity curve:
the digital assets sleeve consists of blue-chip tokens, generally allowing conversion within a few days
invoice financing assets have a constant repayment cycle, offering an efficient tool for liquidity management
consumer and real estate loans have an average maturity of less than a year
quantitative strategies rely on highly liquid financial instruments and are typically liquid within days.
Additionally, the F-ONE fund has the capacity to employ leverage and obtain various forms of credit, including for the purpose of processing redemptions and managing liquidity and treasury needs within the fund.
mF-ONE token holders are entitled to convert their holdings into F-ONE shares through a note structure. They have the option to either sell the note on a secondary market - potentially to a traditional finance actor - or to the issuer at a 10% discount, or to request that the security agent redeem their F-ONE shares.
mF-ONE can be redeemed via Midas on a rolling 30-day basis. Investors may submit an "advance redemption request" to process a full redemption. Once a redemption request is submitted, the redemption amount is calculated based on the last published NAV, and payment is issued through the Fasanara structure 30 days later. This structure enables investors to unwind levered positions without sequential redemption windows.
4.3. Embedded Leverage
The F-ONE fund is authorized to borrow up to 200% of its NAV and can be leveraged up to 500% of its NAV. These limits are defined in the prospectus, while the fund’s typical leverage target ranges between 130% and 150%.
This leverage serves to amplify returns. When returns are positive, the leverage can help offset or cover incurred costs, including origination costs, management fees, and performance fees.
4.4. Valuation Policy
The mF-ONE price is updated on-chain through a feed involving multiple parties (Fasanara, Midas, and eOracle). It is computed as the on-chain market value of mF-ONE positions in mTBILL, Fasanara Digital’s Pareto Vault, and its token holdings balance, in addition to the off-chain valuation of the F-ONE fund as reported by Fasanara.
The Fasanara F-ONE share price is estimated weekly by the Fasanara team, following a strict valuation policy detailed below. This weekly price is used in the on-chain oracle to reflect the underlying valuation and ultimately updates the mF-ONE price on a weekly basis.
The official F-ONE fund NAV is calculated monthly by the appointed Fund Administrator, who is responsible for providing independent performance verification on the fund’s inventory and producing monthly reports, account statements, and performance. The official NAV is made available to all investors.
The risk of a shortfall of redeemable NAV in F-ONE is contingent on having valuation policies that accurately track the recoverable F-ONE market value of the NAV, as well as the structural credit risk of the strategies the fund is invested in.
The F-ONE fund adheres to the following principles for valuation of fund positions:
Fair Value Measurement: Valuations will reflect the fair value of the securities, defined as the price that would be received to sell an asset in an orderly transaction between market participants at the measurement date.
Market-Based Approach: Whenever possible, valuations will be based on active market prices. When market prices are unavailable, this Policy will outline the methodology for deriving fair value using market-corroborated inputs.
Consistency: The methodology applied will be consistent over time for the same types of investments. Any changes in valuation techniques will be documented as part of this Policy's review.
Independence: valuations are conducted with impartiality. The valuation process embeds a multi-layered approach, involving different service providers, to ensure impartiality and independence from a single party.
Accuracy and Reliability: Valuations will reflect the accurate and verifiable amount of outstanding investments held by the Fund.
Currency Valuation: Cash and investments held in currencies other than the Fund's reporting currency will be converted using the prevailing exchange rate as of the valuation date.
Transparency and Documentation: The process and rationale for valuation is well documented and thoroughly explained in this Policy. The Policy is available for review by any auditors, any investor and regulatory bodies.
Regular Review and Updating: the policy should be reviewed regularly to ensure it remains relevant and aligned with current market practices, accounting standards, and regulatory requirements.
Listed or liquid and actively traded instruments rely on pricing information drawn from reputable third-party such as Bloomberg or Thomson Reuters. If instruments became illiquid or trading were suspended, the Fund would use the most recently available trading price and adjust it for significant events that could affect the instrument’s value.
For digital assets trading 24/7, prices are observed at 23:59:59 UTC each day. The data feed comes from reputable and independent sources, typically from the listed pairs on the highest-volume exchange with the most consistent pricing. Fair value adjustments may be applied.
In Fintech Lending, the Fund employs the amortization method for invoice lending and the mark-to-model method for consumer loans. The market widely recognizes that payment delays can occur for various reasons. The effective payment date does not necessarily match the expected due date of the invoice. The Fund allows a grace period of 120 days, during which interest continues to accrue. After 120 days, the investment is considered impaired, with the estimated probability of default increasing to 20% between 120 and 250 days, 50% between 250 and 365 days, and 75% thereafter. If the payment delay reaches three years, the investment is written off. The Loss Given Default is set at 100% for all direct lending, and at 0% for SPV structures with guaranteed mechanisms.
As consumer loans are pooled by origination platforms, a mark-to-model approach is used to value these instruments. Historical data are fitted into smoothing and averaging models that estimate default and prepayment rates. The loans are then discounted using the internal rate of return (IRR) derived from the fitted curve. The pool is subsequently evaluated against the model: if realized cumulative defaults exceed model expectations by more than two standard deviations, the model is adjusted to reflect the current performance curve, and pricing is updated accordingly.
5. Morpho Lending Protocol Overview
DeFi unlocks the ability to execute sophisticated yield-enhancing strategies by providing access to a wide range of financial tools that were once reserved for elite financial institutions.
Overcollateralized loans are an essential tool that provides liquidity to borrowers based on the collateral they post. Morpho is the leading decentralized and transparent protocol for overcollateralized loans, known for its battle-tested reliability. Built as an immutable set of smart contracts, it provides a robust and trustworthy foundation for both lenders and borrowers. It depends on curators for effective market management. Steakhouse Financial is the largest curator and has led advancements in real-world asset collateral while developing tools to improve governance and automation, ultimately enhancing market efficiency and lowering counterparty risk through decentralization.
Morpho employs dynamic interest rate models that address the inherently conflicting goals of borrowers and lenders. While borrowers aim for low-cost leverage, lenders seek higher returns to offset the risks involved. Morpho’s interest rate mechanisms are carefully crafted to balance these needs in a transparent manner.
The protocol targets a 90% utilization rate, meaning that typically 10% of deposited assets should remain available for immediate withdrawal requests. When utilization exceeds 90%, the dynamic interest rate model incentivizes borrowers to repay by increasing the interest rate. This system, which includes a dual mechanism of utilization and time drift, naturally encourages borrowers to adjust their loans by making repayments. At a 100% utilization rate, the borrowing rate is four times the 90% target rate, doubling every five days. Conversely, when utilization falls below 90%, the interest rate decreases to stimulate borrowing and improve capital efficiency.
5.1. Morpho Market / Leverage Strategy
At Steakhouse Financial, we are committed to innovation in market curation and, by extension, in the risk management of Morpho markets. As our vaults interface between lenders and borrowers, we reconcile their objectives by enhancing robustness, reducing noise, and improving market efficiency and security.
We carefully design new markets to serve emerging types of borrowers, enabling them to implement their desired strategies. We have developed a unique structure that allows mF-ONE holders to leverage their positions by accessing liquidity in Morpho's stablecoin markets.
Morpho Market parameters
Collateral asset: mF-ONE token
Loan asset: USDC
LLTV: 91.5% LLTV with 7.7% oracle price discountThis discount is achieved through a dedicated oracle address6 with a 7.7% discount on the base feed which is the NAV calculation of the mF-ONE token7. The effective LTV of the market is 84.45%.
On the oracle smart contract, the discount percentage is expressed as a percentage. The variable is used in the formula as discountPercentage / (100*decimals). Decimals are set to 8, similar to the Oracle Aggregator Feed.
5.2. Oracle configuration and tail risk management
We’ve chosen the above discounted oracle price with the LLTV such that the market can be both attractive to all stakeholders. We believe this configuration would ensure a healthy ecosystem of actors that can coordinate to make mF-ONE an attractive asset to both loop and liquidate, while providing a safe risk buffer to the lenders.
Specifically, we lay out the considerations from the perspective of each stakeholder:
Loopers: LLTV of 91.5% with an oracle price discount of 7.7% would imply an effective 84.45% LTV, or maximum leverage of 1/(1-0.8445) = 6.4x.
Liquidators: the expected value of liquidations need to be attractive. This means high enough LLTV that there is a sufficient frequency of liquidations, but also an attractive enough liquidation penalty. In Morpho, liquidation penalty is guided by the following formula:
As the sensitivity chart next page shows, this means a liquidator’s incentive declines with higher LLTV - 91.5%, incentive to the liquidator is a mere 2.62%. However, the oracle price discount of 7.7% ensures that the total incentive to the liquidators exceeds 11%, or in the worst case scenario of quarterly redemptions of the underlying, an annualized return of ±44%.
Lenders: Lenders rely on the risk curator parameterizing the underlying asset’s LLTV to be reasonably in line with the underlying credit and price volatility risk of the collateral asset. At the selected LLTV of 91.5%, the collateral NAV can decline by 1-LLTV*morpho liquidation penalty = 1-0.915*1.0262 = 6.11% before lenders face the risk of incurring bad debt. Assuming the 80% maximum allocation of mF-ONE to the Fintech Lending strategy, this implies that the valuation of this strategy has to decline 11.05% before incurring bad debt. Given the Fintech Lending concentration profile of the portfolio positions and historic volatility of the underlying assets, we feel assured that the chosen risk parameters would provide a reasonable risk buffer for lenders.
5.3. Bank run scenario illustration
In the normal course of events, the Morpho Market should reach an equilibrium in which rising instantaneous interest rates attract new lenders. As the leading curator and the largest stablecoin vault manager on Morpho, we regularly observe new lenders entering the markets when abnormal rates appear, supporting rate equalization through active reallocation.
If an extreme event arises with liquidity drying up and withdrawals occurring from the mF-ONE/USDC market, utilization would reach 100%, causing interest rates to spike and borrowers’ LTV ratios to rise.
Note that liquidation can only occur in the mF-ONE/USDC market when the LLTV ratio exceeds its threshold. This ratio is set at 91.5% (effectively 84.5% when accounting for the 7.7% discount in the price oracle), and other market parameters are detailed in the Morpho Market section above.
5.3.1. Bad debt protection for lenders
Example with 8% borrow target rate at 90% utilization, markets rise at 100% utilization on day 0. The Market Oracle returns a discounted price of 92.3% of mF-ONE NAV. LTV is initially at liquidation for the borrower & Morpho Market LLTV at 91.5%.
The discount mF-ONE NAV oracle used in Morpho Market extends the profitable period for liquidators from 15 days to 35 days. From day one, a liquidator would seize 1.0262 * loan value of collateral asset. However, since the collateral asset is priced at a 7.7% discount, the true value of the mF-ONE obtained by the liquidator would represent 111.18% of the loan value.
Over this period, the interest rate rises sharply, reaching 800% on the 24th day. During this period, capital allocators are incentivized to provide liquidity in the forms of liquidation or by lending to the market and allowing users to unwind their position over a long period of time.
Allowing market participants to act on their positions over more than 20 days creates opportunity for secondary market sales of the token position to digital asset players or for in-kind redemptions of the underlying notes and sale to traditional finance actors.
This unique market design, developed by Steakhouse Financial in collaboration with Midas and Fasanara, ensures that lenders to Morpho Market benefit from a broad network of participants ready to provide liquidity at steep discounts.
5.3.2. Elements to gauge for borrowers
The mF-ONE NAV is updated weekly based on Fasanara’s estimated valuation of its investments. The NAV can be volatile from one week to the next. When a new NAV is determined, both the feed oracle and the discounted oracle are updated, which programmatically alters the borrower’s LTV.
The borrower’s LTV increases continuously as interest accrues on the loan. A higher NAV update will reduce the LTV, while a lower NAV will increase it. These factors must be actively monitored, and borrowers should maintain a margin as a buffer against NAV volatility.
6. mF-ONE Structure
mF-ONE tokens are issued as Tokenized Bearer Bond Certificates under the MiFID II regime, classified as financial instruments, by Midas Software GmbH (the Issuer), a company incorporated under German law. They are offered to eligible professionals and qualified investors through a Private Placement Memorandum.
The mF-ONE tokens seek to track a basket consisting of:
an exposure to US Treasury Bills or equivalent tokenized short-term US Treasury instruments, held on-chain in a custody-controlled smart contract infrastructure,
an indirect exposure to a private credit investment strategy implemented through the F-ONE Note, achieved through the contractual beneficiary rights held by the Issuer.
Infinite Tokens S.A. acts, in respect of its compartment D, as a fiduciary special purpose vehicle and holds legal title to a variable funding note (F-ONE Note). The entity maintains a dual-benefit fiduciary relationship for the benefit of both the Issuer and the Tokenholders. These beneficiary rights serve as collateral securing the obligations of the Issuer under the mF-ONE tokens.
The F-ONE Note is issued by Fasanara Investments, acting in respect of its compartment AK, and represented by its management company, Fasanara Manco S.à r.l..
The F-ONE Note reflects the performance of shares in the F-ONE fund, legally registered as the sub-fund "F-ONE Sub-Fund 29" of Fasanara Investments S.A., SICAV-RAIF, a public limited company incorporated and registered in Luxembourg.
6.1. Legal Overview
The mF-ONE product enables investors to gain on-chain exposure to real world private credit strategies. This is achieved through an optimized tokenization structure, including Special Purpose Vehicles under familiar regulatory regimes for professional investors.
The tokenization structure is tailored to benefit on-chain investors, who only need to complete KYC with one of the issuers to gain leveraged exposure. It incorporates legal mechanisms that ensure the proper functioning of the entire product structure within a decentralized environment.
It enables liquidity, on-chain through atomic settlements and off-chain for underlying note holders through traditional secondary markets, and a discounted price off-chain facility. While all the legal features around the structure are not intended to be triggered as a primary intent, they are in place to safeguard investors interests, and provide greater liquidity than a traditional private credit fund typically allows.
6.2. Fasanara F-One Fund
6.3. Smart contracts
mF-ONE is a token representing the Tokenized Bearer Bond Certificate on-chain. It is not an on-chain vault, as subscriptions made through the deposit vault are partially directed off-chain and off-ramped into fiat currency to purchase the underlying structure’s notes. The on-chain price of mF-ONE is obtained through a separate oracle feed, with the price computed using off-chain data provided by Fasanara. The rights and obligations of mF-ONE token holders are set out in the Midas PPM.
mF-ONE: 0x238a700eD6165261Cf8b2e544ba797BC11e466BaDeposit Vault (for minting): 0x41438435c20B1C2f1fcA702d387889F346A0C3DERedemption Vault Swapper (for withdrawal): 0x44b0440e35c596e858cEA433D0d82F5a985fD19CMidas-deployed smart contracts have been audited multiple times, and the reports are available on their website. This tokenization structure has been battle-tested repeatedly, with six “mTOKENS” currently backed by real-world assets issued exceeding $200mn in value on their platform. The mF-ONE smart contracts are deployed on Ethereum mainnet.
6.4. Midas platform / KYC
Minting and redeeming the mF-ONE token are permissioned actions that require an account on Midas platform, which provides the infrastructure with institutional-grade compliance. Only onboarded investors are eligible after having their account being verified (KYC/KYB). Secondary transfers, including the deployment into DeFi lending markets, are permissionless.
6.5. Atomic subscription and redemption
Subscriptions to mF-ONE tokens will be directed to the token’s liquidity sleeve if the allocation target falls below 10%.
If liquidity is available, mF-ONE holders are entitled to redeem their tokens for the mTBILL token. The atomic liquidity is observable on-chain or through the Midas Real-Time Transparency Report. As of June 24th, there was $0.9mn atomic liquidity in the mTBILL token on the Ethereum network. The mTBILL token is holding USTB and other tokenized T-Bills instruments, which can be redeemed atomically.. Midas replenishes below-target levels based on the capacity schedule.
Midas is also upgrading the redemption process of its mTBILL token by allowing atomic redemption in a greater capacity. It additionally enables the user to redeem mF-ONE for USDC directly by converting the underlying USTB held by the mTBILL token into USDC using the USTB redemption contract.
A 0.50% redemption fee applies when redeeming through the instant liquidity pool. The Midas Redemption Vault Swapper smart contract allows green-listed users to instantly convert to USDC, subject to available liquidity in the instant mTBILL sleeve and, subsequently, the USTB holdings. Other holders must submit a redemption request along with the transfer of the mF-ONE token, which will be reviewed for processing by the Midas team. The atomic redemption fee is re-allocated to remaining mF-ONE holders, compensating for potential cash-drag.
7. Ensuring safety
The integration of mF-ONE and Morpho presents a clear challenge. mF-ONE's underlying asset, F-ONE, exhibits low liquidity and offers only partial quarterly redemptions. This contrasts sharply with Morpho, a money market platform requiring rapid access to funds for lenders. Essentially, the system attempts to fund relatively illiquid, long-term assets with short-term liabilities.
mF-ONE Level Atomic Redemption: Incorporating liquid sleeves allows for atomic redemptions.
On-Chain Liquidation Network: Development of a network offering high-discount liquidations and balance sheet capacity.
TradFi Secondary Access: Enabling the unwrapping of the mF-ONE token to access traditional finance secondary markets.
7.1. mF-ONE Level Atomic Redemption
mF-ONE is not a simple tokenized form of its underlying F-ONE. It also holds a liquidity sleeve composed of tokenized MMF within mTBILL. This enables two parts. First, it allows mF-ONE to accept atomic subscriptions and put the raised capital to work while waiting for a subscription window for F-ONE (monthly). On the reverse, it also enables atomic redemptions (with a fee for the benefit of the other mF-ONE holders). While this is not a mitigant strong enough for a “bank run” scenario, it allows strong composability within DeFi and the ability to open and close a leveraged position atomically.
7.2. On-Chain Liquidation Network
The holy grail of RWA was always to be able to generate a healthy secondary trading activity on-chain, in other words, an active network of participants. The illiquidity of mF-ONE in case of a depleted MMF sleeve creates a nice opportunity for institutions with some balance sheet capacity to trigger liquidation and acquire mF-ONE with a 10% discount on the last NAV, or a ±40% IRR held over a quarter. They would then hold it for redemption, which could take up to three months but more than compensated by the discount. As explained in the fund description, the fund itself keeps a liquid profile.
7.3. TradFi Secondary Access
The on-chain liquidation network assumes that there will be enough balance sheet capacity to hold mF-ONE in need of liquidation within DeFi. Depending on the size of the mF-ONE product and the development of the liquidator network this might not be the case. To increase resiliency, a method has been set up to “unwrap” the mF-ONE product, allowing a liquidator to exchange mF-ONE for the underlying F-ONE shares, structured as notes. The latter is not tokenized and lives in the TradFi world but such form factor enables it to be sold to other TradFi institutions. Just within Fasanara, there is 4.5B AuM of funds that could get exposure to F-ONE but can’t touch anything tokenized. This will allow the DeFi liquidator to get mF-ONE at a significant discount and resell the F-ONE component to TradFi participants at a smaller discount.
8. Risks and warnings for leveraged loopers
Exiting an mF-ONE position involves sending the mF-ONE token to the Midas Redemption Vault and either benefiting from instant liquidity or waiting until on-chain liquidity is replenished to finance the redemption.
Since the instant liquidity sleeve targets 10% of mF-ONE's total value locked (TVL) at any given time, the liquidity available for redemptions is limited to this amount. Because it is not allocated on a pro-rata basis but socialized across all token holders, any investor can redeem their mF-ONE tokens and deplete the available liquidity.
In such a case, Midas would need to initiate a redemption of its underlying F-ONE shares by giving the issuer 30 days' notice, followed by a 5-day settlement period to receive payment.
Because of the redemption mechanism, there is additional structural illiquidity to the leveraged loop that users should be aware of, on top of the illiquidity inherent to a longer duration private credit strategy. Each leg of a ‘loop’ involves depositing mF-ONE as collateral on Morpho, borrowing USDC and minting new mF-ONE positions, then repeating the cycle for the amount of leverage desired. Structurally, the market as we have configured it will not allow more than 6.4x without triggering a liquidation. Although minting is atomic, redemption is not and is subject to withdrawal windows that depend both on Midas mechanisms as well as Fasanara’s structured gates. This means that a leveraged looper may be committing to a greater level of illiquidity risk in return for expressing a view on the rate spread between DeFi borrow rates on Morpho and the return of mF-ONE.
A reasonable strategy could be, for the moment of redemption, for leveraged loop seekers to reserve enough capital to repay the full loan, i.e. all of the loops they have incurred. In this way, the notional value of the token can be redeemed in one go through the redemption vault without incurring further interest cost or locking up collateral for longer. To illustrate the level of liquidity risk that leveraged loopers may face without the ability to withdraw the collateral fully in one go, in the absence of liquidity in the mF-ONE instant sleeve and the “advance redemption request”, unwinding a 5x leveraged loop risks taking up to (5 + 6) × 95 days = 570 days.
Improvements to this system may emerge over time with feature upgrades on the Midas side, for example, but leveraged loopers should take the system as it is today.
9. Conclusion
Long-dated maturity mismatch is relatively new to DeFi but presents many opportunities for holders and speculators alike. Integrating these new products is nonetheless fraught with risk and should be undertaken carefully.
With the integration of mF-ONE within the Morpho ecosystem, following principles set in The Curious Case of Onchain Private Credit Repo8, Steakhouse, Fasanara and Midas have developed additional features to improve the process of tokenization of private credit and integrate it within DeFi.
We hope that this structure can provide notes for other market participants to learn from as the landscape for TPC in DeFi expands. As we mentioned earlier, we view this as a v1.0. There are many compromises when off-chain traditional finance is merged with the speed and composability of DeFi. But we believe this is the first step in the right direction towards automating and bringing on-chain private credit activity in the modular and composable way that crypto-native users are used to, and we look forward to charting that path in the months to come.
ARC Ratings is a Credit Rating Agency, registered with the ESMA, within the scope of the Regulation (EC) Nº 1060/2009, and recognised as ECAI. ARC’s Fund Ratings are an independent assessment of a specific fund’s exposure to factors that could lead to unexpected NAV and total return volatility. It should be noted that fund ratings are not credit ratings and therefore carry the (f) modifier.