Thread by @PinkBrains_io

MegaETH committed $10M to the Aave DAO over 5 years. How are they going to pay?

Aave earns from reserve factors: 10% on USDM and USDT0, 15% on WETH, 25% on USDe.

If revenue is below $2M a year, MegaETH pays the gap
If it’s above, the excess rolls forward

Let's look at the current numbers:

1. USDM market: $599.97M supplied (cap maxed). $180M borrowed at 1.34%. At 10% reserve factor, that’s about $241k/year.
2. USDe market: $200M supplied (cap maxed). $1M borrowed at 0.02% x 25% RF = $50/yr
3. WETH and USDT0 are still small

Total current earnings is around $241k/year. Gap to the $2M floor is about $1.76M.

So the heavy lifter is Megaavethena, which is now underperforming.

Loop works when loopers' income on $USDe (3.08% APY) exceeds $USDm borrow cost x LTV.

At optimal utilization (85%), borrow rate is around 4% APY, but the looping is already unprofitable by then, meaning the system must rely on non-loop borrowers to sustain demand.

At target $500M USDe supply cap (current $200M), USDM borrowable at 90% LTV = ~$450M.

- Conservative case (~3% borrow rate, where looping still works): $450M x 3% x 25% RF = $3.375M/year
- High utilization case (~4% borrow rate): $450M x 4% x 25% RF = $4.5M/year

Looks clean, but there is also additional cost: the Foundation is also paying Merkl incentives in $MEGA.

5.12% on $600M USDM supply = $30.72M/yr
minus Aave's native interest rate (0.32% APY) = $1.92M/yr
minus USDM's T-Bill (~4% APY) = $24M/yr

Emissions burn $4.8M at the current rate (numbers can change as Aave native rate increases).

Net sell pressure on $MEGA depends on how much loopers hold vs dump rewards.

The team thought about this. That's probably why they've launched the $MEGA locking program to hold things up in the early stage.

You can lock MEGA to receive more MEGA when KPIs hit. 53% of the total MEGA supply is gated behind KPI achievement.

Delays emissions until growth metrics are met. A deflation mechanism while the chain finds its feet.

Most likely 5-year roadmap for MegaETH:

Year 1: With the current earnings at ~$241k, the foundation pays ~$1.76M + $4.8M $MEGA emissions. Loop is still small. Incentives do the work.

Year 2: USDe supply cap raised toward $500M. USDM borrow cap raised proportionally. Loop scales to ~$450M USDM borrowed. Megaavethena saves the game with enough roll-forward credits for the next few years.

Year 3-5: Loop reaches max utilization. Non-loop borrow demand kicks in (WETH/USDT0/wstETH), adding more $500k-1M+ to MegaETH's revenue.

MegaETH clears the $10M commitment in roughly 2.5 years, making the back half of the deal pure profit.

Total Foundation economic cost: ~$6.5M, mostly front-loaded in year 1.

The money might come from the same treasury that funds $MEGA buybacks:

- USDtb T-Bill yield (~$24M/yr on $600M USDM circulation)
- $50M from the October token sale
- Other Foundation reserves

The liquidity bribe is a 5-year bet on:

- Megaavethena works with incentives
- ETH stays productive for leveraged borrowing
- Fed not cutting hard enough to compress T-Bill margin
- $MEGA holds its price

There is no onchain escrow, no upfront collateral on the Aave guarantee. If MegaETH fails to commit, the DAO will become an unsecured creditor. Unclear whether there's a binding legal contract behind the scenes.

TLDR: MegaETH's $10M Aave commitment is mostly self-funding if Megaavethena scales as planned. Now growth looks slow, but time will tell.

The loop looks attractive now at 0.02% borrow rate. Why is there only $1M borrowed out of a $40M?

This should’ve been maxed out on day one in the last bull run, when USDe yields were higher, and people weren’t as worried about DeFi hacks.

Did I miss anything?