MEDICI Protocol Capital

Overview

$MEDICI is the native protocol capital asset of Medici Markets.

The purpose of $MEDICI is not to function as a payment token, settlement asset, or mandatory intermediary for repo transactions. USDG remains the settlement and funding asset of the protocol, while tokenized securities represent the primary collateral layer.

Instead, $MEDICI represents the economic participation and security layer of Medici Markets.

Collateral LayerTokenized Securities

Settlement LayerUSDG

Protocol Capital Layer$MEDICI

Participants do not need to hold $MEDICI to borrow, lend, or settle transactions.

Participants who wish to earn protocol incentives, originate markets, provide economic security, participate in risk governance, or access advanced protocol functionality may be required to stake or bond $MEDICI.

The Protocol Capital Model

Let annualized protocol transaction volume, weighted average protocol fee rate, and annualized protocol revenue be defined as follows.

V_{t} = annualized protocol transaction volume at time t

f = weighted average protocol fee rate

R_{t} = V_{t} \cdot f

For example, assuming $10 billion of annualized volume and a 5 basis point fee rate:

R_{t} = 10, 000, 000, 000 \times 0.0005

R_{t} = $5, 000, 000

R_{t} = R_{r eser v e} + R_{sec u r i t y} + R_{l i q u i d i t y} + R_{t r e a s u r y}

R reserve strengthens protocol-controlled reserves.
R security compensates participants providing economic security.
R liquidity supports productive liquidity incentives.
R treasury funds continued protocol development and operations.

Stake-to-Earn

Liquidity incentives should reward productive capital rather than passive token ownership.

W_{i} = L_{i} \cdot M (S_{i}, D_{i}) \cdot Q_{i}

M (S_{i}, D_{i}) = 1 + α \frac{S _{i}}{S _{0}} \cdot min (1, \frac{D _{i}}{D _{ma x}})

1 \leq M \leq M_{ma x}

The square-root function creates diminishing marginal returns. Doubling the amount of $MEDICI does not double the participant's incentive multiplier.

MEDICI Stake	Duration	Multiplier
0	0	1.00x
100,000	30 days	1.10x
500,000	90 days	1.35x
1,000,000	180 days	1.60x
5,000,000	365 days	2.00x

Productive Liquidity + MEDICI Commitment -> Enhanced Economic Participation

MEDICI Backstop Vault

A portion of staked $MEDICI may participate in a protocol backstop mechanism. The purpose of the Backstop Vault is to provide an additional layer of economic protection against explicitly defined protocol loss events.

B_{t} = total MEDICI deposited into the Backstop Vault

P_{t} = market price of MEDICI

C_{t} = B_{t} P_{t}

50, 000, 000 \times $0.20 = $10, 000, 000

E [r_{B}] = \frac{R _{sec u r i t y}}{C _{t}} - p_{L} \cdot L G D

This creates an explicit relationship between risk and compensation. $MEDICI is therefore not merely staked to generate yield. It represents economically committed protocol capital.

Layered Protocol Protection

MEDICI should not necessarily represent the first source of capital used during every protocol loss. A layered protection model can instead be used.

L1Transaction Collateral

L2Haircuts and Margin

L3Protocol Reserves

L4MEDICI Backstop Capital

X_{r e mainin g} = max (0, X - L_{1} - L_{2} - L_{3})

X_{M E D I C I} = min (L_{4}, X_{r e mainin g})

The backstop is therefore the final economic defense layer rather than the primary risk-management mechanism.

Market Origination Bonds

Creating a new market introduces risk to the protocol. A participant requesting permissionless or semi-permissionless market creation may be required to bond $MEDICI.

SPY/USDGNVDA/USDGTSLA/USDG

B_{m} = B_{0} \cdot R_{m} \cdot V_{m}

B_{m} = 100, 000 \times 1.5 \times 2

B_{m} = 300, 000 MEDICI

The bond may be released after a predetermined period if the market operates correctly. Under narrowly defined malicious or economically damaging conditions, some or all of the bond may be forfeited.

Market Creation -> Capital Commitment -> Economic Accountability

MEDICI Capital Score

Token ownership alone should not determine protocol status. Medici Markets can introduce a Capital Score that measures long-term economic contribution.

C S_{i} = S_{i}^{α} D_{i}^{β} V_{i}^{γ} Q_{i}^{δ} R_{i}^{ϵ}

0 < α, β, γ, δ, ϵ < 1

C S_{i} = S_{i}^{0.30} D_{i}^{0.20} V_{i}^{0.25} Q_{i}^{0.15} R_{i}^{0.10}

Using exponents below one creates diminishing returns. A participant therefore cannot maximize Capital Score simply by purchasing a disproportionately large quantity of $MEDICI.

Tier	Capital Score	Example Privileges
Participant	0+	Base protocol access
Merchant	1,000+	Enhanced incentive eligibility
Banker	5,000+	Market origination privileges
Medici	20,000+	Maximum incentive tier and advanced protocol participation

Productive Staking

Traditional staking frequently creates the following circular structure:

Stake Token \to Receive More Token \to Stake More Token

Medici should instead emphasize Productive Staking:

Stake MEDICI + Perform Useful Protocol Function \to Economic Reward

Providing repo liquidity
Providing backstop capital
Originating markets
Maintaining reliable market-making activity
Providing infrastructure
Participating in risk management
Providing long-duration protocol capital

Protocol Revenue Flywheel

The long-term objective is to connect protocol growth to demand for productive protocol capital.

01More Collateral
02More Funding Demand
03More Repo Volume
04More Protocol Revenue
05Greater Incentive for Liquidity and Security Providers
06Greater Demand for Productive MEDICI Participation
07Deeper Markets
08More Collateral

C ↑\Rightarrow V ↑\Rightarrow R ↑\Rightarrow S ↑\Rightarrow L ↑\Rightarrow C ↑

MEDICI Participation Ratio

M P R = \frac{S _{p r o d u c t i v e}}{S _{c i r c u l a t in g}}

S_{p r o d u c t i v e} = S_{l i q u i d i t y} + S_{ba c k s t o p} + S_{b o n d s} + S_{in f r a s t r u c t u r e}

M P R = \frac{180 , 000 , 000}{400 , 000 , 000} = 45%

The MEDICI Participation Ratio measures how much circulating supply is economically committed to protocol activity. Unlike simple staking ratios, MPR excludes passive staking that provides no identifiable service to the protocol.

Capital Efficiency

P C E = \frac{V _{t}}{C _{t}}

V_{t} = $20 B, C_{t} = $100 M, P C E = 200

max (P C E)

Pr (protocol insolvency) < ϵ, L_{ma r k e t} \geq L_{min}

Every dollar of economically committed MEDICI capital supports approximately $200 of annualized protocol activity in this example.

Risk-Adjusted Security Requirement

The amount of MEDICI required by the protocol should scale with economic risk.

R W E = j = 1 \sum n E_{j} \cdot w_{j}

S R = \frac{C _{sec u r i t y}}{R W E}

C_{sec u r i t y}^{*} = $500 M \times 0.02 = $10 M

Δ C = $10 M - $7 M = $3 M

The protocol can respond by increasing security incentives until sufficient productive capital is attracted.

Dynamic Incentive Equilibrium

Rather than distributing a fixed quantity of tokens regardless of protocol conditions, incentives can respond to the difference between required and available capital.

I_{t} = I_{0} + λ max (0, \frac{C ^{*} - C}{C ^{*}})

C \geq C^{*} \Rightarrow I_{t} = I_{0}

C < C^{*} \Rightarrow I_{t} > I_{0}

Governance

Governance should focus primarily on protocol risk and capital allocation.

Collateral onboardingRisk-weight parametersHaircut frameworksBackstop parametersMarket origination requirementsProtocol reserve allocationIncentive budgetsTreasury managementMajor protocol upgrades

V P_{i} = S_{i} \cdot D_{i}^{β}, 0 < β < 1

V P_{i} = S_{i}^{α} C S_{i}^{β}

Economic Identity of MEDICI

Tokenized Securities = CollateralUSDG = Settlement and Funding$MEDICI = Protocol Capital

$ M E D I C I = Security + Bonding + Liquidity Alignment + Reputation + Governance

$MEDICI is not designed to replace the assets being financed. It exists to coordinate the participants responsible for making those markets liquid, secure, reliable, and scalable.

Desired equilibriumProtocol Growth -> Higher Productive Capital Requirement -> Greater MEDICI Economic Participation

Rejected patternToken Emissions -> Temporary Yield -> Sell Pressure

Design Principle

You do not need MEDICI to use Medici Markets. You need MEDICI to participate economically in Medici Markets.

Borrowers should be able to borrow. Lenders should be able to lend. Institutions should be able to settle.

The MEDICI token becomes relevant when a participant wants to become part of the economic infrastructure behind those activities.

In this architecture, MEDICI is not an additional asset inserted into transactions where it is unnecessary. It is the protocol capital asset held, staked, bonded, and deployed by participants who secure, originate, and expand Medici Markets.

MEDICIProtocol Capital