Distribute yield with Merkl

Distribute reserves-generated yield with Merkl

When token issuers want to shape the liquidity of their token across DeFi, they typically turn to incentive programs. Traditionally, these incentives are funded directly from the protocol treasury—a finite resource that depletes over time.

However, yield-bearing assets have a fundamental advantage: their reserves natively generate yield. This creates an organic, self-renewing incentive budget without requiring constant treasury withdrawals.

Rather than directing all reserve yields to staked token holders or using them solely for overcollateralization, protocols can take a performance fee on these reserves and redistribute them strategically to users in targeted DeFi venues. This redistribution can be either centrally managed by the protocol team or incorporated into governance mechanisms, enabling governance token holders to direct DeFi yield allocation, giving further utility to the token.

The key to making this work is controlling how much you spend and avoiding overpaying certain venues or being gamed by advanced users. This is where Merkl plays a crucial role: by providing granular control over reward distribution, performance-based metrics, and venue-specific targeting, Merkl ensures that your self-generated incentive budget is deployed efficiently and strategically.

This approach transforms passive reserve income into an active liquidity shaping tool that is sustainable, scalable, and aligned with protocol growth.

Idle liquidity-based rewards

Overview

Idle liquidity-based rewards are a capital-efficient incentive mechanism that allows protocols to reward lenders proportionally to unutilized liquidity, ensuring incentive spending never exceeds the revenue generated from the tokens that are sitting idle in the protocol.

How It Works

This feature creates a self-balancing incentive system where your reward costs scale automatically with market conditions:

• Fixed APR on Idle Capital: You specify a target APR (e.g., 5%) to be paid on the unborrowed balance sitting in a protocol. This target APR corresponds to the APR you generate with your reserves, net of performance fees.

• Automatic Forwarding: These rewards are distributed proportionally to all depositors, even if they use vaults or other 3rd party apps to provide liquidity.

Key Benefits

• Cost Control: You only pay when capital is unutilized—high utilization means minimal incentive costs but maximum borrow fee revenue

• Natural Equilibrium: When utilization is low, lenders receive rewards close to the reserve rate, improving overall APY and attracting deposits

• Self-Funding: Incentives are funded directly from the reserves generated by idle capital, creating a sustainable model

Market Dynamics

High Utilization (90%+)

• Minimal idle capital → Very low incentive costs

• High borrow fees generated → Lenders earn primarily from organic borrowing activity

Low Utilization (20-40%)

• Significant idle capital → Higher incentive payments (but a lot of idle assets are sitting in the protocol, the cost is partially or completely paid by the yield generated by the reserves)

• Lower borrow fees → Lenders receive substantial rewards from idle liquidity, keeping APY competitive

Fixed total APR

Overview

Fixed total APR is a feature that allows asset issuers to guarantee a minimum yield for their token holders across DeFi venues, while only paying incentives when needed. You specify a target APR (e.g., 8%), and Merkl automatically tops up the difference between the native yield and your target.

How It Works

This feature creates a backstop mechanism that ensures competitive yields while minimizing incentive spend:

• Set Your Target: Define the total APR you want users to earn (e.g., 8%)

• Automatic Monitoring: Merkl continuously tracks the native APR generated by the venue

• Smart Top-Up: Incentives are only paid when native yield falls short of your target

Payment Logic

The system follows a simple conditional payment structure:

When Native APR < Target APR

• Merkl pays: (Target APR - Native APR)

• Example: Target = 8%, Native = 5% → Merkl pays 3%

When Native APR ≥ Target APR

• Merkl pays: 0%

• Example: Target = 8%, Native = 10% → Merkl pays nothing

Key Benefits

• Cost Efficiency: You only spend when organic yields are insufficient, never overpaying for venues that are already competitive

• Yield Stability: Users experience consistent returns regardless of market volatility

• Market Responsive: Automatically scales incentives based on real-time market conditions

• Budget Protection: Your incentive spend naturally decreases as the asset gains organic traction

Market Dynamics

Consider a target APR of 8% across different market conditions:

Bull Market (High Demand)

• Native APR: 12%

• Merkl Payment: 0%

• User Receives: 12%

• Your Cost: $0

Neutral Market

• Native APR: 6%

• Merkl Payment: 2%

• User Receives: 8%

• Your Cost: Moderate

Bear Market (Low Demand)

• Native APR: 2%

• Merkl Payment: 6%

• User Receives: 8%

• Your Cost: Higher (but a lot of idle assets are sitting in the protocol, the cost is partially or completely paid by the yield generated by the reserves)