How the Exchange Rate Is Calculated

The exchange rate between MON and shMON determines how much shMON you receive when depositing, and how much MON you receive when withdrawing. Understanding this rate helps you make informed decisions about timing.

The Core Concept: Equity

The exchange rate is based on equity—the total value of MON owned by all shMON holders. Think of equity as:

$$\text{Equity} = \text{What the Protocol Owns} - \text{What the Protocol Owes}$$

More precisely:

$$\text{Equity} = \text{Total Staked MON} + \text{Available MON} - \left(\text{Pending Withdrawals} + \text{Validator Rewards Payable} + \text{Zero-Yield Deposits}\right)$$

What each term means:

• Total Staked MON: All MON currently staked with validators (including queued amounts)
• Available MON: Liquid MON held by the protocol
• Pending Withdrawals: MON owed to users who burned shMON but haven't collected yet
• Validator Rewards Payable: MEV rewards held temporarily before distribution
• Zero-Yield Deposits: MON from the zero-yield tranche that doesn't belong to shMON holders

From equity, the exchange rate follows standard vault math:

$$\text{Exchange Rate} = \frac{\text{Equity}}{\text{Total shMON Supply}}$$

Different Rates for Deposits vs. Withdrawals

The protocol implements an anti-manipulation mechanism: deposits and withdrawals use different equity calculations.

For Deposits

When you deposit, the system includes all recent revenue in the equity calculation. This means the exchange rate reflects not just historical earnings, but also the rewards currently being earned in the ongoing epoch.

Effect: You receive slightly fewer shMON per MON, effectively "pre-paying" for upcoming rewards. This prevents large depositors from timing their entries right before reward distribution, extracting value from existing holders.

For Withdrawals

When you withdraw, the system excludes a portion of recent revenue from the equity calculation. Specifically, it removes:

$$\text{Recent Revenue} = \text{Earned}_{\text{current}} + \frac{\text{Earned}_{\text{last}} \times \text{Blocks Remaining in Epoch}}{\text{Total Blocks per Epoch}}$$

This formula smoothly transitions between epochs. Early in an epoch, most of last epoch's rewards are still excluded. Late in an epoch, almost none are excluded because most of the earning period has passed.

Effect: You receive slightly fewer MON per shMON compared to the full equity value.

Why: This prevents users from depositing right before rewards arrive, holding briefly, and immediately withdrawing with their share of the rewards. It keeps rewards with long-term holders.

An Important Timing Consequence

These different exchange rates create a scenario to understand:

If you deposit MON and then immediately initiate an unstake in the same epoch, you may receive less MON than you deposited.

This occurs because:

1. The deposit exchange rate includes ongoing epoch rewards (higher price per shMON)
2. The unstake exchange rate excludes those same rewards (lower value per shMON)
3. The difference represents rewards that haven't been fully earned yet

This is intentional. The system discourages very short-term "flash staking" where someone deposits, captures a few blocks of rewards, and immediately exits. Instead, rewards flow to participants who stake for at least a full epoch cycle.

Summary

The exchange rate mechanism serves two goals:

1. Fair pricing: Each shMON represents a proportional share of the protocol's total equity
2. Protection against gaming: Different rates for deposits and withdrawals prevent value extraction through precisely-timed entries and exits

The underlying math is complex, but the principle is simple: if you stake for a meaningful period, you earn your fair share of rewards. If you try to time very short-term deposits and withdrawals, the exchange rate adjustments ensure you don't profit at the expense of long-term holders.