Fees and Yield Calculations

shMonad earns revenue from two primary sources: staking rewards from validators and MEV (maximum extractable value) payments. Understanding how these are processed and distributed helps you estimate your returns.

Fee Structure

The protocol charges a 5% commission on both revenue sources:

Staking rewards: When validators earn staking rewards, 5% goes to the protocol (for development and operations), and 95% increases the value of shMON.

MEV and validator boosts: When validators receive MEV payments, the protocol:

1. Takes 5% as a commission
2. Routes the commission to the zero-yield tranche (where it doesn't dilute shMON holder equity but earns yield for them)
3. Distributes most of the remaining amount back to the validator after a one-epoch delay
4. Allocates the fee portion to increase equity for shMON holders

Atomic unstake fees: When you use the instant withdrawal pool, you pay a utilization-based fee. This fee is pure revenue for the shMON holders-the protocol does not take a commission.

All commissions are routed to a special protocol-controlled balance in the zero-yield tranche, ensuring their staking rewards boosts the yield for shMON holders until explicitly converted.

How Yield Accumulates

1. Revenue arrives: Staking rewards and MEV payments increase the protocol's total MON holdings
2. Equity grows: After deducting the 5% commission, the remaining amount increases equity
3. Exchange rate rises: With more equity backing the same number of shMON tokens, each shMON becomes worth more MON

Note that shMON is not rebasing: you don't receive additional shMON tokens as rewards. Instead, the shMON you already hold becomes worth more MON over time.

The Leverage Effect of Zero-Yield Deposits

Zero-yield deposits create a multiplier effect on shMON returns:

When someone makes a zero-yield deposit:

• The protocol's total staked MON increases
• The shMON supply stays the same
• All rewards from that deposited MON flow to existing shMON holders

Example: If the protocol has 1,000 MON backing 1,000 shMON, and someone makes a 100 MON zero-yield deposit:

• Total staked: 1,100 MON earning rewards
• Total shMON: Still 1,000 (unchanged)
• Result: The same number of shMON tokens now benefit from 10% more staked capital

This creates a leverage effect without debt, liquidations, or interest payments. The zero-yield depositor's principal is tracked as a liability and remains withdrawable, but until conversion or withdrawal, the deposit is staked and its staking rewards boost yield for shMON holders.

Estimating Returns

To estimate the annual percentage rate (APR) or annual percentage yield (APY), you track how equity changes over time.

Basic APR calculation:

$$\text{APR} = \frac{\text{Ending Equity} - \text{Starting Equity}}{\text{Starting Equity}} \times \frac{\text{Seconds per Year}}{\text{Seconds Measured}}$$

This gives you a simple annualized rate assuming no compounding.

APY with compounding:

Since rewards are reinvested automatically, you can calculate compound returns. With roughly 1,590 epochs per year (5.5 hours each):

$$\text{APY} = \left(1 + \frac{\text{Equity Change per Epoch}}{\text{Starting Equity}}\right)^{1590} - 1$$

What affects your returns:

1. Base staking rate: Monad's validator rewards (outside shMonad's control)
2. MEV activity: Additional revenue from block production and MEV capture
3. Zero-yield deposits: More zero-yield capital means higher APR for shMON holders
4. Atomic unstake fees: Revenue from instant withdrawals adds to returns
5. Protocol commission: The 5% fee reduces gross returns slightly

Important note: Since equity grows continuously while shMON supply stays fixed (except for minting and burning), your returns compound automatically. You don't need to manually reinvest—just hold your shMON and watch its MON value increase.