# Debt Portfolio & Risk Model

MZF PROTOCOL facilitates the deployment of capital into real-world mezzanine debt and venture debt opportunities, providing valuable funding for early-stage startups, property developers, and infrastructure projects. These investments are designed to generate returns for the platform, which are used to support operational growth, liquidity, and platform expansion. However, $MZF token holders do not receive a share of these returns. The platform’s primary function is not to distribute investment returns, but to provide a utility token for staking rewards, governance, and community engagement.

The debt portfolio is structured to maximise capital efficiency and reduce risk exposure by investing in a blend of subordinated debt with higher yields and traditional senior debt. The risk model for these investments is based on stringent due diligence and ongoing monitoring of all investments. While these investments are critical to MZF PROTOCOL’s success, they do not affect the staking rewards or the value of the $MZF token, as the token’s utility is driven solely by its role within the ecosystem.

### Borrower Credit Risk

Borrower credit risk is a critical component of MZF PROTOCOL’s risk management framework and is directly tied to the due diligence and monitoring processes. Both processes involve a comprehensive evaluation of a company’s financial health and its ability to meet debt repayment obligations. MZF PROTOCOL uses both off-chain and on-chain data to assess borrowers, depending on the industry in question.

When pricing loans, MZF PROTOCOL adheres to industry-standard best practices and utilises a Loan Pricing Formula. The formula is as follows:

Loan Interest Rate = Funding Cost + (PD × LGD) + Operational Cost + Capital Allocation Cost + Profit Margin

Where:

* Funding Cost (also known as the Base Rate) is the lender’s cost of raising capital, typically based on a risk-free rate or the cost of funds.
* (PD × LGD) represents the credit risk premium, factoring in the Probability of Default (PD) and the Loss Given Default (LGD), which estimate the potential loss if the borrower defaults.
* Operational Cost covers expenses such as legal fees, due diligence, underwriting, and ongoing loan servicing.
* Capital Allocation Cost pertains to regulatory and economic capital set aside for potential loan losses. This cost varies depending on the size of the loan, its risk weight, and the required return on capital.
* Profit Margin reflects MZF PROTOCOL’s hurdle rate, which is based on its systematised risk appetite and competitive market conditions.

Additionally, MZF PROTOCOL assesses the borrower’s Debt-to-Cash Flow Ratio (DCF) to further evaluate credit risk. This metric measures a company’s ability to service its debt obligations using its operating cash flow, with the formula as follows:

Debt-to-Cash Flow Ratio = (Short-Term Debt + Long-Term Debt​) / (EBITDA − CapEx − Taxes − Changes in Working Capital)

Once the relevant inputs are received, MZF PROTOCOL analyses the DCF ratio within the context of the company’s historical cash flow volatility. The DCF ratio is used to categorise risk as follows:

* Low DCF Ratio (≤ 3x): Low risk, indicating that the company has more cash flow to service its debt.
* Moderate DCF Ratio (3x – 5x): Medium risk, where the loan is manageable but requires frequent monitoring.
* High DCF Ratio (> 5x): High risk, potentially indicating repayment issues.

While the Loan Pricing Formula and Debt-to-Cash Flow Ratio provide a structured methodology for evaluating credit risk, MZF PROTOCOL integrates the expertise of its professionals to ensure a nuanced approach. These industry experts bring deep insights into financial analysis, risk management, and market trends, ensuring that risk assessments are contextualised to reflect the borrower’s specific circumstances and the broader economic environment.

In light of the above, when a startup is unsuccessful in its application for funding, MZF PROTOCOL retains a record of the credit assessment, including the underlying inputs that contributed to the startup’s risk profile and resulting credit score. This creates a transparent and traceable feedback loop, allowing both the protocol and the applicant to monitor how their creditworthiness evolves over time. By maintaining these linked records, MZF PROTOCOL enables founders to identify areas for improvement and reapply with greater confidence as their financial position strengthens.

By combining structured quantitative models with institutional-grade credit analysis, MZF PROTOCOL delivers fair, risk-adjusted pricing that aligns with each borrower's ability to sustainably service debt. This dual-layered approach not only supports robust risk management but also fosters long-term success for both investors and startups. In doing so, MZF PROTOCOL advances a new standard in decentralised capital formation — one that prioritises transparency, resilience, and responsible growth.

### Market & Liquidity Risk

Market and liquidity risks are actively managed by MZF PROTOCOL, with adjustments made based on real-time economic conditions, borrower credit risk, and debt market trends. Given the nature of alternative finance, which involves higher yields and subordinated debt structures, these risks must be carefully monitored to ensure the continued sustainability and liquidity of investments. Although returns from debt investments are reinvested into the platform’s growth and liquidity, they indirectly contribute to the long-term value of the $MZF token.

MZF PROTOCOL’s approach to managing market and liquidity risk includes a range of strategies designed to ensure that debt investments remain resilient and well-collateralized, even in fluctuating economic conditions. Key pillars of this strategy include:

#### Collateralisation & Loan-to-Value (LTV) Ratios

MZF PROTOCOL implements Loan-to-Value (LTV) ratios to avoid under-collateralization, ensuring that loans are properly backed by assets. The platform uses a combination of on-chain oracles and traditional financial data sources to dynamically track collateral valuations. When significant fluctuations in asset prices occur, borrowers are notified that collateral requirements may be adjusted to maintain acceptable risk levels. This dynamic approach ensures that collateral values remain appropriate and reflect market conditions.

#### Token-Gated Community Engagement & Risk Discussions

While MZF PROTOCOL is not governed by a decentralised DAO structure, the platform maintains an exclusive, token-gated WhatsApp community where verified stakeholders can engage in ongoing risk-related discussions. This community serves as a space for sharing insights, raising concerns, and discussing potential adjustments to internal risk models, credit ratings, and collateral thresholds. Although advisory in nature, this feedback loop enhances transparency and gives community members an opportunity to contribute to platform evolution.

#### Insurance Mechanisms & Reserve Pools

To further protect against risk, MZF PROTOCOL maintains reserve pools, which are approximately 20% of the total tokens in the pool of tokens dedicated to treasury purposes. These pools provide liquidity support and act as an insurance mechanism in the event of borrower defaults or market shocks. The reserve pools can absorb losses from defaulted loans, reducing systemic risk and maintaining platform stability. This setup also allows investors to exit positions without causing severe market disruptions, further enhancing the platform’s liquidity.

#### Conclusion

MZF PROTOCOL’s approach to risk management is dynamic and adaptable, ensuring that the platform’s debt investments remain robust and resilient under varying market conditions. By integrating advanced risk tracking, collateral enforcement, token-gated community engagement, and reserve buffers, MZF PROTOCOL aims to position itself as a leader in structured debt finance within the Web3 ecosystem.

\\
