Author: @Pathfinder0x18D
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DISCLAIMER
This article does not constitute investment advice. Before interacting with Mars, review the project disclaimers
here
.
This article is subject to change but is not guaranteed to be up to date. Mars Protocol is going to go LIVE on February 21, 2022. There are no MARS tokens currently (if you see them on a DEX, they are a scam). If changes to the platform are announced I will do my best to update the article.
OVERVIEW OF MARS
Mars is a credit protocol for the future: non-custodial, open-source, transparent, algorithmic and community-governed.
Like banks, Mars aims to attract deposits and lend out this money while managing illiquidity and insolvency risk. Unlike banks, Mars is a fully automated, on-chain credit facility governed by a decentralized community via a transparent governance process. All decisions are made by the Martian Council, composed of MARS stakers who put skin in the game to backstop certain kinds of protocol risk in exchange for a portion of the protocol borrowing fees.
Mars Protocol is being developed by a joint venture among Delphi Labs, IDEO CoLab Ventures and Terraform Labs.
MARS vs ANCHOR (Terra Ecosystem)
Before we go further…I wanted to provide some context around the differences b/w Mars and Anchor.
Mars and Anchor don't compete...Mars is a decentralized banking protocol, whereas Anchor is a savings protocol (savings-as-a-service/SaaS).
Mars and Anchor compliment one another, and we even expect some interesting collaborations of functionality across the protocols.
We believe Mars and Anchor will be foundational building blocks for the future of Terra growth and broad adoption (next 1 Billion users).
KEY TAKE-AWAYS
(in case you don’t want to read some of the more technical aspects)
Mars protocol’s goal is to be a credit/lending facility for the entire Terra (and eventually broader multi-chain ecosystem). Mars will accept a far broader range of collateral to borrow against (MIR,
MIR
,ANC, $UST, etc)
Because these assets don't have fixed yields, Mars deposit rates are not stable but rather driven by demand for borrowing, both from borrowers, yield farmers and smart contracts.
Users will be able to deposit any crypto that runs on the Terra blockchain. Then, other users can come and borrow that crypto (paying interest in the process). The more demand there is to borrow a token, the higher the interest rate will be on Mars.
In banker terms, Mars is a true money market.
By allowing anyone, anywhere to deposit or withdraw whatever they’d like, it’s a great way to earn yield on your full crypto portfolio. It also effectively enables sophisticated financial solutions like taking leveraged long or short positions on specific cryptos.
One could deposit LUNA, for example, and use that collateral to borrow more LUNA…in effect increasing or leveraging their exposure to the price of LUNA.
Mars will also launch with liquidity mining, leveraged yield farming strategies (think $ALPHA on Terra) and uncollateralized lending across protocols.
Anchor [savings protocol] has one overarching goal: making it incredibly easy to earn a fixed interest rate on deposits
As a decentralized bank, Mars' goal is enabling borrowing and lending of virtually any crypto that runs on Terra. Mars’ interest rates are volatile, because yields on the two platforms come from different places.
HOW MARS WORKS
At the heart of Mars is a fully automated, on-chain credit facility built on the Terra blockchain. Like existing credit protocols, interest rates are priced algorithmically based on utilization rate. Unlike existing credit protocols, Mars will utilize a dynamic interest rate model based on control theory, allowing for greater responsiveness and capital efficiency (more on this later). Note: Dynamic interest rate functionality will not be immediately available at launch.
The system is comprised of the following stakeholders:
Lenders: Deposit assets into Mars liquidity pools, earning an interest rate
Borrowers (collateralized): Borrow assets from Mars liquidity pools using their deposited assets as collateral. These borrowers must therefore also be depositors (lenders)
Borrowers (contract-based): Smart contracts that borrow assets from Mars liquidity pools without posting collateral. Each smart contract credit line must be approved by governance and will include a credit limit to mitigate the protocol’s risk exposure
Council: Stake MARS in order to earn protocol fees, participate in governance and backstop certain kinds of protocol risk
A. Collateralized Borrowing — C2B Lending
Similar to existing credit protocols, Mars will support non-custodial, collateralized borrowing. Users deposit assets into smart contract liquidity pools, receiving interest-bearing maTokens which (through the smart contract functionality) act as their shares of the liquidity pool. They can then choose to borrow using their deposits as collateral.
Lending thus serves two purposes: generating yield and, if the user chooses, acting as collateral to borrow against. Borrowers are liquidated when their loan-to-value (LTV) ratios fall below the required maintenance margin, which happens when their collateral decreases in value relative to their debt. The interest rates paid by borrowers and received by lenders are determined algorithmically, taking into account supply and demand by targeting an optimal utilization rate (more on this in the Controller section below).
Example 1
Example 2
B. Contract-to-Contract (C2C) Borrowing — Leveraged Yield-farming Strategies
Traditional credit protocols offer relatively low interest rates to users. This is because they offer only collateralized loans which are capital-inefficient (low LTVs) and target a small market since they rely on lenders who also want to borrow. Contract-to-contract (C2C) borrowing solves this by allowing Mars to tap into a completely new source of borrowing demand: non-depositor borrowers (i.e., third-party smart contract systems). This will generate higher borrow demand, utilization rates and therefore higher yields for Mars lenders.
The following diagram shows, at a high level, how deposits work with the MIR-UST
strategy, resulting in an effective 2x leverage ratio for the user:
This allows the user to farm with leverage with increased yield (in the form of MIR tokens issued as staking rewards), but there is a liquidation risk should the value of MIR drop. This process is shown step-by-step below.
Scenario 1: Value of LP asset remains constant or increases
Scenario 2: Value of LP asset decreases, resulting in liquidation
Token Economics (MARS)
Mars can be thought of as in some ways a bank of the future, operated and governed by a decentralized community via a transparent governance process. Like banks, Mars aims to attract deposits and lend out that money safely without incurring excessive risk. Mars will launch with a token (MARS). MARS’s token economics, incentive design and governance system are critical to achieving this goal.
The Martian Council — a DAO of xMARS token holders — will govern the deployed instance of the Mars Protocol smart contract system which is embraced by the community as the canonical “Mars.” The parameters to be set by the Martian Council will include which assets are subject to borrowing and lending by the system, the risk parameters for those assets, which third-party smart contracts will be eligible for C2C lending and the risk parameters for those contracts. These decisions have consequences on third parties (users) and, in extreme cases, can lead to Shortfall Events (as described below).
Note: The Mars Joint Venture is merely developing software designed to create certain incentives on the part of MARS and xMARS holders. Governance is ultimately a discretionary process subject to numerous uncertainties, and no specific governance outcomes can be guaranteed.
A. Token Architecture
The guiding principle behind MARS’s token economics is that of skin in the game: those making decisions should bear the consequences of those decisions, both positive and negative.
In order to provide the Martian Council with an incentive to govern well, Mars distributes a portion of its fees to xMARS stakers on an ongoing basis through purchases of MARS, as further described below.
In order to provide the Martian Council with an incentive to assume responsibility for governance failures, Mars:
Requires that members of the Martian Council stake their Mars to activate governance power
Continuously routes a portion of fees generated by Mars to a Safety Fund which can be tapped by the Martian Council to compensate users for Shortfall Events attributable to governance failures.
B. Staking — xMARS
MARS holders who wish to participate in governance can stake their MARS tokens and receive xMARS in return, with an unstaking period of 7 days. xMARS has a few key properties:
Governance: 1 xMARS = 1 unit of voting power. Only xMARS (and MARS that’s locked for contributors) can participate in governance, making decisions on asset listing, risk parameters, treasury spending and more.
Fees: xMARS holders will receive a share of protocol interest-rate revenue. Similarly to SushiSwap’s SushiBar contract, this will be done by using the revenue to buy MARS on the open market and adding it to the xMARS pool.
Safety Fund: xMARS holders will be incentivized to backstop protocol risk by using a pool of reserved aUST (the ‘Safety Fund’) as a first-resort source of recovery for shortfall events and staked Mars as a last-resort source of recovery for Shortfall Events, with up to 30% of their stake being locked and sold in case of a shortfall event
C. Value Flows
Initially, 80% of all interest payments will go to lenders, with the remaining 20% being split amongst the Mars Treasury, Safety Fund and xMARS stakers.
All parameters, including the reserve factor and percentage of fees flowing to each bucket, will be alterable by governance.
If interested (NFA/DYOR): https://marsprotocol.io/
⚠️Disclaimer: Not Financial Advice || Do Your Own Research!⚠️
This newsletter is strictly educational and is not investment advice or a solicitation to buy or sell any assets or to make any financial decisions.