Mars Protocol: Money Markets over the Interchain

the 1.0 to 2.0 step for DeFI

Money markets in the United States are valued at a whopping three trillion dollars. THIS IS AN OUTRAGE. I say, an outrage!!

Money is freedom. Who owns the money thereby owns the freedom. We are a populace endangered to our banks. We’ve become complacent with sovereignty. Do we know true freedom?

These thoughts consumed my mind two years ago amid financial recession. This made me resolute on one thing: For far too long, we’ve submitted ourselves to the mercy of tyrants; if we do not commit to freedom now, then when?

This paper is in preparation for my pitch for Oregon Blockchain Group. THIS IS NOT INVESTMENT ADVICE.

The primitives where we will create and build a better system, for those who do not know monetary freedom, will take place on composable spot markets protocols like Uniswap and Osmosis. A market is dysfunctional without a location where assets can be instantly exchanged and settled. With the invention of Constant Product Automated Market Makers, which you can read about here from another OBG member link, the genesis event of money markets came to fruition.

Currently, Automated Market Makers enable lending applications such as Aave, Compound, Umee, and Mars. These four protocols put the goal of Decentralized Finance, namely freedom from tyrants, one increment closer. I will be focusing on Mars Protocol. After copious research the evidence of greatness leans towards Mars, allow me to explain why.

To understand the competitive moat Mars Protocol exhibits over other lending platforms we’ll spend time reviewing Red Bank, collateralized borrowing, contract-to-contract lending, Rover, Vaults, and the vision for Mars Hub.

Red Bank

Red Bank is a money market that enables on-chain credit facilities through two methods. Method one, Collateralized Borrowing, is prehistoric in blockchain time. Collateralized borrowing allows peer-to-peer over collateralized borrowing. In non-blockchain speak, this means that a depositor, A, at Red Bank can borrow from another depositor, B; Only if depositor A holds exceedingly more token value than they wish to borrow from depositor B. Red Bank is a money market that is deployed on each chain. The actions are illustrated below:

Contract 2 Contract

Method two, Contract to Contract lending (C2C), is in its infancy as compared to method one. With C2C lending, we eliminate the need to borrow money from counterparties. As imaged below, the primary difference between C2C and P2P borrowing is that borrowers are not required to be lenders. C2C receives capital from the Red Bank Community Pool. Deeper capital efficiently results from the C2C design. The more capital efficient our money market, the deeper liquidity, and higher utilization. How does C2C work?

Credit Manager

The Red Bank owns the right to keep the borrower’s possessions, known as a lien, through a Credit Manager Smart Contract. The Credit Manager pulls a line of credit from the Red Bank, pending approval of the martian council, and oversees a user's credit account called Rovers. Herein, the Red Bank holds indirect power over the user’s collateral.

In theory, Centralized Exchanges can offer 10x leverage because they are custodians of the asset and can liquidate you. For Mars, under the C2C model, the Smart Contract is a custodian of the assets and can liquidate the user if they’ve fallen below the Health Factor (HF will be explained later). As a result, Mars Hub Outposts can offer undercollateralized lending. Gone are the days of providing 100$ to receive a 99$ endowment.

The Contract to Contract lending model optimizes utilization and market efficiency by allowing one depositor to lend from a contract. Every two users can each receive a loan, versus the P2P model, which requires two people to receive one loan. Thereby C2C breeds market efficiency.

Now we understand the two methods of lending and borrowing Mars implements. One of which is new, the other old. In isolation, the methods to loan function well; oppositely, once exposed to the external world, they fail. A money market is only as efficient as its liquidation engine. The Red Bank and Credit Manager implement the drivers for liquidation.

An important distinction must be made; the Credit Manager is a separate trusted third party. The Red Bank can not force it to liquidate positions. Thus the onerous responsibility to ensure proper implementation of liquidation logic and tracking mechanism falls on the Martian Council. There, Credit Managers can have dissimilar liquidation strategies, but the underlying incentivization to liquidate will remain the same. I will only explain the Red Bank liquidation strategy that, for the sake of explanation, we’ll assume is used across all Credit Managers.

Liquidation Incentivization

“The Red Bank offers incentives to liquidators to repay the debt of at-risk positions”(Mars GitHub). A health factor (HF) formula evaluates the health of an active rover account, in other words, a collateralized borrowing account. If the HF falls below one, the account is liquidated. A liquidity-to-value ratio (LTV; calculated from Conditional Value-at-Risk link) is determined for each asset which weights the amount of loan an account can receive for total collateral.

The procedure is as follows:

1. A liquidator views an account that has <1 HF
2. Liquidator chooses a debt asset they pay back on the account’s behalf
3. Liquidator chooses the collateral asset from the account they desire
4. Liquidator pays back the users debt up to the solvent amount
5. Liquidator receives the collateral equal to the debt repaid plus a liquidation bonus

A question I have that I couldn’t find the answer to is what happens if the debt is 100% of the collateral who pays the liquidation bonus, the mars council???

Field of Mars: Vaults

The first Vaults appeared on the Osmosis Outpost recently, giving users the option to leverage yield farm Osmosis pools. A vault operates a yield strategy for assets within its custody. The C2C borrowing program withdraws money from the Red Bank. The Credit Manager oversees a user's leveraged vault position.

Vaults used with Cross-Collateralized Margin Accounts

Currently, each leveraged yield farming strategy requires its isolated collateral. For now, an HF for each independent position is calculated, but in the months to come, cross-collateralized margin accounts will arrive in the form of Rovers. To restate a user’s credit account is called Rover. A Rover allows borrowers to have one HF and requires liquidators to track a single LTV ratio irregardless of the number of positions the account holds, pictured below. The Rover results in higher utilization, greater potential demand, and increased capital efficiency.

Each Rover account receives an NFT designed to only interact with whitelisted contracts. The NFT is a key that allows money out of the Rover account. The NFT enables many more possibilities than just a safety check. Users could sell their credit account to a counterparty or even fractionalize it. The bottom line is that Rover users experience outsized efficiency and ease of use.

Zooming out from Outposts to Mars Hub

I’ve explained the inner working of each Mars outpost from a high level now we zoom out to the Mars Hub. Analyzing competitors like Aave, Compound, and Umee will provide a baseline for what Mars must meet or exceed.

Examining Competitors' Go-To-Market Strategies

Aave, Mars, Compound, and Umee all offer overcollateralized loaning but do so in different forms. Aave and Mars opt for the horizontally integrated (outpost) model, while Compound and Umee opt for the vertically integrated model. The translation of the former sentence follows as Compound and Umee must attract applications to their chain while Aave and Mars are attracted to applications. The difference being one goes to the market the other forces the market to go to them.

Aave secures 7 billion of liquidity across 5 markets, including Avalanche, Ethereum, Polygon, Harmony, and Fantom. In contrast, Compound secures 2 billion on Ethereum alone. Aave market cap is 1 billion while Compound is 300 million. The products Aave and Compound don’t differ materially except for Aave’s flash loans, uncollateralized lending that occurs in one block. Flash loans are very situational, and most consumers are not utilizing them. Then the difference must come down to the model. To build outposts on different chains that have demand for money markets accrues more value to the protocols native token. A problem arises with Aave’s model. Liquidity is fragmented across multiple different chains as a result capital could be used more efficiently.

With all the above information, what can we conclude about Mars hub; Will Mars hub meet Aave’s utility?

How Mars Positions itself

The word outpost has come up once or twice because Mars will be implementing the same operations strategy of Aave for the same but different reasons. Like Aave, the Mars Hub sees the value of going to the customer. The success of Aave affirms the product market fit of the operation strategy. The difference in reasoning comes down to synchrony.

Competitive Advantages of Mars over Umee

The interchain is a packet-switched network, resulting in asynchronous message passing from chain to chain. To elaborate on a current example, we’ll use Umee and Osmosis.

As stated previously, Umee is a vertically integrated credit facility. The goal: Osmosis wants to borrow money from Umee.

1. Osmosis posts a borrowing request to Osmosis Inter Blockchain Communication module
2. Request is picked up by a relayer and sent to Umee
3. Umee sees message in Umee IBC module
4. Umee executes the message
5. A relayer picks up the message and sends it to Osmosis

For that to occur, we need at least three blocks to pass; One block to send, another to execute the message, and one more to send back. All of these tasks are because of the asynchronous nature of the Interchain.

The advantage of synchrony is fast execution and settlement. Mars is a lending and risk management market. Speed is key to ensuring solvency and user experience. Then Mars must create outposts on each ledger with demand for a money market, like Osmosis. One could think of the Aave and Mars outpost model like McDonalds franchisees. Yet again, we enter the fragmented liquidity issue that Aave experiences. Mars has a solution.

Competitive Advantages of Mars over Aave

A competitive advantage Mars has over Aave is IBC. With IBC Mars can manage its satellite markets. To elaborate further, the hub functions as a headquarters and outposts as blockchain franchisees. The Mars Hub will unify liquidity across outposts. For instance, if asset OSMO is not being used at outpost A and outpost B is utilizing asset OSMO at a high rate, the hub will allocate asset OSMO to higher priority outpost B. Mars Hub solves the fragmented liquidity issues of Aave and vertical integration problems with Compound and Umee giving it a competitive moat in capital efficiency and potential utilization.

The model is a catalyst for greater use, but the chain will only succeed with quality products to use Mars Hub’s liquidity. As specified under the C2C section, an advantage of Mars is undercollateralized loans. Compounding these advantages, another primary differentiator is Mars Hub cross-margin accounts that combine all held assets into one total account Health Factor thus empowering the user with greater capital efficiency. We enter a new age of money markets with Mars Hub.

History always rhymes but never repeats. With our analysis of Aave verse Compound, we can analogize Umee as the equivalent of Compound in the Interchain; While we can compare Mars Hub to Aave. With Mars’ few distinct advantages over Aave, I find it sits in an incredible spot for disruption.

I’ll cap off my pitch with tokenomics and Mar’s Roadmap.

Governance Mechanism/Tokenomics

The Martian Council decides on what assets should be used as collateral, what actions should be whitelisted, what outposts should be expanded to, what vaults should be enabled, setting the parameters (LTV) governing assets, and setting the proportion of outpost fees that go to the Safety Fund. The Martian Council is composed of delegators and validators. Delegators receive 10% of interest payments from outposts (interest is determined by a dynamic interest rate curve), the Safety fund receives 10%, and Red Bank lenders, aka depositors, receive 80% of interest payments.

Side Note the Safety Fund, depositor, and interest payment rewards are similar to Aave and Compound. The Safety Fund is used to cover bad debt, collateral that is worth less than the debt. If the Safety Fund can’t cover all bad debt, all stakers get slashed and pay for the protocols debt.

Finally, there are 1 billion Mars, 30% go to contributors 63% go to the community pool and 6.7% goes to Mars classic and Terra classic holders.

The vesting schedule for Mars Contributors is as follows: ⅓ unlocks september 1st 2023, with remaining unlocking daily over two years.

Road Map:

Fields of Mars just released, and the next step is creating the Rover cross-collateralized credit accounts. More so, it has been speculated that Mars’ next outposts will be order book chains like SEI or Injective.

Conclusion:

Ultimately, I recommend .3 eth of our fund to be vested toward staking on Mars protocol. With the competitive advantage of IBC, satellite networks, Contract to Contract lending, undercollateralized lending, cross-collateralized credit accounts, and a proven go-to-market strategy it is positioned to lead the Money Market of the Interchain.