Deep Dive | Mars Protocol
*Disclaimer: I am contributing to Mars Protocol.
One of the most important pieces of infrastructure in any ecosystem is a credit protocol. This can be seen in more mature DeFi ecosystems like Ethereum where credit protocols like Aave and Compound have more than $20B in TVL. This is simply because they serve a crucial task in providing a platform for participants to borrow and lend their assets.
As of now, the Terra ecosystem lacks this important piece of infrastructure. While Anchor Protocol does allow for borrowing and lending, it is more akin to a savings protocol since its deposit rate is designed to be stable at ≈20%.
In order to do this, Anchor only takes in Proof-Of-Stake (POS) assets as collateral such as bLUNA and bETH.
In contrast, Mars Protocol is a complete credit protocol that enables Terra native assets (mAssets, ANC, MIR) to be borrowed or used as collateral, thereby providing them with another valuable use case.
How it Works
Like any existing credit protocol, Mars consists of two main participants:
- Lenders: users who deposit assets to Mars liquidity pools to earn interest
- Borrowers (collateralized): users who borrow assets from Mars liquidity pools (need to deposit collateral in order to do so)
When a user deposits an asset, they receive interest-bearing maTokens in return. These tokens represent your share in the liquidity pool, similar to how aUST works on Anchor Protocol.
This now also means the user can borrow out assets since their deposited assets serve as collateral. By borrowing, users will have to maintain a loan-to-value (LTV) ratio. Failing to do so could result in the liquidation of their deposited assets.
An example of this is in the graphic below:
UST, LUNA, MIR, and ANC will be the first assets to be available for borrowing and lending on Mars. Additional assets can be added through Mars’ governance process.
Dynamic Interest Rates
One of the factors that differentiate Mars from existing credit protocols is how the interest rate model works. Interest rate models on current credit protocols are limited due to their inflexible design, which results in sub-optimal use of capital and inefficient interest rates.
Mars will solve this by introducing a dynamic interest rate, which simply means the interest rate model on Mars is able to react to market conditions without the need for a governance proposal. This should lead to more optimal use of capital and efficient interest rates on Mars.
Smart contract to smart contract (SC2SC) lending
Another unique factor that differentiates Mars from existing credit protocols is the addition of SC2SC lending.
In this scenario, the following participant is:
- Borrowers (SC2SC): smart contracts that borrow assets from Mars liquidity pools without depositing collateral.
Initially, these smart contracts will consist of two strategies: the MIR-UST pool on Mirror and ANC-UST on Anchor. Future smart contract lines can be approved by governance.
For example, if a user wanted to yield farm on Mirror by providing liquidity to the MIR-UST pool, they would need an equal dollar amount of both assets. By using this feature on Mars, the user can simply supply MIR itself without the need for an equivalent dollar amount in UST, thereby generating a 2x exposure.
An example of this is in the graphic below:
MARS Token
In order to participate in governance, staking MARS is required. In return, users are given xMARS. The xMARS token serves several purposes: governance, value accrual, and insurance.
- Governance: 1 xMARS = 1 unit of voting power. xMARS holders can vote on various issues including adding new assets, risk parameters, treasury spending, and more.
- Value Accrual: a part of the interest payments are accrued by xMARS holders in the form of buying back MARS tokens and adding to the xMARS pool.
- Insurance: xMARS holders insure protocol risk in the case of *shortfall events. Up to 30% of their stake could be locked and sold.
*Shortfall events are defined as when a borrower’s debt exceeds the value of his collateral which leads to a deficit for lenders. This can be caused by smart contract exploits, bad liquidations, oracle attacks, or borrowers failing to be adequately incentivized by the threat of liquidation.
More details of the MARS token architecture is in the litepaper:
MARS lockdrop
The MARS lockdrop is a way for the protocol to bootstrap liquidity while fairly distributing MARS tokens. There will be a total of 2.5M MARS tokens (2.5% of total supply) allocated to this.
The “Ignition Phase” of the lockdrop is a 14-day period where users can deposit UST into Mars. Users can choose to lock their UST anywhere from 1 to 52 weeks. There is also a weight multiplier, which means users who lock their UST for a longer period will get more MARS tokens compared to users who lock it for a shorter period.
In the first 12 days of the Ignition Phase, users can choose to withdraw after depositing initially. In the last 2 days, withdrawing your UST will be disabled, but users will still be able to deposit UST during that time period.
A timeline of the Ignition Phase is below:
Rewards for locking UST will be dependent upon the duration of the lock-up and the amount of UST deposited. Users can expect the following things to happen at the end of the Ignition Phase:
For more details about the MARS lockdrop, check out the article below:
TLDR
- Mars Protocol is a credit protocol (allows for borrowing and lending)
- Main difference from existing credit protocols: dynamic interest rate and smart contract to smart contract (SC2SC) lending
- MARS is the governance token, staking MARS = xMARS
- xMARS holders are responsible for governance and insuring protocol risk, in return they receive fees (a share of the protocol’s revenue)
More Information
- Mars Twitter: https://twitter.com/mars_protocol
- Mars Website: https://marsprotocol.io/
- Mars Whitepaper: https://mars-protocol.medium.com/mars-protocol-litepaper-1-0-60d1b024405a
- Mars Disclaimer: https://mars-protocol.medium.com/ignition-phase-announcing-the-mars-protocol-lockdrop-and-mars-token-launch-fa5b5160996d (located at the bottom of the Mars lockdrop article)
About Qi Capital
Qi Capital is a group of like-minded and experienced individuals from around the globe, sharing two common objectives: providing insights about crypto and DeFi, and proactively working with ambitious teams on the future of decentralized finance. Our core principle is to promote and foster individual creativity, growing not only as a group but also as creative thinkers and builders. To learn more about us, check out our website www.qicapital.org and our “Qi Podcast” via www.buzzsprout.com/1729379/ or engage with us on Twitter: @QiCapital.
Disclaimer
This content is for informational purposes only and you should not make decisions based solely on it. This is not investment advice. All market prices, data, and other information are not warranted as to completeness or accuracy, are based upon selected public market data, and reflect prevailing conditions and the author’s own views as of this date, all of which are accordingly subject to change without notice.
