Mars Protocol: Terra’s Money Market

What is Mars Protocol, and why should you care about it? Also, how does Mars compare as a money market with other chains?

Introduction

Ah… another Terra alt, another down-only right?

“The ‘Terra-Alts Curse’ can’t be broken!” You tell yourself… as you aggressively sell like the rest of the people who are dumping tokens because MARS is/was down only for a period of time and also a “Terra-Alt”.

Well before you dump more, read my take on why you shouldn’t be dumping MARS tokens when it’s barely been a month since the protocol launched. Of course, let’s first understand what is MARS.

Disclosure: I am invested in Mars Protocol and hold MARS tokens. This statement is to disclose any conflict of interest and is not a recommendation to purchase any tokens. This content is for informational purposes and should not be treated as investment advice.

Mars Protocol: An open-source credit protocol

Mars Protocol is a credit protocol commonly also known as the money market. A money market, like banks, allows participants to borrow and lend assets while the protocol manages illiquidity and insolvency risks.

Mars is also similar to how Anchor works except that Anchor is focused on savings for Terra stablecoins, and as such, it’s limited to Terra stablecoins for loans and deposits, and only bonded assets, such as bLUNA or sAVAX, to be used as collateral. With MARS, you can utilize any CW20 and Terra Native assets such as MIR/ANC/ASTRO for loans, deposits, and to be used as collateral.

The Red Bank: Contract-to-Borrower (C2B)

Like traditional money markets, MARS will support non-custodial, overcollateralized borrowing at launch. Here’s the step-by-step on how a user would lend and borrow on MARS. Let’s call him Max:

Depositing

  1. Max would firstly have to go to the Mars Protocol website and deposit his asset to the Mars Protocol Liquidity Pools.
  2. Max will then get maAssets in return. maAssets represents his share in the liquidity pool and can be exchanged for the underlying asset at any time.
  3. For example, if Max deposited 10 ANC tokens in 2022, he’ll get back 10 maANC. Since maAssets are yield-bearing, assuming the ANC pools provided a 10% APY, Max can then redeem his 10 maANC for 11 ANC in 2023 (just an example).

Borrowing

  1. Since Max has already deposited, he is now also able to borrow from Mars if he wishes to, with a LTV limit. His deposit will act as the collateral.
  2. If Max decides to borrow, he will be susceptible to liquidations if his LTV ratio falls below a maintenance margin specified by Mars Protocol.
  3. In the case where Max’s LTV ratio falls below his maintenance margin, any address can then pay a fraction of Max’s debt in exchange for his collateral + a premium.

To sum this part up, here’s an example provided by Mars Protocol Docs.

Dynamic Interest Rates

One of the questions you might be asking yourself now is, “How does MARS determine its interest rates for loans and deposits?”

At the start, Mars Protocol will use a standard 2-slope rate model akin to the ones Aave or Compound uses (as shown below) where the rates follow the first slope before optimal utilization levels and the steeper slope when it’s over-utilized.

However, once market utilizations kick in, Mars will transition to a dynamic interest rate model, and this model has not been deployed by any other money markets as of yet. The dynamic interest rate will allow the rates on Mars Protocol to evolve based on market conditions and it is determined by a Proportional-Integral-Derivative (PID).

According to Mars, the PID is akin to cruise control in your car where the “PID” in the car will adjust the usage of gas based on whether you are going uphill (more gas is needed) or downhill (less gas is needed). If you are a more technical person, here is the formula that the Mars PID will use, for you to see.

If you want to read up more in-depth about the dynamic interest rates, here’s the link: https://mars-protocol.medium.com/exploring-mars-protocols-dynamic-interest-rate-model-4347c303bf28

The Fields of Mars: Contract-to-Contract (C2C)

Apart from just dynamic interest rates which is a new concept for money markets, Mars has also thought out a way for users to borrow capital without the need to post collateral. This is useful in certain scenarios such as (but not limited to) leveraged yield farming or arbitrage and brings in borrowing demand for collaterals. This section is called Contract-to-Contract (C2C).

Field of Mars

Mars Protocol will be the first protocol to test out the Field of Mars, giving users access to a credit line for leveraged yield-farming strategies & with the first few strategies being MIR-UST, LUNA-UST, and ANC-UST.

Here’s a visualization of how this credit line for non-depositors borrowers will work, essentially opening up a 2x leveraged position on MIR-UST:

Liquidation

With any form of borrowing, the user has a risk of liquidation. Any smart contract that wants to implement C2C borrowing must have its own liquidation logic which ensures its ability to pay back regardless of any market conditions. This logic has to also be approved by the Martian Council for them to get a C2C credit line.

In the case of MIR-UST, here’s how the liquidation logic works:

  1. The user’s asset is staked MIR-UST LP tokens
  2. If the value of the LP drops below a liquidation threshold, which is a % of the user’s debt, anyone can close the user’s position
  3. The assets are removed from the LP position and the UST portion is used to pay back the debt
  4. If there is any outstanding UST debt, MIR will then be sold for UST to pay back the debt
  5. After the debt is paid back, the remaining amount will then be refunded to the user, with a portion of it to be rewarded to the liquidator.

If you want to read more about the launch perimeters of the Field of Mars, here’s the link: https://mars-protocol.medium.com/launch-parameters-for-the-fields-of-mars-494c7c5197de

Tokenomics

Mars Tokenomics is unique in the sense that they have implemented the lock drop model (like Astroport) instead of getting funds from VCs. In a lock drop model, users lock up tokens (UST in this case) in return for MARS tokens. More details below:

  1. 30% will be allocated to Mars builders, which consists of Terraform Labs, Delphi Digital, We3, and their respective service providers which consists of 3 entities and 33 individual builders. Distributions for this will start around 21 February 2023, and they unlock pro-rata daily over the next 24 months following that. (Source)
  2. 7% will be reserved for lock drops and airdrops. 60M for lock drop and 10M for airdrops respectively. (Source)
  3. 53% will be reserved for the community, which includes staking incentives, liquidity mining, and community-building programs.
  4. 10% will be part of the Mars Reserve.

Value Flow

Mars has also provided a value flow for the interest payments from borrowers as seen below.

Initially, 80% will go to depositors with the remaining 20% to be split between the MARS treasury, safety fund, and xMARS stakers. All parameters thereafter will be alterable via governance voting.

xMARS and what you need to know

xMARS is a token with an unbonding/unstaking period of 7 days, that is received by users who stake their MARS token. xMARS tokens also have a few other properties:

  1. Governance: Where 1 xMARS = 1 voting power, and only xMARS holders can vote for governance to make decisions on asset listing, risk parameters, treasury spending, and more
  2. 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.
  3. 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.

How does Mars Protocol compare with other Money Markets?

With Mars implementing new things to the MM space, how does it compare to other Money Markets? Here, we take a look at comparisons between various MMs from other ecosystems.

Let’s compare it with:

  1. Maple Finance on Ethereum
  2. Benqi on Avalanche
  3. Geist on Fantom
  4. Tranquil on Harmony
  5. Solend on Solana
  6. Tectonic on Cronos

Due to the fact that MARS is a new token, the MCAP has to be manually calculated. Here, we assume that there are about 70M circulating tokens at a price of $0.93.

MCAP/TVL

Here, when we compare the MCAP over TVL, we can see that Mars is fairly priced in, according to its TVL in the protocol, and in fact a little higher than its peers. I think this is partly due to the fact that as of writing, you can only lend/borrow UST & LUNA and the Field of Mars is limited to only the three strategies as written under the “Field of Mars” section above.

MM TVL as a % of L1 TVL

However, when we compare its TVL as a % of its Layer 1 TVL (LUNA) and compare it with the rest, we can see that Mars only comprises 1.67% of the total TVL of LUNA. This is way lower than its peers, and I think that in the near future, we might see the TVL of Mars increase given the fact that Mars is the only money market on Terra, apart from Anchor which caters to a different market.

Wrapping it all up

With that, my thought would be that Mars as of now, is priced in. However, it does have a speculative value (which comes with its risk) that not many are taking on right now.

What speculative value and why? This is due to the fact that firstly, Mars is the only money market on Terra, and secondly, Mars only captures 1.67% of the total TVL on Terra. I do believe that with the implementation of other CW20 and native Terra assets, Mars will be undervalued in the future, and this is the speculative value we are talking about.

This is a bet that I will take and I most definitely think it will pay off in the near future. Let me know what you think about this!

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Satria Pamudji

Satria Pamudji

I help you understand technical concepts by writing easy-to-digest articles