Key Takeaways

Mars is a generalized credit protocol built on the Cosmos SDK that leverages a hub and spoke model to control smart contract deployments, called Outposts, on other Cosmos chains.
Mars is attempting to build a DeFi superapp with a CEX-like experience that allows a user to borrow/lend, spot trade, cross-margin leverage positions, and invest in automated strategies for yield.
In its first six weeks since launch, Mars has gained over 2.5k unique users, $13M in deposits with ~40% capital utilization, and has generated over $8k in protocol revenue.

Introduction

Despite many in crypto believing DeFi’s future, a DeFi super app has yet to be created that can rival a centralized exchange’s (CEXs) user experience. The DeFi experience is fragmented, where spot and derivatives trading, lending, and yield farming all happen on separate applications. Other than more liquid markets, CEXs are able to offer cross-margin where traders can use different assets across their sub-accounts to maintain margin requirements on levered long or short positions. Additionally, the inability to trust on-chain borrowers has forced DeFi to offer capitally inefficient overcollateralized lending services.

In the real world, debt obligations are enforced through legal contracts whereby if a borrower defaults, the lender can take ownership of a borrower’s assets until they are made whole. With contract-to-contract DeFi lending, a similar experience can be created on-chain. As a separate point, if a borrower’s creditworthiness in the traditional finance system is determined by a credit score that looks at a borrower’s financial history and outstanding debt, a DeFi application should be able to track an address’ on-chain history and current positions to do the same.

Mars protocol is attempting to solve these pain points by bundling a suite of financial services in one application. With the recent blowup of FTX, the need for an on-chain CEX-like experience is sorely needed as more users flock to self-custodied wallets.

Mars Overview

Originally built as a dApp on Terra that facilitated contract-to-contract (C2C) lending for leveraged yield farming strategies, the development team led by Delphi Labs decided to build out an appchain post-Terra collapse. By leveraging whitelisted contract-to-contract lending, Mars v1 could claw back a borrowers’ funds deposited into a smart contract in the event of a near-default. This allowed borrowing without directly providing collateral, creating more capital-efficient markets.

Built on the Cosmos SDK, Mars v2 is a generalized credit protocol that leverages a hub and spoke model to control smart contract deployments, called Outposts, on other Cosmos chains. The Mars central hub governs parameter changes and smart contract upgrades and collects revenue from each Outpost. Outposts are a bundle of smart contracts that allow a user to borrow/lend, invest in automated strategies approved by governance, and perform both spot and margin trading. In early February 2023, Mars launched its first Outpost on Osmosis, as the largest DeFi liquidity hub in the Cosmos ecosystem.

The major components of Mars v2 are the Red Bank, Vaults, and Rover Credit Accounts. The Red Bank is both a lending protocol that enables overcollateralized peer-to-contract lending (P2C) similar to AAVE or Compound, as well as a C2C lending protocol similar to Mars v1. Today, markets for ATOM, OSMO, axlUSDC, and most recently, stATOM are live.

Vaults are generalized asset containers, similar to Yearn Finance, that can implement automated strategies to generate yield. Currently, two auto-compounding leveraged yield-farming strategies are live for the ATOM-OSMO and axlUSDC-OSMO Osmosis pools. Because the assets the user borrows from the Red Bank are deposited directly into Osmosis via the Mars vault, Mars uses the entire LP position (the borrowed funds + the user’s funds) as collateral. This allows the user to obtain leverage and use their capital towards the strategy instead of sitting idle as collateral. Vaults will also be able to support other strategies like options and other automated trading strategies in the future, extending the capabilities of DeFi hubs they are built on (like Osmosis).

With Mars v1, users could not use cross-margin positions, meaning each user position required separate collateral and had different liquidation levels. This created sub-optimal capital efficiency and a clunky user experience. Mars v2 introduced Rovers, isolated credit accounts that aggregate all user DeFi activities with a single health factor to determine liquidation LTV. Rovers are analogous to CEX sub-accounts and are represented as transferable NFTs that can ultimately be used for on-chain identity for social trading, developing a credit score, secondary marketplaces, and asset management through fractionalization.

By leveraging Interchain Accounts and Queries that enable asynchronous cross-chain composability over IBC, Mars Rovers can cross-margin a user’s positions between all Outpost deployments in the Cosmos ecosystem. Mars also plans on using Interchain queries to synchronize interest rates across Outposts for the same asset by moving assets from one chain to another, acting like a global liquidity pool across the Interchain.

Tokenomics

Mars has a fixed max supply of 1B tokens that are split between early Mars v1 token holders, Mars contributors that help develop the protocol, and the DAO’s community pool that will be used for strategic purposes. While the early Mars v1 tokenholder supply allocation was liquid at mainnet launch, the contributor allocation is subject to a two year linear vest after a six month cliff where 33% of the allocation unlocks on September 1, 2023. Although the community pool is not technically liquid today, governance decides how to strategically leverage these funds to acquire users and capital. Because these funds can become liquid at any moment subject to governance, we deem the entire community pool allocation as circulating.

In Mars v1, the MARS token not only gave governance rights to holders, but it also backstopped the protocol in the event of a mass liquidation event that led to bad debt. As a PoS appchain, in Mars v2 the MARS token is used to secure the chain, provide governance rights, and pro–rata revenue share of protocol fees from the Outpost deployments. Instead of backstopping the protocol with MARS, Mars v2 has a Safety Fund that accrues 10% of protocol fees converted into axlUSDC to potentially recapitalize the system. Governance has the right to increase or decrease the safety fund revenue split, and one could argue in its earlier days all protocol revenue not going to LPs should go to the Safety Fund to build up a warchest as Mars scales.

Since inception, the protocol has generated ~$8k in revenue split 50/50 between MARS stakers and the Safety Fund.

To encourage users to deposit funds into the Red Bank, the community voted to tap into the community pool to begin a liquidity mining campaign in February and has since extended it to continue into May 2023. In total, the campaign has rewarded depositors just under 1M MARS out of the total 3M allocated through May. This amounts to ~$250k in incentives to date.

Protocol Traction

High inflationary staking yield has hampered DeFi traction in the Cosmos. Why LP in Osmosis or lend out your assets in a lending protocol for 10% when you can stake it for 20%+ in many cases? This has made it difficult for most DeFi protocols to create liquid markets. By leveraging Osmosis’ brand and liquidity for its vault product, Mars is able to partially overcome this cold-start problem, but still needs to leverage liquidity mining incentives to attract capital, as shown above.

Additionally, lending protocols are mostly used to gain leverage to go long an asset, or borrow an asset with stablecoin collateral to go short. The lack of native stablecoin in the Cosmos ecosystem post-Terra collapse has made it difficult for users to perform either action since most Cosmos assets are tightly correlated. Axelar, a generalized cross-chain network, has become the de facto bridge for non-native USDC into the Cosmos ecosystem and was chosen as the canonical bridge for Osmosis. With over $10M of axlUSDC on Osmosis today, and native USDC coming to the ecosystem later this year, this barrier for lending protocols is disappearing.

To date, Mars has ~2.5k unique users, of which all users deposited assets and ~1.4k have borrowed assets. In order to ensure a safe launch in its early days, the Mars developer team decided to gate how much can be deposited into the protocol. The drop off in users since Feb 19 can be attributed to Mars’ deposit caps being hit for axlUSDC with users currently getting over 25% to lend, as well as an equal or lower deposit yield than the current ATOM and OSMO stake rates.

In total the 2.5k depositors have deposited ~$13M to the protocol since early February, of which ~$5M has been borrowed. This leaves Mars with ~$8M in TVL and ~40% capital utilization, mostly led by axlUSDC with 70% of the deposited assets currently being borrowed.

Sometimes there is alpha following DeFi power users on-chain. Below are the top five Mars borrowers that we will closely be tracking as Mars, and the DeFi ecosystem in Cosmos, expands. These five users alone account for 50% of all borrowed funds on Mars.

Final Thoughts

While Mars v2 is not feature-complete today, its hub and spoke architecture, innovative NFT use case for credit accounts, and first-mover advantage to build on top of Osmosis will likely make it the top lending protocol in the Cosmos ecosystem. Once live, the ability to cross-margin will attract DeFi power users from other chains, and could put Cosmos DeFi on the map. Although it has only been live for six weeks, Mars already has the most liquid money markets for top Cosmos assets like ATOM, OSMO, and axlUSDC.

Unfortunately, all of Cosmos DeFi needs to compete with the high staking yield in the ecosystem. As liquid staking derivatives become more commonplace, these inflationary yields should decrease and allow DeFi to flourish. Even without a decrease in staking yield, the Cosmos ecosystem continues to gain mindshare, with dYdX and other innovative products launching later this year. Mars will likely benefit from new users entering the ecosystem as it deploys more outposts on other chains, and as more users leave CEXs due to custody risk.

Mars Protocol: Cosmos' DeFi Superapp

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