The Red Planet

Mars Protocol 🪐

Mars is a bank of the future: non-custodial, open-source, transparent, algorithmic, and community-governed. -Mars Protocol litepaper 1.0

Mars aims to provide a better service than our traditional banks. It's fast, anybody can access it, and all controlled by ourselves.

You might already got a fair idea about what mars is trying to achieve. Basically, Mars aims to replace traditional banks using a decentralized model using the Terra blockchain.

There are four fundamental parties involved in Mars Protocol.

Lenders -Those who deposit assets into Mars.
Borrowers with collateral- Those who deposit assets can borrow some of it paying interest.
Borrowers with no collateral: Smart Contracts can borrow assets from Mars if they are approved by the governance. It's one of a kind.
Governance: Stakers of Mars tokens will be participating in governance.

What makes MARS Protocol different?

All these seem to be similar to most of the other Defi protocols right? No, you are wrong. Let's see what MARS trying to do differently.

The Uncollateralized Borrowing

But wait, WHAT? Uncollateralized borrowing? Isn't it risky? Actually no. It's uncollateralized in the sense that its collateral doesn't sit in MARS, but underlying strategies are themselves collateralized. Let's check an example of how this works.

Consider MIR-UST farming. Imagine you want farm using 1 MIR whose current price is $1. You can leverage the UST needed using MARS uncollateralized borrowing function, which is $1 UST(2x Leverage).

MIR goes up in value. Say MIR-UST now goes to $1.5, you can close the position and repay the UST borrowed and realize a profit.
MIR goes down in value. MIR-UST is now $0.5, which is below the liquidation threshold, a liquidator can supply the UST needed to close position, and can walk away with the liquidated MIR.

👤 Users - Depositors and Borrowers 💻

The Field of Mars feature of the protocol allows certain whitelisted addresses to borrow funds without collateral. This can be thought of as a pre-authorized, permissioned lending service. Part of the novelty here is that it enables dApps to be built on top of the Red Bank, such as leveraged yield farming and liquidity-as-a-service. In general, most credit protocols only offer collateralized loans. This limits capital efficiency (low loan-to-value ratios) and targets only a small market of users since the end result is a lender that also wants to borrow. As a result, the interest rates offered to users end up being relatively low. By enabling whitelisted, uncollateralized loans, Mars expands the market to non-depositor borrowers which in turn increases both borrower demand and utilization rates.

Ultimately, lenders receive much higher yields than otherwise would be possible with strictly collateralized lending. While whitelisted entities can borrow without collateral, Mars mitigates its risk exposure through the provision of liquidation logic that ensures that a given borrow has the ability to repay regardless of market conditions. This framework is monitored and approved by governance. Allowing dApps to access Mars’ liquidity increases its composability and creates more demand for deposits. This creates a positive feedback loop in which this added demand for liquidity will keep constant pressure on utilization rates, thereby increasing the yield paid to lenders and further tapping into their overall willingness to lend their capital.

LUNA and UST deposited and borrowed 📈

You can borrow LUNA and stake it for leveraged yield or sell the borrowed LUNA to effectively short LUNA.

If the LUNA price drops the LUNA you owe is worth less so you will profit on the difference when you decide to pay it back. Or you can borrow UST and buy LUNA for a leveraged long position.

These are just a few strategies you can utilize. There are others you can do like hedging/leveraged farming

Note an interesting trend: