Mars Protocol: Decentralised Banking and uncollateralised borrowing
At this point in Block Chain technology advancements it is pretty clear that cryptocurrency is focusing on challenging mainstream banks. Recent news of late continues to focus on Governments around the world wanting a stable coin with many banks now saying the costly endeavour would be better lead by the private sector as a number of successful stable coins already exist.
As each day goes by there seems to be a new project that arises that continues to challenge the current status quo. With the rise of Decentralised Finance we have see a significant amount of people delve into similar projects but not without risk as many seem to benefit the few who get in early and then pull out before a crash. Crash's are often brutal leaving nothing but destruction in their wake and many investors without their initial deposits (investors beware)
What is Mars Protocol?
In simple terms Mars Protocol is the Terra Network's (Luna) answer to AAVE and Compound which revolutionised lending and borrowing. Prior to Compound and AAVE's arrival there wasn't much on offer for someone who purchased a token and you just held it in the hopes of it increasing in value. The risk was also that it would decrease and what AAVE and Compound offered was the ability to lock your token into a contract and borrow against it.
This enabled people to increase utilisation of their investment and unlocking capital to invest in other tokens. However, the projects have a slight flaw to them in the fact that you could lend for example Bitcoin and borrow a stable coin like USDC and stake it into another farm to earn interest. Not only are you now earning interest for providing collateral but you're earning it on what you have borrowed.
With your new interest you could continue buying your original staked token and adding it to your collateral and borrow more creating a never ending cycle. Of course market dips occur and people get liquidated.
The Mars difference
Mars has further built on the work of AAVE and Compound to include uncollateralised borrowing and unlocking the utilisation rate to increase the overall interest rates. With AAVE and Compound they only appeal to one side of the market people with assets that want to borrow against them.
Now it is important to note that it is called uncollateralised borrowing but it isn't. They have just created a method to incentivise borrowers to close their position and are working across multiple chains.
An example used to explain this Mars uses the MIR example where a person is providing LP to MIR and earning rewards in MIR. Now the person has earned 100 MIR and instead of selling half for UST and increasing their LP they can take that 100 MIR approach Mars and apply for a loan with MIR for the equivalent amount of UST to stake to their LP. The rewards are auto compounded and grow fast and paying interest on the loan. If the value increases the person can choose to take profits and close the loan taking their initial MIR and all profits. You can read more in their Red Paper here
From the diagram provided it appears that the protocol has come up with a way to solve impermanent loss.
Now I think this is a really good plan that also shares risks with investors of the token but a great safeguard has been developed. When markets crash people often start removing LP and stake and dumping the token which creates a constant decline. Mars will lock their pools to ensure people don't mass dump ensuring no major price declines outside the market dip.
Mars will also establish an Insurance fund which will be of UST and the project hopes the community will have this staked on Anchor to continue to grow it's value. In the event of a market dip the UST will be used to prop up and prevent liquidation of assets.
If the Insurance fund is wiped clean then the protocol will sell up to 50% of staked Mars to cover people effected by the dip so as a Mars staker you are also taking onboard the potential risk of any future market failures.
Thoughts on Mars?
And there you have it a short introductory into the Mars protocol based on their red paper which can be found here I have to admit it is something a little different compared to other lending platforms and the addition of uncollateralised lending adds an additional layer to the protocol which will make it attractive to others to use and expanding current cliental.
What are your thoughts on Mars Protocol?
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