MARS Tokenomics 2.0

Tokenomics 2.0

Introduction

The objective of this post is to present some ideas that could be implemented as part of a tokenomics update to Mars. The post will be divided into two broad sections. In the first section, we will present ideas that are relatively easier to execute and thus whose probability of being implemented (if they are well received) is higher. In the second section we will present a set of exploratory and more complex ideas whose whole implementation details might not be completely finalized, where the main motivation is to generate discussion and better understand the community’s interest around each of them.

We expect the result of the discussion around this post to be general consensus over the ideas to be implemented in the short term (first section) and those that the community is interested to see implemented (or at least keep thinking about) over a more extended time horizon (second section). For the implementation of the ideas presented in the first section, a governance vote would likely follow. For those in the second section, further posts providing more granularity and discussions might be needed before submitting them to governance votes for implementation.

Section 1

Reducing the Community Pool Size

The current community pool (CP) size is ~619M MARS. Most of these tokens are not being used or expected to be used in the short to medium term. As such, we propose to burn most of these tokens to leave only 300M MARS left in the CP. We believe these tokens should be enough to cover any short and mid-term needs of the protocol.

It is worth noting that with the deprecation of Mars Hub and the governance system moving to DAODAO, there will be no need to spend on security/validators rewards, which currently constitute a significant cost for the protocol. Historically, this cost has been paid from the CP, which further strengthens the case for reducing its size.

Improving the Fee Distribution Mechanism

In the current model, protocol fees, which are generated from interest payments within every market on the Red Bank, are distributed as follows:

  • Safety Fund: 50% of fees go to the Safety Fund in the form of axlUSDC.
  • Mars Stakers: 50% of fees go to Mars Hub stakers in the form of MARS.

We propose to change the distribution as follows:

  • Safety Fund: A share* of protocol fees will be used to buy nobleUSDC on the market to be sent to the Safety Fund.

  • Buy and Burn: A share* of protocol fees will be used to buy MARS on the market and burn those tokens.

  • Buy and LP: A portion* of protocol fees will be used to provide liquidity for MARS. The mechanics for LPing could work as follows:

  • 50% of fees would be used to acquire MARS.

  • The remaining 50% would be used to acquire the pair token.

    • This could be OSMO, NTRN, nobleUSDC or whatever governance decides. This decision should be made per outpost.

On Osmosis:

  • The MARS and pair tokens are deposited across the whole range of a MARS/PAIR 0.2% Supercharged Liquidity pool.

  • If the pool doesn’t exist it would need to be created first.

On Neutron:

  • MARS and PAIR are deposited into the MARS/PAIR Astroport PCL pool.
    • If the pool doesn’t exist it would need to be created first.

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This new fee distribution methodology achieves the following:

  1. The buy and burn simplifies fee distribution to tokenholders and will have a deflationary effect on token supply.
  2. The buy and LP mechanism builds organic, protocol owned liquidity for the token, which might reduce or completely eliminate the necessity of introducing liquidity mining schemes to build up that liquidity.
  3. It maintains flows to the Safety Fund, which is a key component of Mars.
  • The share of fees that should be allocated to each bucket are governance defined and updatable parameters.

Section 2

Implementing Staker Rebates

Users would be able to stake MARS to receive a rebate of protocol fees. The rebate could work as follows:

  • With a certain frequency (i.e. weekly, monthly), all protocol fees generated for that period are aggregated.

  • This could be done by converting all fees to nobleUSDC at the end of the period.

  • From these fees (the total accumulated by the protocol during that period), a certain % will be rebated back to users of the protocol.

    • This % would be a governance defined and updatable parameter and could be as high as 100%.
  • There are 2 variables that determine the amount of fees attributable to each user as a rebate:

    • The share of staked MARS the user has.
    • The share of protocol fees paid by the user during the rebate period.
    • And the final rebate is determined as:

Where:

  • Rebate_i is the rebate attributable to user i.
  • stakedMARS_i is the amount of MARS staked by user i at the beginning of the rebate period.
  • totalStakedMARS is the total amount of MARS staked at the beginning of the rebate period.
  • feesPaid_i are the total protocol fees* paid by user i during the rebate period. This value should be denominated in nobleUSDC.
    • If the user paid fees in other assets, the conversion to nobleUSDC could be made at the end of the period.
  • totalFeesPaid_t are the total protocol fees (in nobleUSDC) that were accumulated during rebate period t.
  • RebatablePortion is the % of protocol fees rebateable.

Other Details:

  • Unstaking Period: To be able to unstake, users would need to wait an unstaking period.
    • The unstaking period would be a governance defined and updatable parameter.

Launching a Referrals Program

Referrers should be able to create their own referral code to share on any platform. When a user signs up using a given referral code, that code should be stored in the user’s account. This allows the referrer to be compensated from activity generated by the user from that moment onwards. When a referred user then uses Mars, the referrer would receive a share of the user’s paid fees.

The referral benefits (for the referrer and its referred users) would depend on a tiered system. The more activity a given referrer is able to promote, the higher the commission the referrer receives and the discount its users receive. The different tier benefits could work as follows:

  • Tier 1: X% rebate* to referrer, A% discount for users**.

  • Tier 2: Y% rebate to referrer, B% discount for users.

  • Tier 3: Z% rebate to referrer, C% discount for users.

  • The rebate means that the given % of protocol fees paid by its referred users are sent back to the referrer. Given that Mars is a complex protocol where fees could be generated from different activities such as lending and trading, it is to be defined what fees exactly could flow back to the referrer such that the system achieves its purpose but is also practical and pragmatic.

** In the same vein as the fees, it is to be defined how this discount can be applied such that it’s pragmatic. For instance, this discount could apply to certain activities (such as trading, where it’s easier to apply) and not others (such as borrowing, for instance).

And the following are some proposed requirements a referrer should meet to reach a certain tier:

  • Tier 1: No requirement.
  • Tier 2: At least a certain number of active users using the referral codes per week and a combined weekly volume above $X million
  • Tier 3: At least a certain number of active users (higher than Tier 2) using the referral codes per week and a combined weekly volume above $Y million

The benefits, the requirements per tier and the rebate frequency should be governance defined and adjustable parameters.

Copyright

Copyright and related rights waived via CC0.

Disclaimers/Disclosures

This proposal is being made by Delphi Labs Ltd., a British Virgin Islands limited company. Delphi Labs engages in incubation, investment, research and development relevant to multiple ecosystems and protocols, including the Mars Protocol. Delphi Labs and certain of its service providers and equity holders own MARS tokens and have financial interests related to this proposal. Additionally, Delphi Labs is one of several entities associated with one another under the “Delphi Digital” brand. Delphi Digital’s associated entities and/or equityholders or service providers of such entities may hold MARS and may have financial interests related to this proposal. All such entities, service providers, equity holders and other related persons may also have financial interests in complementary or competing projects or ecosystems, entities or tokens, including MARS, Osmosis/OSMO and Neutron/NTRN. These statements are intended to disclose relevant facts and to help identify potential conflicts of interest, and should not be misconstrued as a complete description of all relevant interests or conflicts of interests; nor should they be construed as a recommendation to purchase or acquire any token or security.

This proposal is also subject to and qualified by the Mars Disclaimers/Disclosures. Delphi Labs may lack access to all relevant facts or may have failed to give appropriate weighting to available facts. Delphi Labs is not making any representation, warranty or guarantee regarding the accuracy or completeness of the statements herein, and Delphi Labs shall have no liability in the event of losses or damages ensuing from approval or rejection or other handling of the proposal. Each user and voter should undertake their own research and make their own independent interpretation and analysis of all relevant facts and issues to arrive at their own personal determinations of how to vote on the proposal.

6 Likes

Overall feeling: really great to see exploration on driving value to $MARS.

Other thoughts:

  • Post deprecating the chain, what’s the value to the protocol for users to stake? We just want to discourage on-the-whim dumps? The value prop to the holder for staking does not seem worth it. Think we should either:

    • Enrich this proposition by (1) allowing only stakers to participate in the new form of governance and (2) not burning at all and giving a higher rebate to stakers.
    • or… Remove staking entirely and doing a higher burn
  • What will be done with the LP yield generated? Used to compound LP position?

  • The referrals program feels a bit out of place. It is the equivalent of “should we spent protocol revenue on a referral marketing program?”. Do we have examples of this working in web3? I almost think we can have a governance proposal to do this off-chain to see if it is a valuable marketing activity first (before baking this into smart contract code). We can add a referral query parameter to the “create credit account” page and someone can track results and disperse funds manually. I also wonder how we’d determine whether it was “incremental activity” versus the same users taking advantage of the program. How would we prevent all whale users from creating a referral account and referee account and pocketing the rewards?

The value prop to the holder for staking does not seem worth it.

I think we have to think about how much economic security we need. The protocol is currently pretty heavily controlled by governance, so if we have a very small amount staked relative to the assets in the protocol it can become an attack vector. On the other hand it seems to be a cost we have to pay for, so ideally we should look to keep that cost as low as possible?

Removing staking is an interesting thought - would make our economic security (i.e voting power) very cheap - but I guess the question here is how do we vote, and who gets a vote? Only idle mars? Would LP pools get a vote?

I think Liquid staking is another way of reducing the cost to stakers - they get the benefits but still get liquidity. TBH this seems inevitable, so why not think about enshrining LS as a native feature and cut out the middle man?

Intro
I have contributed to the front end of the Mars Protocol for almost three years now. And I’m happy to finally participate in the discussion about the tokenomics of the Protocol.

I believe a quick historical background (from my POV) on why the protocol ended up with the current tokenomics would help to understand why it’s the right time for an overhaul.

Historical POV
The Mars Protocol tokenomics were created back in the glory days of Terra. Mars Protocol was highly anticipated by the community as the chain needed a good Money Market capable of C2C (Contract to Contract) lending. The idea was to reserve a good amount of MARS to incentivize liquidity and have a Community owned war-chest for things like the Astrowars, Protocol token exchanges (for example with Apollo, Pylon, Prism and other bigger DeFi Protocols of that time) and future Contributor allocations. With its staking mechanism through xMARS and the general staking narrative of these days, it was more than reasonable to have a 60% community pool, with around 10% circulating and 30% of team-allocated tokens.

After the crash and the end of Terra as we knew it, it was decided to fairly distribute all MARS on the Terra Blockchain (columbus-6) to the holders of xMARS and MARS in a 1:1 ratio based on two snapshots.

This included vested positions, circulating supply, and the community pool.

The decision to keep a large Community Pool was still reasonable at that time since it was planned to use the Mars Hub Blockchain (mars-1) as the primary security layer for the Protocol. When the decision was made to launch on the Osmosis Blockchain (osmosis-1), brainstorming started on how to shape the future of the Mars Protocol. One plan was to deploy as many outposts on as many chains as possible. Nobody knew if Osmosis was the right call (it didn’t dominate the Cosmos Ecoverse as it does today), but that didn’t matter, as the idea was to be on most of the other chains anyway. Another idea was to have as many protocols as possible to build on the Mars Hub and bring more than only governance and security use cases to the chain.

Times changed again, and the Bear Market hit. This was the first moment the contributors realized that having a super app on one or two chains could be the best way forward. Concentrating DeFi activity on one or two chains, creating arbitrage opportunities, and minimizing maintenance and infra backlogs would also help survive the Bear. Mind that Mars Protocol didn’t raise any money by then, but the contributors were still paid monthly. This made the Bear hard for Protocols like Mars Protocol that had limited runway.

Present
Mars Protocol launched a foundation for a successful super app by launching a v2 version of its Money Market with a novel concept of cross-collateralized credit accounts and was able to secure a deal with Neutron to exchange 60M MARS for 3M USDC to create further runway to build its vision.

Other than some staking rewards, initial deposit incentives, and the 60M MARS deal, there was no further need for the Community Pool until today.

Personal Feedback
My excitement for the revamp of the tokenomics is unbroken.

I’m contributing daily to the Frontend codebases of the Mars Protocol. And I know a lot more about the Protocol’s upcoming roadmap, goals, and features than the average user. Sadly, the legal boundaries around sharing this information are super tight, and we were advised to be careful when discussing the Protocol’s future, not to raise expectations or violate any of the dubious crypto laws created in the past couple of years. This is why I can’t share the WHY of my following stance.

I’m still super excited for the future of this Protocol. I know that the community looks at the 30% team allocation and thinks that the contributors (and Delphi in general) are nothing more than a big cash grab, waiting to dump on their users, rugging the Protocol of its potential, and walking away with millions of dollars made on the back of the average user.
This view is more than exaggerated! I think most of the community didn’t know that we contributors mainly were paid out of the private investments of the founders of Delphi Digital. And as a long-term contributor, I can tell you guys that the allocation I got assigned is way less than most of you may think. But in crypto, a team of contributors has a high fluctuation. I saw contributors come and go in the past three years. All (or at least the majority) of them earned their fair share of allocation, and my biggest thanks go to the founders of Delphi, who paid with their private funds to help us shape the future of DeFi. My understanding is that they get the most significant part of the team allocation, and I couldn’t trust these individuals more with the token given to them, as none of them have an interest in selling, but being able to have a say in the governance votes that decide and shape the future of this Protocol.

Proposal Feedback
With all that said, I’d like to express my feedback on the proposal.
I feel that it is not drastic enough. In my opinion, it should be the goal of the Protocol to reduce the community pool (and optimize the FDV) as much as possible.
I think a burn of half of the total supply (500M MARS) would leave the community pool with enough tokens (119M) to secure another deal, maybe if the current runway isn’t enough to secure enough POL and fees to pay off their contributors.
It should also be in the interest of the Protocol to claw back as much MARS from the open market as possible by implementing a buyback mechanic.
A deflationary token is nice, but a war chest would be my preferred way moving forward besides a safety fund (to make users whole in case of bad debt) and incentives for stakers to secure governance and share Protocol revenue. The war chest would start with 0 MARS and build up a MARS (and maybe USDC) balance based on fees collected to pay allocations to new contributors.

Together with new fee income streams (that I can’t talk of, as mentioned above), I feel that this would be a revamp of the tokenomics.

Instead of a Market Cap. / FDV ratio of 0.1 today, we would end up with ~0.45 in February 2023 and ~0.85 in September 2025 if there was no use of funds from the community pool.

Closing Thoughts
As I mentioned above, I’m happy that tokenomics is now the next focus in the evolution of the Mars Protocol. I feel that many good decisions were made in the past and that the time has come to correct some of the mistakes made along the way. It shows that nothing that has been done and will be done is set in stone and that we, as contributors, are open to ideas and feedback from the users and community members of this DeFi tool we’re building.

I sincerely hope this is another step forward in the right direction in this financial revolution of the 21st century.

3 Likes

My opinion as a pretty big user of the protocol as well as having a large speculative position in the MARS token:

Things I like:

  • Burning part (or the entire) community pool. Leaving some extra left over like suggested seems like an ok iea and if there isnt a new use for them they can be burnt again at a later date.
  • Buy and burn, buy pressure and deflation is very bullish.
  • Staking for fee rebates. Good way to get users to buy the token as well as lock up some circulating supply.

I don’t have a really strong opinion on the buy and LP idea. I understand both sides of the argument, but I lean towards letting the market decide what is the right amount of liquidity for the token as well as what the PAIR token should be, at least in the early stages. Buy and Burn + Safety fund seem like priority #1 to me and the liquidity pairing could come later after the safety fund is decently sized. Buy and burning on thin liquidity early on is also more bullish for pumping the price. If it does get implemented though, id like to suggest keeping it to 1 MARS-PAIR (preferably USDC so that it doubles as almost the safety fund) rather than bits and pieces of liquidity on each outpost chain, buying other peoples tokens and leaking value to arb bots.

Ideal LP set up imo would be having the thickest liquidity for MARS-PAIR and the pair token being something really strong (I like NTRN) to maximize USD value appreciation as it gets dragged along.

1 Like

Agree with most of the suggestions, a few notes:

  • As @Linkielink mentioned the CP burn should be more drastic & leaving 10% as some suggested or burning 500mill tokens (50% of supply) would be a better option.
  • Although I agree with @Linkielink that technically a war chest or redistributing to stakers is probably the better option, we can not ignore the power of the deflationary/burn narrative in the crypto industry. The reason this narrative is strong is because its simple to understand for most people " supply down = value up ", while the other options are a little harder for the average person to grasp the impact on value.
  • The rebate is a great way to compensate stakers.
  • The referral program if implemented well could be a great marketing tool.
1 Like

I appreciate the passionate engagement in this thread and the high-quality suggestions being shared. I would like to share my thoughts on the matter.

Returning to basic principles, the primary goal of a robust tokenomics model should be to provide utility to the Governance token. This ensures protocol security by making it challenging to accumulate enough tokens to attack the protocol. It also establishes proper incentives, encouraging the holding of tokens by responsible actors who make decisions beneficial to the protocol.

Mechanisms that enhance token value are crucial for improving protocol security. Features like Buy & Burn (creating deflationary pressure) and Buy & LP (increasing token liquidity over time) clearly align with this objective, and I am favorable toward both.

Now, let’s discuss the Community pool. In my view, the Community Pool serves a dual purpose:

  1. Creating incentives to enhance protocol efficiency (e.g., incentivizing lending, trading activity) to attract users and improve protocol value/utility.
  2. Periodically compensating contributors for building and driving value through innovative features, risk monitoring, operations, and maintaining infrastructure.

It is vital to maintain sufficient resources in the community pool for the long-term success of the protocol. However, having an excessively large community pool, even with a long-term utilization plan, can be detrimental to token holders, indicating an unreasonably high FDV. Therefore, I am in favor of burning part of the pool. The question remains: how much? This depends on how we intend to ensure the long-term goals of the pool, as described above.

I like the idea of burning most of the pool (500M), leaving a fractional portion (~119M) for short-term needs. But what are the options after the amount (if that occurs) runs out?

One option is not to burn Mars and instead follow Linkie’s suggestion: accumulate it in a War Chest or return it to the Community pool. This is a reasonable solution, with the only limitation being that, by reducing the burn, the supply of Mars would essentially remain constant over time, neither inflationary nor deflationary.

Another approach is to retain the Buy & Burn functionality and introduce the ability to mint new tokens as necessary via Governance Proposals. I like this idea because it means that if the protocol is successful, generating significant demand, it would result in deflationary MARS. If the protocol is unsuccessful or does not generate enough demand, it would lead to inflationary MARS. The key is that the trend should be deflationary in the long run, driving significant value to the Governance token. Therefore, I am favorable to such an approach.

The final point concerns whether we should allow MARS to be staked. I believe staking, as a requirement for participating in Governance and/or collecting a portion of protocol revenue, with an associated unbonding period, is crucial. This creates the proper incentives to guarantee protocol security, as users can’t simply buy MARS, vote, and then sell them. Users who stake MARS should also receive a higher rebate than those who do not, as it promotes good usage and proper incentives. Ultimately, more staked MARS creates more demand for MARS, improving protocol security, as discussed earlier. Should there be xMARS? I believe so, especially because users might want to use their staked MARS as collateral on the protocol itself in the Credit Accounts, providing further utility to the token.

I agree, I also prefer a burn combined with the ability for governance to mint tokens at a specified rate ( e.g 2% apy). It’s not that I think 1 billion is too much (or too little) but I think having a set amount of tokens in the CP leads to overspending in the short term, due to the Wealth Effect.

Low float / high fdv projects also (rightfully) have a bad reputation among crypto enthusiasts.

leaving a fractional portion (~119M) for short-term needs.

Personally would prefer leaving less - maybe 10% of circulating cap (~40m) This + contributor unlock would leave the circulating supply as a large majority of the FDV.

I think it is better if the protocol can decide on an adjustable yearly APY, and this would be minted into the community pool / treasury at a steady rate (e.g 2% per year).

I like this because the issuance / inflation is more predictable.

Ideally the inflation can be kept pretty low, with the goal being deflation long term.

The reason why I’m against a specific inflation rate is because it could be either too little or too much. Generally protocols tend to have a higher inflation rate at the beginning tapering off thereafter. But this to me seems unnecessary, we should just mint when needed as much as needed. And at the beginning, we’ll most likely mint more / ideally over time we either don’t need to mint or mint a lot less.

1 Like

xMARS as collateral would be excellent.

But regarding the inflationary policy of MARS, I think 119million tokens for the community fund is pretty big, and imo once a DAO mints itself more tokens the market loses all interest in speculating on that asset (I know I do). Maybe a portion of the buy and burn MARS can go to the DAO treasury for long term development.

From an token speculating standpoint, holders seeing the net supply always going down is so much more bullish and a real differentiator compared to other DAO gov tokens. Ultimately speculation and people buying and not selling is what keeps the price up. That way MARS has the utility get people to hold the token longer term if they use the app, but then also pumpamentals to bet moar on and get speculators in that dont use it.

1 Like

I don’t like the mint idea as it kind of negates the entire burn & deflationary narrative. I think best is to keep a larger amount in pool so 119M tokens instead of 10% as some suggested. I believe with the deflationary/burn narrative it should be enough to last a very long time.
One option incase these funds start running low is to be able to redirect 50% of the burn to a war chest as suggested instead of the mint feature. This can be triggered for example when the pool funds reach 50M tokens.

2 Likes

1.Burn as many community pool tokens as possible.If someone’s opinion is to reserve a certain amount, should it be stated as much as possible what the purpose of retaining these amounts of tokens is?Because as ordinary token holders, we don’t know the “big plan” for using community tokens in the future.If we need to use some in the future, we will discuss whether additional issuance can be carried out like a real dao.
2.No matter how few tokens are left, it can only be used for voting now, and people holding it are not interested in voting.I suggest that token holders who hold more than 10,000 and stake for more than 90 days can enjoy more favorable rights. For example, more rebates, higher leverage, lower transaction fees, etc.

2 Likes

100% agree. Would like to see a burn of 50% of tokens. Not all, as mentioned, to have capacity for further promotion / marketing etc. A buy and burn programme would be good too. A wider point to mention that we should introduce some form of value (other than the price) in holding the token - noting the recent halt in staking rewards.

At the least I think we should do the community pool burn of 50%. Alleviate future token inflation, and significantly reduce diluted market cap / potential dilution which will inherently deter new investors from coming into Mars…

1 Like

As a follow-up, agreeing with Tony, there should be explicit and very clear messaging to the entire community / investing space of the intention with the remaining community tokens…The average person looking into Mars protocol isn’t going to be nearly as engaged in these forums to understand the nature / purpose of them…should be stated on the website / any social media marketing / whitepaper etc.

1 Like

My thoughts:

  • Burn at least 80% of the community pool - it’s often a comment I hear that the FDV is too high and makes parties who could be interested in the project skip over it
  • I like the buy & burn idea as it simplifies governance contracts logic - especially with the move to DAODAO on Neutron. However we do need to think about the utility of MARS token without a staking reward at all. The rebates is in ideation phase and won’t be implemented straight away on the DAODAO/Neutron move. So we will be in the same situation we are in now (with Mars Hub staking reward incentives stopped) where MARS stakers will not be receiving any reward for staking the token - it is purely a governance token.
  • I’m personally a fan of having the option mint the token if needed. We are coming from a PoS background where minting a token is normal practice for secuirty (Mars Hub being quite the exception in the Cosmos PoS world where it instead decided to mint a max supply and incentivise staking through community pool incentive scheme)
  • I think if we have a buy & burn offsetting the mint, then any issues around minting the token can instead be turned into a story around protocol revenue outpacing inflation - as Ethereum has done

Can we move this forum to get some development / action plan - as it has been out here well over the 5 day requirement

Are we going to move this to a vote to burn a portion of the community pool?