Summary
This proposal aims to increase the Noble USDC LTV on the Neutron outpost of the Red Bank as follows:
- Maximum LTV: from 79.5% to 90%
- Liquidation LTV: from 80% to 92%
Motivation
The perp markets which will soon be launched on the Mars Outpost on Neutron allow users to open positions with maximum leverage of up to 10x, which corresponds to 90% Maximum LTV and 92% Liquidation LTV in the HF formula. When a perp position is closed, the USDC-denominated PnL is added to the user’s assets or liabilities. Since the current Liquidation LTV for USDC is lower than the perp LTV, theoretically, after the perp position is closed and the realized positive PnL is added to the user’s account, the account’s health can worsen due to the lower risk weight being applied (see the example below).
If the account’s HF can deteriorate after the position is closed, then a situation can arise where a healthy account becomes liquidatable immediately after the perp is closed. As a result, the user receives incorrect information about the account’s health status and the attempt to close the position fails.
To avoid this issue, we propose to increase USDC Maximum LTV and Liquidation LTV up to the maximum values across all perp markets which is 90% and 92%, respectively.
Example:
Let us consider the following account state:
- Risk-weighted Collateral = $100
- Debt = $440
- Entering Long Perp Position Value = $598
- Current Long Perp Position Value = $1,020
- Unrealized PnL = $422
- Funding = $0
- Perp LTV = 92%
- USDC LTV = 80%
- Closing fee is ignored for simplicity.
Then we have the following HFs before and after the position closure:
- HF(before) = (100 + 1,020*92%) / (440 + 598) = 1.00039
- HF(after) = (100 + 422*80%) / 440 = 0.99455
Note that this scenario is not frequent because certain conditions must be met for the account, namely, the debt must exceed the risk-weighted collateral by a certain amount and the positive PnL must exceed a certain threshold relative to the value of assets and debt. However, to avoid potential issues associated with this, we suggest adjusting the risk parameters.
Risks
Increasing the LTV for USDC increases the borrowing capacity of users against USDC collateral and therefore increases the risk of bad debt in the protocol caused by the explosive growth in the value of volatile borrowed assets.
To help mitigate this risk, in future we will further introduce borrow factors into the HF formula, i.e. weights applied to the borrower’s liabilities when determining the maximum borrowing capacity of an account and establishing the liquidation point, similar to the weights used in calculating the risk-weighted value of collateral.
Implementation
This is a signaling proposal, not an executable proposal.
The Mars smart contracts on the Neutron chain are currently controlled by the Builder Multisig address. If this proposal passes, the builders will utilize their multisig to make the necessary changes.
Copyright
Copyright and related rights waived via CC0.
Disclaimers/Disclosures
This proposal is being made by Mars Protocol Foundation, a Cayman Islands foundation company. Mars Protocol Foundation engages in research and development of the Mars Protocol. Mars Protocol Foundation and certain of its service providers and managers own MARS tokens and have financial interests related to this proposal. The aforementioned persons or their affiliates may also have financial interests in complementary or competing projects or ecosystems, entities or tokens, including NTRN and USDC. 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. Mars Protocol Foundation may lack access to all relevant facts or may have failed to give appropriate weighting to available facts. Mars Protocol Foundation is not making any representation, warranty or guarantee regarding the accuracy or completeness of the statements herein, and Mars Protocol Foundation 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.