Summary
This proposal aims to launch the following perp markets on the Mars Outpost on Neutron:
- ATOM/USD
- TIA/USD
Motivation
The Perps feature set has been recently launched on the Mars Outpost on Neutron, and the infrastructure deployed is working as intended.
This proposal aims to vote on listing two more markets: ATOM/USD (with maximum leverage of up to 7x) and TIA/USD (with maximum leverage of up to 5x). Since ATOM and TIA are used as collateral, listing of these perp markets will allow for delta-neutral basis trade strategies.
Risk Parameters
Following the methodology suggested by the Perps Risk Framework, we propose the following initial risk parameters:
| Parameter | ATOM/USD | TIA/USD |
|---|---|---|
| Max. LTV | 85% | 80% |
| Liquidation LTV | 87% | 84% |
| Maximum Long Open Interest, $ | $2.7M | $1M |
| Maximum Short Open Interest, $ | $2.7M | $1M |
| Maximum Net Open Interest, $ | $800k | $300k |
| Skew Scale, in token amount | 21,000,000 ATOM | 11,000,000 TIA |
| Max. Funding Rate Velocity | 13 | 23 |
| Opening Fee Rate | 0.075% | 0.075% |
| Closing Fee Rate | 0.075% | 0.075% |
| Minimum Position Value | $10 | $10 |
Note that all parameters except for the Liq. LTV are controlled by Risk Management DAO and can be updated without the full governance procedure of posting the proposal on the Mars forum to receive feedback before going to vote.
Parameters Description:
- Max. LTV = 1 – Initial Margin is the perp Maximum LTV which is used to determine the maximum position size when opening or modifying the position;
- Liquidation LTV = 1 – Maintenance Margin is the perp Liquidation LTV (Liquidation Threshold) which is used to monitor user’s Health Factor;
- Maximum Long/Short Open Interest is the maximum dollar-denominated notional value of all open positions on each side of the market. Orders cannot be opened/increased that would cause the notional value of either side of the market to exceed the limit. This restriction doesn’t affect the closing of positions.
- Maximum Net Open Interest is the maximum dollar-denominated excess value of longs over shorts. The same absolute value is used for either short-skewed or long-skewed market. If a skew is at maximum, we allow to open/ modify the positions that contract the skew only. The position closure is always permitted. By implementing a soft skew cap, the protocol lowers the directional risk the vault takes on.
- Max. Funding Rate Velocity is the parameter that is used to determine the daily funding rate velocity;
- Skew Scale is the parameter that determines the price impact for opening/closing the perp position and used to calculate the daily funding rate;
- Opening/Closing Fee Rate is the fee charged against the notional value at the moment of position modification. When a position is modified, the trading fee is applied to the difference in the position size only: if the position is reduced the closing fee is applied, the opening fee is used otherwise.
- Minimum Position Value is the minimum dollar-denominated position notional.
Risks
Below are the main risks associated with launching a new product.
Oracle Risk
The protocol uses the oracle-based perps trading mechanism, therefore, the oracle risk is one the key ones. If attackers can control the price updates included in the chain, this gives them a significant advantage even with a relatively small price manipulation due to high leverage.
The mechanism makes use of Slinky price oracle to track the underlying market prices. These prices are updated on a per-block basis. In contrast to transaction-based oracles, Slinky’s production of oracle prices does not rely on any outside actors, apart from the data originator, rather price inputs are fetched and aggregated entirely within the consensus process. This helps to mitigate certain oracle price manipulation attacks, in particular oracle front running attacks which have been prevalent in oracle perps protocols.
Given Slinky’s security properties, we believe that Slinky oracle prices are secure and manipulation-resistant. In addition, in the future, it is planned to incorporate oracle price circuit breakers for extra security.
Counterparty Risk
The specific risk related to oracle-based perps trading mechanism is the vault counterparty risk, i.e. the net risk taken on by the vault that acts as a counterparty to all trades. If the traders are net profitable, the vault loses money, and vice versa. However, to compensate for the risks taken on the vault earns from trading fees the traders pay.
The counterparty risk arises when the market is imbalanced, i.e. one side overweighs the other one. Hence, to manage this risk there are measures taken to keep the market skew within the limits, namely the velocity-based funding rate mechanism and the price market impact. When the skew is high, the funding rate quickly increases (in absolute value), decreasing traders’ profits on the dominated side of the market encouraging traders to close or flip positions; while high funding rate and the price discount for reducing the skew incentivize arbitrageurs to open opposite positions. This self-regulating mechanism aims to keep the skew within the limits.
We also limit open interest per market: maximum open interest and maximum skew. These risk parameters are calibrated under a stress scenario approach that when the market is at the theoretical maximum skew and the market price changes extremely towards the skew direction within a given risk horizon in the absence of arbitrage, the vault potential loss doesn’t exceed a certain threshold with high probability.
We also keep track of the vault Collateralization Ratio, which is the vault balance against net global unrealized PnL of all traders. Once the collateralization ratio is below a certain threshold, the protocol will start auto deleveraging (automatic closure) open positions, starting from the most in-profit positions, to de-risk the overall platform and LPs.
Liquidation Risk
Because of the use of cross-margin and cross-collateral approach, the health score of the whole credit account is constantly monitored rather than the margin of the individual perp position.
Liquidation of a credit account occurs when the account Health Factor falls below 1 to prevent the account from going bankrupt and the protocol from accumulating bad debt.
The perp-related risk weights (Initial and Maintenance margins or LTVs) are calibrated conservatively so that the liquidation most likely will occur much earlier than the account goes into bankruptcy.
All open perp positions for the account targeted for liquidation are first closed, the USDC-denominated PnL is added to the user’s assets or liabilities, and then the liquidation process continues in accordance with the standard auction-based liquidation mechanism. The liquidation bonus is dependent on the Health Factor. As Health Factor declines below 1, the liquidation bonus increases helping to find a fair market cost for liquidations. The liquidator also receives additional compensation for closing perp positions.
If after closing all perps there is no debt left in the credit account, the liquidator is rewarded only for the initiative to close positions.
We believe that the current liquidation mechanism ensures secure and timely liquidation minimizing the chances of bad debt formation in the protocol.
Implementation Risk
The new Perp feature has undergone a comprehensive security audit process conducted by a qualified authority. All issues found have been resolved. The results of this and other audits for Mars can be found here: GitHub - mars-protocol/mars-audits.
Implementation
The following messages will be executed to add ATOM and TIA perps markets:
- neutron1x4rgd7ry23v2n49y7xdzje0743c5tgrnqrqsvwyya2h6m48tz4jqqex06x
{
"update_perp_params": {
"add_or_update": {
"params": {
"denom": "perps/uatom",
"enabled": true,
"max_loan_to_value": "0.85",
"liquidation_threshold": "0.87",
"max_long_oi_value": "2700000000000",
"max_short_oi_value": "2700000000000",
"max_net_oi_value": "800000000000",
"max_funding_velocity": "13",
"opening_fee_rate": "0.00075",
"closing_fee_rate": "0.00075",
"min_position_value": "10000000",
"skew_scale": "21000000000000"
}
}
}
}
- neutron1dwp6m7pdrz6rnhdyrx5ha0acsduydqcpzkylvfgspsz60pj2agxqaqrr7g
{
"set_price_source": {
"denom": "perps/uatom",
"price_source": {
"slinky": {
"base_symbol": "ATOM",
"denom_decimals": 6,
"max_blocks_old": 2
}
}
}
}
- neutron1x4rgd7ry23v2n49y7xdzje0743c5tgrnqrqsvwyya2h6m48tz4jqqex06x
{
"update_perp_params": {
"add_or_update": {
"params": {
"denom": "perps/utia",
"enabled": true,
"max_loan_to_value": "0.80",
"liquidation_threshold": "0.84",
"max_long_oi_value": "1000000000000",
"max_short_oi_value": "1000000000000",
"max_net_oi_value": "300000000000",
"max_funding_velocity": "23",
"opening_fee_rate": "0.00075",
"closing_fee_rate": "0.00075",
"min_position_value": "10000000",
"skew_scale": "11000000000000"
}
}
}
}
- neutron1dwp6m7pdrz6rnhdyrx5ha0acsduydqcpzkylvfgspsz60pj2agxqaqrr7g
{
"set_price_source": {
"denom": "perps/utia",
"price_source": {
"slinky": {
"base_symbol": "TIA",
"denom_decimals": 6,
"max_blocks_old": 2
}
}
}
}
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. 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.