Summary
This proposal aims to adjust the interest rate parameters for the USDC market on the Osmosis outpost of the Red Bank to better align with current market conditions. For the Neutron chain, the risk DAO will receive a similar parameter update proposal.
After analyzing competing protocols, we propose the following parameter changes:
Current Parameters:
- Base Rate: 0%
- Slope 1: 20%
- Slope 2: 200%
- Optimal Utilization: 80%
Proposed Parameters:
- Base Rate: 3%
- Slope 1: 12%
- Slope 2: 120%
- Optimal Utilization: 85%
These changes would make Mars Protocol more attractive to USDC borrowers and lenders at medium-to-high utilization levels by enabling higher utilization before steep rate increases, thus enhancing capital efficiency.
Motivation
The borrowing interest rate on Mars follows the two-slope model with a base rate:
- Below optimal utilization: BorrowRate = BaseRate + slope1 * (UtilizationCurrent / UtilizationOptimal)
- Above optimal utilization: BorrowRate = BaseRate + slope1 + slope2 * (UtilizationCurrent - UtilizationOptimal) / (1 - UtilizationOptimal)
Our analysis of USDC interest rate curves across multiple lending protocols with similar interest rate model revealed several key insights:
1. Uncompetitive Rate Structure:
- At low utilization (<30%), Mars rates are lower than competitors.
- At medium-to-high utilization (>45%), Mars rates are higher than all sampled protocols.
- At high utilization (80-90%), Mars rates are significantly higher than competitors.
2. Standard Practice:
- Most competing protocols maintain a base rate between 3-6%, while Mars currently has 0%.
- The median optimal utilization threshold in the market (85-90%) is higher than Mars’ current 80%.
3. Capital Efficiency Opportunities:
- Current parameters incentivize lower utilization than market standards.
- Introducing a base rate would ensure minimum compensation for suppliers increasing borrowing rate even at low utilization levels.
The proposed changes would make Mars Protocol more attractive for both borrowers and lenders by:
- Creating better alignment with market rates at various utilization levels.
- Improving capital efficiency through a more appropriate optimal utilization point. The adjusted parameters should attract more borrowers, potentially increasing total interest generated. Higher optimal utilization (85% vs. current 80%) allows for more efficient capital deployment while maintaining safety.
- Ensuring minimum returns for liquidity providers through a base rate.
Risks
While the proposed changes aim to improve the protocol’s performance, they come with several considerations:
1. Utilization Impact:
- Increasing the optimal utilization threshold from 80% to 85% slightly increases the risk profile. Higher utilization may impact withdrawal liquidity during market stress (a smaller percentage of the total supplied assets remains available for withdrawals).
2. Supplier/Borrower Balance:
- Lowering Slope 1 from 20% to 12% may reduce the appeal for suppliers at moderate utilization levels, potentially decreasing liquidity provision.
- Reduced slopes may impact supplier revenue expectations at high utilization.
The overall risk is considered low, as these parameter adjustments:
- Are based on established market benchmarks;
- Maintain appropriate risk compensation at high utilization levels;
- Do not introduce new smart contract code (no technical risk).
If market conditions change significantly, the new parameters may need further adjustment.
Implementation
This is a signaling proposal, not an executable proposal. The Mars smart contracts on the Osmosis chain are currently controlled by the Builder Multisig address. If this proposal passes, the builders will utilize their multisig to make the necessary parameter 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 OSMO and 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.