This proposal aims to increase the Red Bank stATOM deposit cap to 90,000.
Motivation
stATOM was added to the Reb Bank as a collateralizable token on March 13th, with a deposit cap of 45,000. That cap was quickly reached. Since everything has been running smoothly, it makes sense to cautiously increase the deposit cap to 90,000.
Notably, stATOM is the only Red Bank token that does not receive deposit rewards. While other deposits have to be subsidized with MARS rewards, stATOM has 100% organic demand.
Specification
I propose the following increase from the current deposit cap for stATOM.
Current Deposit Cap on Redbank
Proposed Cap on Redbank
stATOM
45,000
90,000
Risks
The dominant risk associated with this proposal is that increasing the cap for stATOM increases Mars’ exposure to that token. Capping exposure allows Mars to reduce risk associated with asset price manipulation, extreme price volatility, and abnormally high swapping fees (lack of liquidity), among others. As a token’s cap is increased, so too are these issues. And these issues could be detrimental to Mars in terms of insolvencies and liquidations.
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 change.
I would caution against this currently. While I think stAtom is a good asset to be utilized by users of Mars protocol, this cap raising is premature.
Mars does not inherently benefit from raising the caps of stAtom at this point. You cannot borrow stAtom, and thus Mars does not generate revenue from stAtom. You could argue that allowing stAtom as collateral will increase borrowing of other assets, but I would disagree, at least at this point in time. In the past week since stAtom could be used as collateral, we saw a reduction in native Atom collateral deposits- a net equal in terms of mars TVL. Reduction in atom deposits makes it more expensive for the average user to borrow Atom, and could discourage them from borrowing on Mars protocol.
It would be wise to wait and see the borrowing demand of stAtom (and thus the revenue generation stAtom would bring to Mars) before we raise the caps on the deposit side.
Let’s not forget that having stAtom on Mars is a risk, and we need to ensure that this risk is paid off via revenue generation to Mars holders.
Speaking of risk, especially when borrowing against lsd Assets like stAtom, the users must understand the risk associated with holding non-native assets, and more specifically the pricing module for those pools. I would not like to see what happened with stOsmo happen to stAtom while Mars and it’s users have over $1M exposure to stAtom.
Let me offer some insights into the current economics of Mars.
Mars is just getting started, and still in the bootstrapping phase. Currently, all deposits except stATOM are being subsidized by MARS rewards. But even with these subsidies in place, ATOM and OSMO both have a supply rate of only ~2.5% APR. This is problematic. Why would users supply ATOM and OSMO for 2.5% APR when they could instead stake for around 20% APR? So even with temporary deposit rewards causing significant rehypothecation (looping), the supply rates for ATOM and OSMO are nowhere near where they need to be.
stATOM offers a solution to this problem. Unlike other tokens, there is significant organic demand for stATOM, because users don’t have to forfeit their staking rewards when using it as collateral. What’s happening is, users are borrowing ATOM against their stATOM, because they only have to pay ~8% for ATOM, whereas the staking yield is ~20% - a clear arbitrage opportunity. As more people do this arb, the supply / borrow rate for ATOM goes up, which is very good for the economics of Mars, because people using ATOM as collateral need a sufficiently high supply rate to compensate for their forfeited staking rewards. And of course, people are borrowing USDC and OSMO against their stATOM, too.
In my view, stATOM is the path to viability for Mars protocol. There’s significant organic demand for stATOM, and the more users borrow other tokens against stATOM the more those tokens’ supply rates increase, lowering the opportunity costs of depositing those tokens.
In my opinion, increasing the stATOM deposit cap to 90K is a cautious and prudent step - and further increases in the future would likely make sense, too. While there are risks, as outlined in the proposal, these are not unreasonable risks, given the benefits provided by stATOM.
axlUSDC is a bridged asset from Axelar. So it does carry some risks that native Cosmos tokens do not have, which is why the deposit cap hasn’t been raised yet. But I think that as liquidity on Osmosis increases and a solution for proof of reserves becomes available, the cap will make sense to increase.
In regards to stATOM deposit cap increase, I agree with @John_Galt. LSDs like this are really good assets for a money market in Cosmos as there is organic demand for them. A simple use-case is leverage staking by looping ATOM to get more stATOM. This allows you to get leverage on staking rewards for ATOM. In doing so it will generate organic demand for ATOM borrowing, which in turn should increase the Deposit rate and attract more capital. Furthermore, MRC-15 should go on chain soon, whitelisting on Farm stATOM/ATOM 14d vault. This also should further generate organic demand for ATOM, which in my opinion is good for Mars.
ATOM borrow rate in a mature lending market will trend toward the staking rate anyway - anyone supplying for under the staking rate is doing it to receive rewards. The addition of stATOM pushed it in that direction and that is a positive thing.
Moreover, supplying ATOM as collateral is far less interesting than supplying stATOM. This is easy to demonstrate as stATOM caps are hit instantly while ATOM remains far below cap. More collateral supplied allows more borrow capacity, which drives earnings up.
That said, the points about risk are spot on. Cap raises should only occur if risk analysis suggests it’s prudent.