Summary
The objective of this proposal is to list the following Neutron Supervault LP tokens as collateral on the Neutron outpost of the Red Bank:
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dATOM/ATOM Supervault LP
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dATOM/USDC Supervault LP
Motivation
Neutron Supervaults are liquidity management vaults that provide automated market making on Duality DEX, Neutron’s protocol-native orderbook. These vaults automatically create and rebalance orderbook positions across different price ranges and fee tiers using Neutron’s integrated Cron module, achieving maximal capital efficiency while earning trading fees for LPs.
These Supervault LPs earn yields through:
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Trading fees from automated market making on Duality orderbook
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Liquid staking yields embedded in dATOM itself
The dATOM Supervaults have demonstrated strong liquidity and APY, making them good candidates for listing on Mars Protocol:
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dATOM/ATOM: ~$1.73M TVL, 24% 30d APY (performance over hold 1.77%)
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dATOM/USDC: ~$448K TVL, 234% 30d APY (performance over hold 10.45%)
The ability to use these yield-generating positions as collateral on Mars increases capital efficiency for users: LPs can maintain their AMM returns and liquid staking exposure while simultaneously accessing borrowing capacity for DeFi strategies.
dATOM holders can now maximize capital efficiency by providing liquidity in Supervaults and using those positions as collateral, creating deeper integration between Mars, Neutron’s DEX infrastructure, and Drop Protocol.
We believe that listing Neutron Supervault LP tokens will benefit the Mars protocol catalyzing activity within the Red Bank on Neutron through increased TVL, new users acquisition, deeper integration, and enhanced capital efficiency across the ecosystem.
Technical Risks
Smart Contract Dependencies: The Supervault LP token functionality depends on multiple integrated modules:
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Supervault contract: Core contract managing all vault operations - bugs could cause loss of funds or incorrect LP valuations.
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Duality DEX module: Protocol-level orderbook where liquidity is deployed - module vulnerabilities could lock funds or enable exploits.
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Cron automation module: Automated rebalancing logic - bugs could prevent rebalancing or execute trades at a loss.
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Slinky oracle: Provides price feeds for rebalancing decisions and LP token valuation - oracle failures or manipulation could cause incorrect vault operations.
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Token Factory Module: Mints LP tokens - bugs could enable unauthorized minting or prevent redemptions.
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Drop protocol contracts: Manages dATOM liquid staking - smart contract vulnerabilities could cause dATOM depegging.
Failure in any component could impact vault operations, block withdrawals, or compromise LP token valuation accuracy. This could result in the inability to obtain correct token reserves/prices, or the inability to redeem and/or liquidate LP token components.
Centralization Risks
Governance Control: Neutron DAO controls Supervault parameters and can pause operations in emergency scenarios which can block liquidations.
Oracle Risk
Oracle risk for LP tokens is one of the key ones. If attackers can manipulate the price updates used in the lending market, this gives them a significant advantage when borrowing against inflated collateral.
Pricing underlying assets:
Oracle risks related to pricing dATOM, and USDC noble and are provided in governance proposals [MRC-105] and [MRC-48] correspondingly, ATOM is now priced via Pyth oracle.
In Mars Protocol (for collateral valuation and liquidations) the dATOM price is determined as follows:
dToken/USD = min(dToken /Token TWAP, dToken /Token RR) * Token/USD
where:
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dToken /Token TWAP is the 30-minute arithmetic mean TWAP from the dToken /Token Astroport PCL pool on Neutron;
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dToken /Token RR is the redemption rate of dToken according to the Drop contract deployed on Neutron;
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Token/USD is the Pyth provided feed, used to normalize the price to USD.
The Mars pricing implementation is considered robust for collateral valuation as it provides downside protection against dATOM depegging (see [MRC-105]).
Note that in the Neutron Supervault the dToken is priced using a bit different methodology:
dToken/USD = dToken /Token RR * Token/USD
where
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Token/USD is the Slinky provided feed, used to normalize the price to USD;
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dToken /Token RR is the redemption rate of dToken according to the Drop contract deployed on Neutron.
When Slinky and Pyth oracle prices diverge, the LP token can be valued differently in Mars and Supervault. However, the deviation is expected to be insignificant as both oracles are based on mostly the same price sources and provide reliable price feed close to the fair token value.
Pricing LP tokens:
To determine the price of the Supervault LP tokens, the Mars Protocol oracle deploys the following pricing implementation using real Supervault reserves and Mars oracle prices:
LP Token Reserves Manipulation Risk:
The primary oracle risk for Supervault LP tokens stems from potential price manipulation through large swaps that create imbalanced reserves. When LP oracle uses real (instant) reserves and fair oracle prices, the LP price can be artificially inflated through large swaps with high slippage.
Manipulation Vector:
The LP price before swap:
Example Scenario:
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Initial pool: 100k dATOM ($500k at $5) + 500k USDC = $1M TVL, 1M LP tokens
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LP price = (100k × $5 + 500k × $1) / 1,000,000 = $1 per token
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User drains all dATOM with 20% slippage
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Fair value of all dATOM: 100k × $5 = $500k
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With 20% slippage user pays: $500k × 1.20 = $600k USDC
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Post-attack pool: 0 dATOM + 1,100,000 USDC (500k + 600k)
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Manipulated LP price = (0 × $5 + 1,100,000 × $1) / 1,000,000 = $1.10 (+10% increase)
Potential Issues:
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Extra volatility of the LP token price. The LP price changes not only due to changing prices but because of skewed reserves, i.e. the vault activity.
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Potential attack scenario: Large swaps against vault with high slippage put it in an unbalanced state. Oracle calculates LP price using instant reserves and fair prices, allowing borrowing against inflated collateral. The higher the slippage is the greater the potential LP price movement could be.
Mitigation:
Neutron Supervault uses a dynamic slippage mechanism with maximum slippage capped at 5% by Neutron DAO. Oracle manipulation attacks are economically unfeasible at this threshold - profitable attacks would require slippage of 20-30% or even higher. If the maximum slippage parameter is increased by Neutron DAO beyond this threshold, attack feasibility would increase. This requires ongoing monitoring of vault parameters.
Moreover, complex system architecture (Duality orderbook, automatic rebalancing mechanisms, Mars liquidation system) increases attack difficulty. The swap is made via the Duality orderbook not Supervault directly. Though Supervault is currently the dominant liquidity provider in Duality, other market makers can also absorb some trade impact.
The proposed LP token pricing implementation is considered acceptable given current protections. However, conservative risk parameters (45% Max LTV, 50% Liquidation LTV, and low deposit caps) are essential due to all risks involved. Supervault LP tokens will not be borrowable, limiting attack scenarios.
As LP token integrations expand throughout Mars Protocol, circuit breakers for the LP price could be introduced.
Liquidity Risk
Whitelisting LP tokens as collateral essentially increases the protocol’s total exposure to individual tokens. Supervaults do not maintain a ~50/50 balance ratio: after LP token withdrawal, the received amount may be predominantly denominated in one of the constituent tokens which should be swapped for borrow token during liquidation. Therefore, when accounting for deposit caps, the LP token cap must be subtracted from the total caps for each constituent asset.
Risk Parameters Suggestion
Due to high risks related with Supervault LP tokens we recommend the following risk parameters:
| Parameter | dATOM/ATOM LP | dATOM/USDC LP |
|---|---|---|
| Max. LTV | 45% | 45% |
| Liquidation LTV | 50% | 50% |
| Deposit Cap | 50,000 USDC / 9 LP tokens | 50,000 USDC / 9 LP tokens |
| Liquidation Parameters | ||
| Starting LB | 0 | 0 |
| Slope | 1 | 1 |
| Max. LB | 0.2 | 0.2 |
| Min. LB | 0.05 | 0.05 |
| Target Health Factor | 1.05 | 1.05 |
| Protocol Liquidation Fee | 0.25 | 0.25 |
| Reserve Factor | 10% | 10% |
| Usable as collateral? | Yes | Yes |
| Available to borrow? | No | No |
Implementation
This is a signaling proposal, not an executable proposal.
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, dATOM, ATOM and USDC Noble. 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.