[MRC-17] Proposal to introduce LSVs: Leveraged Staking Vaults

Proposals MRC (Mars Request for Comment)
1

Summary

This proposal aims to introduce a Leveraged Staking Vault Standard on the fields of Mars and propose a first LSV with $stATOM.

Abstract

The addition of the first LSD as a collateral token has made leveraged staking farming vaults possible on the fields of Mars. $stATOM is only the beginning and the addition of more LSDs will follow with the growth of Mars Protocol and the Cosmos ecosystem in general.

I propose building and adding a Leveraged Staking Vault strategy that could be exploited for any upcoming integrations of LSD tokens on Mars.

Motivation

The proposed Vault would offer automated leveraged staking exposure to the underlying LSD token depositors by borrowing the native token associated with the collateral (eg. $stATOM - $ATOM). Therefore offering automated vaults that maximise staking rewards while maintaining a relatively low liquidation risk and driving organic demand for borrowing through the Red Bank.

Currently, $stATOM is the only liquid staking token that meets the Red Bank risk parameters as collateral but as liquid staking grows in the Cosmos, more tokens will be added to the Red Bank. Therefore, the implementation of a leveraged staking vault with reward-bearing LSD tokens as the Base Token on Mars will help bootstrap additional vaults faster in the future (eg. $stOSMO).

Specification

Leveraged Staking Vaults allow users to farm staking rewards with leverage by using rover credit accounts.

Each deposit into a vault creates a credit account with a single position that uses the liquid staking token deposited as collateral to borrow its associated native token from the Red Bank. The borrowed tokens will then be swapped for the liquid staking token to be held in the strategy contract. Here’s an illustration of a Leveraged Staking Vault position using $stATOM/ $ATOM as an example:

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  1. Deposit $stATOM
  2. Borrow $ATOM
  3. Swap $ATOM to $stATOM
  4. Enjoy additional staking rewards

This allows Martians to farm $ATOM staking rewards with up to 2.19x leverage (considering a max LTV of 54.5% for $stATOM) with very low liquidation risks given that $stATOM is pegged to $ATOM.

Liquidation scenarios:

  1. As long as the staking yield generated by the position, which is reflected in $stATOM appreciation against $ATOM, exceeds borrowing fees over time there is no risk of liquidation and the position will yield additional $stATOM for the user.

No liquidation
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  1. The borrowing costs of $ATOM from the Red Bank outpaces the rewards over time and eventually leads to the liquidation of the Martian’s position.

Assuming $stATOM maintains its peg to $ATOM, liquidation risk in the proposed Leveraged Staking Vaults will be very low and could only be triggered by:

  • Significant increase in borrowing costs
  • Significant decrease in Staking rewards APY
  • Both

This risk could be offset by watching the position’s health bar regularly and unwinding the (deleveraging) accordingly. This will be possible with the proposed LSV since, unlike current Liquidity Provision Vaults, there is no lock-up period. Let’s take a look at how liquidation works: :point_down:

Liquidation
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Note: I followed the documentation of Mars Protocol which describes how Farm Vaults function in the Specifications written above.

Risk Parameters Suggestion

Risk Parameters Suggestion:

Max Leverage: 2.19x (based on $stATOM max LTV)

Liquidation Bonus: 15%

Deposit Cap: 100,000 axlUSDC

Oracle Risk

The oracle implementations associated with $stATOM have been discussed by Delphilabs in their proposal to list the token as collateral and are believed to be robust.

Fee structure:

To incentivise future contributions from the community to Mars Protocol and to boost protocol revenue, I propose applying a 5% performance fee on Vaults that is distributed as follows:

  • 3% to Mars Protocol and its stakers
  • 2% to the Vault creator

To sum up, the proposed Leveraged Staking Vaults will offer:

  • A bundled leveraged staking experience (instead of looping multiple times when doing it directly via the Red Bank).
  • Strategy vaults with no lock-up period.
  • Strategy vaults with Low-risk of liquidation.
  • Increased protocol revenues.

Implementation

This is a signaling proposal. If passed, I propose to build the Strategy Vault for LSDs and work with the Mars Builders to implement it.

5 Likes
2

I like a lot the idea of leveraging Credit Accounts to achieve Leveraged Staking with LSDs. It’s a natural fit for Mars Rovers and as you mention, the risk should actually be very well contained, provided that stATOM keeps the peg with ATOM. It will make sense as long as the staking rewards of stATOM will outpace the cost of borrowing ATOM in the Red Bank.

I think that a vault is not necessary in this case. You really just need the ability to hold an asset in the credit account and to borrow against that asset, specifically in this case stATOM the asset acting as collateral and ATOM the debt asset. This type of functionality will be enabled in next iteration of Mars when Rovers will have cross-collateralization turned on and users will be able to hold any asset whitelisted on Rover (Vaults and same tokens as the Red Bank). So when it will be enabled, you should be able to do this easily by just depositing on your credit account stATOM and then borrowing to your max leverage ATOM and manually swapping it.

So I think it’s a good idea and intuition - but I would vote against it at this point since it will be available in a bit of a simpler form when Credit Accounts will be fully functioning in the next iteration of Mars.

4 Likes
3

This would open up a new risk for borrowers of ATOM, depeg liquidations and over borrowing liquidations due to the derivatization of ATOM to stATOM.

I agree with @Dohko_01 wait for the credit accounts to be live.

4

Just saw your presentation on Osmocon, pretty cool!

With the arrival of V2 we can finally get to do this in a much more efficient way :ok_hand:

2 Likes
5

Yes - with High Leverage Strategies.

6

Is the deck used during the presentation publicly available somewhere? Trying to put together a :thread: about possible usecases with Credit Accounts

Would also appreciate any other documentation/ resources (other than the WP)

7

Hey - the deck is not publicly available. But I can list the use-cases:

  1. Spot Trading: Be able to swap any whitelisted asset to any other (whitelisted) asset from a Credit Account
  2. Margin Trading: Trade any whitelisted asset pair on leverage and earn interest
    Example:
    * Deposit ATOM or a stablecoin (ex: USDC.axl)
    * Toggle “Margin” to ON
    * Pick ATOM ↔ USDC.axl pair and select BUY
    * Trade up to 4x leverage (I’m not sure the exact max leverage here)
    * Lend your ATOM in the Red Bank and potentially earn net positive interest!
  3. Lending / Borrowing
  4. Leveraged Yield Farming:
    * Maximize Rewards (Lever up using as debt the token with the lowest interest rate)
    * Bullish both Asset (Lever up using a stablecoin as debt)
    * Bullish only one asset (Hedge out exposure to one of the two LP assets)
    * Delta Neutral (Hedge out exposure to both the assets, collecting just the levered APR of the pool)
  5. High Leverage Strategies: Hold one collateral asset and one debt asset highly correlated and lever up to 10x
    * Levered Staking: Hold LSD as collateral and use its underlining as debt asset (ex: stATOM; ATOM)
    * Levered LPing: Hold LSD<>Underlining LP and its underlining as debt (ex: stATOM<>ATOM / ATOM)
1 Like
8

Of course there are many other use-cases, including shorting assets on Margin.

9

Sounds great!!! Can’t wait using it!