This proposal aims to introduce a Leveraged Staking Vault Standard on the fields of Mars and propose a first LSV with $stATOM.
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.
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).
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:
- Deposit $stATOM
- Borrow $ATOM
- Swap $ATOM to $stATOM
- 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.
- 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.
- 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
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:
Note: I followed the documentation of Mars Protocol which describes how Farm Vaults function in the Specifications written above.
Risk Parameters Suggestion:
Max Leverage: 2.19x (based on $stATOM max LTV)
Liquidation Bonus: 15%
Deposit Cap: 100,000 axlUSDC
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.
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.
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.