Summary
This proposal aims to increase the Red Bank stATOM deposit cap to 200,000.
Motivation
stATOM was added to the Red Bank as a collateralizable token on March 13th, with a deposit cap of 45,000. That cap was quickly reached, prompting an increase to 90,000.
Today, the current 90,000 cap stands at roughly 60% utilization. This unexpectedly low utilization is likely not due to low demand for borrowing against stATOM; rather, it is likely due to the high USDC borrow rate deterring would-be borrowers.
But there is reason to believe the USDC borrow rate will soon fall, which would likely result in an uptick in USDC borrowing collateralized by stATOM.
In two days, the USDC deposit cap will be doubled, from 1.5M to 3M. This will likely significantly decrease the USDC borrow rate. In addition, the current deposit rewards program will finish in early May, which will likely end the USDC “looping” strategy that is currently making the USDC borrow rate artificially high.
Given these factors, it would be wise to skate to where the puck is going, and preemptively increase the stATOM supply cap in anticipation of increased demand. Indeed, due to the USDC supply cap increase in two days, it’s possible the current stATOM cap will be reached even before this prop is put onchain.
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 | 90,000 | 200,000 |
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.
This risk is mitigated by deep stATOM trading liquidity. On Osmosis, the stATOM/ATOM pool has swelled to $23M. In addition, this is mitigated by stATOM not being a borrowable token.
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.
Disclaimers
I am an employee of Stride Labs.