[MRC-37] Deposit Caps Methodology - 1st Run


The objective of this post is to present the results of the first run of the deposit caps methodology, compare them to the current caps on Mars and offer some suggestions based on these results.

We’re looking into performing this exercise once every 1-3 months and present the results and recommendations to the community for further discussion.

Results and Suggestions

The following table summarizes the results of the first run of the methodology:

From the table above, notice that the Final Cap is the minimum between the Max. Cap (which represents the maximum limit determined by onchain and offchain depth) and the Framework Cap, which represents the cap according to the simulation methodology. A condensed outline of the methodology is presented below in the Appendix. Additionally, if anyone wants to dive even deeper please refer back to the deposit caps methodology linked above.

The following table compares the caps suggested by the methodology against the current caps including both the Red Bank and Farm:

As can be seen, there are three assets where the suggested cap is above the current cap: ATOM, stATOM and axlUSDC. However, for ATOM and stATOM the cap is only slightly higher than that suggested by the framework. As such, we don’t think there’s a reason to apply any changes to these markets. For axlUSDC the situation is different though. For this market the current cap is twice the suggested cap by the methodology. As such, this situation warrants careful monitoring. At the moment, however, we don’t suggest lowering the axlUSDC cap, but will consider doing so if liquidity conditions worsen on Osmosis and the margin between the suggested cap and the current cap widens further.

On the other hand, there’s one market where the current cap is 100% filled and the framework suggests it could be increased: AXL. Currently, the cap for this asset is 200,000 AXL and the framework suggests a cap of ~600,000 AXL. As such, we’ll be crafting a proposal in the coming days to increase this cap.


Methodology Outline:

The methodology defines a supply cap for a given token at which the maximum collateral amount eligible for liquidation calculated over a set of historical price change scenarios, doesn’t exceed the amount that can be liquidated profitably, i.e., keeping a realized price slippage below the liquidation bonus.
The methodology consists of the following key steps along with the corresponding outputs that are provided in the table above:

  1. Users’ accounts are simulated a large number of times based on the current protocol snapshot under a set of historical price change scenarios to derive the extreme liquidatable amount. Output: Liq. Amount.
  2. The stressed onchain market depth of the minimum liquidation bonus (5%) level is estimated to obtain the maximum amount that can be liquidated profitably (keeping the slippage below the liquidation bonus) under stressed conditions. Outputs: Depth 5% and Stressed Depth 5%.
  3. The model supply cap is finally determined from the condition that the extreme liquidatable amount under the new supply equals to the maximum amount that can be liquidated profitably. Output: Framework Cap.
  4. The resulting simulation-based caps are restricted to ensure conservatism. The maximum limit is determined by onchain and offchain depth as the minimum between the Median DEX Depth 25% 90d on-chain depth, and 10 times the Global Depth 2%. Outputs: Max. Cap and Final Cap.

Additional Figures:

The following figures show the simulated liquidatable amounts (in USD) for each token over 10,000 simulations:

And the following figures show the dynamics of onchain 25% depth (in USD) for the different tokens evaluated:


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Excellent work! Glad to see the Mars risk team taking such precautions.

The only problem with this framework is that it limits the amount of USDC that can be deposited, which is a significant hinderance to the overall growth of Mars. Is there a way to make a special consideration for USDC?

Maybe the risk methodology could be less conservative for USDC. From what I understand, the methodology assumes the same risk of USDC plunging by 50% as it does for ATOM plunging by 50%, whereas I believe most people would consider the latter much more likely. There’s always a chance USDC could lose its peg, forcing USDC to be liquidated. But I think this is less likely than the possibility of other tokens plunging in value, and thus the safety parameters for USDC shouldn’t have to be as stringent.

For context, the Mars risk methodology is already comfortable taking significant risk with USDC, as Mars hard-codes 1 axlUSDC as 1 USDC. If axlUSDC depegged hard from USDC, it wouldn’t be pretty. For the same reason this allowance is made, perhaps a similar allowance could down-weight (but not remove) the probability of USDC depegging from USD, which would allow for a greater USDC cap.

Alternatively, perhaps Mars contributors could explore the idea of two ways of depositing USDC on Mars - depositing as collateral, and depositing as non-collateral. This way, even if the USDC collateral cap was met, users could still deposit USDC to be lent out and earn interest. This would increase the borrowable USDC supply, thus decreasing interest rates (high USDC rates being a major hinderance for Mars’ growth.)


Hey John, thanks for the thoughtful reply. A couple comments here:

  1. Currently, the liquidatable amount for axlUSDC isn’t the result of assuming axlUSDC drops in price by 50%. Rather, what we do is we use real historical price trajectories for all the assets currently listed to simulate how, together, they impact health factors and liquidatable amounts within the Red Bank. Specifically, “we then run 10,000 account simulations. For each simulation and for each price change scenario, we calculate the amount to be liquidated for each token. In each scenario, the amount to be liquidated is calculated per token as the sum across all accounts for which the HF went below 1 due to price changes.” So basically the current axlUSDC liquidatable amount could come from an axlUSDC price drop, but based on historical performance and not a fixed -50%. Note, though, that it could also come from accounts using USDC as collateral where the debt assets increased in price…

  2. We’ve discussed internally the alternative solution you propose where we don’t treat all deposits as collateral. It makes a lot of sense. The only issues are the additional complexity it adds to the protocol and the technical resources needed to develop it.

  3. We’re currently working on a new version of the methodology that we expect will solve this issue. Basically at the moment we only consider onchain liquidity for liquidations. In the upcoming version we’ll consider both onchain and offchain liquidity (via arbitrage with some time lag) for liquidations. I think this will significantly impact caps for assets where onchain liquidity is low but offchain liquidity is large: USDC, WETH, WBTC and so on…