Summary
The objective of this proposal is to list USDT minted on the Kava blockchain (kavaUSDT) and IBC’d onto Osmosis as a collateral asset on the Osmosis outpost of the Red Bank.
Motivation
With Mars credit accounts’ new margin trading capabilities, we expect the usage of stablecoins within the Red Bank to increase. The reason for this is that they’re the fundamental asset that allows for margin trading on credit accounts. Specifically, users looking to margin long a certain asset will borrow stablecoins to buy that asset and users wanting to short a certain asset will borrow the asset to sell it for stablecoins. As such, we believe the listing of kavaUSDT will increase organic usage of the Red Bank as the popularity of margin trading increases.
Risks
In the sections below we’ll explore the risks associated with listing kavaUSDT and the proposed risk parameters for the listing.
Technical Risk
| Metric | Requirements | Comments |
|---|---|---|
| Time Since Launch | Minimum | USDT minting/redeeming on the Kava blockchain launched on July 3, 2023. |
| Custom Public Audit | Ideal | The TetherToken smart contract was audited by Peckshield in 2021 for Tether’s Ethereum deployment. This is the same contract that was deployed on Kava. |
| Recent Audit | Ideal | The TetherToken contract hasn’t had any changes since it was audited in 2021. |
| No Critical Vulnerabilities | Ideal | No critical vulnerabilities have been exploited. |
| Bug Bounty Program | Not met | Tether has active bug bounties for up to 10,000 USD. |
Centralization Risk
The USDT smart contracts on the Kava blockchain are governed by a multisig controlled by Tether. This multisig has the capacity to authorize and issue kavaUSDT tokens, as well as blacklist certain addresses from receiving and transferring USDT. Given this, it’s clear that kavaUSDT (as is the case for native USDT on Ethereum) is a centralized asset where Tether has significant control over how the asset is used on the Kava blockchain, including blacklisting capabilities.
This centralization risk is very real and can materialize in a number of ways. If the Tether multisig were to be compromised, be it via regulatory pressures, a hack/exploit or just multisig member misbehavior, the asset could suffer significant consequences that could translate into drastic repricings that may lead to protocol insolvency.
This is a known risk when listing these types of assets. The trade-off being made here is more centralization for more usability. Given their popularity, unfortunately we believe this is a trade-off that’s worth making at this point.
Oracle Risk
We propose to use the Pyth USDT/USD feed to price kavaUSDT.
Note that while kavaUSDT is the official version of USDT on Cosmos, as it’s directly minted by Tether, the price of kavaUSDT could potentially deviate from the overall price of USDT in the market (which includes CEXs and other onchain markets like Ethereum). If this were to happen, the Pyth feed probably wouldn’t reflect this divergence, which could translate into issues for Mars.
Collateral Backing Risk
Every USDT (and kavaUSDT) token issued is backed by a mix of assets which is completely under the discretion of Tether. The majority of these assets are held in cash and cash equivalents (US Treasury Bills, money market funds, etc.) and a minority, but still significant portion is composed of other assets such as secured loans, precious metals and Bitcoin. Each USDT issued should be fully backed by these assets. However, this is not an absolute certainty. As some of these assets are exposed to different types of risk, from market to counterparty risk, their quality and value as collateral could fluctuate. As such, if any of those risks were to materialize, USDT could become undercollateralized (or even if it doesn’t, trust in the asset could suffer), leading to high, unexpected levels of volatility which could expose Mars to bad debt.
Risk Parameters Suggestion
- Max. LTV: 79.5%
- Liquidation LTV: 80%
- Deposit Cap: 500,000 kavaUSDT
- Interest Rate Parameters:
- Optimal Utilization: 80%
- Base IR: 0%
- Slope 1: 12.5%
- Slope 2: 200%
- Liquidation Parameters:
- Starting LB: 0
- Slope: 1
- Max. LB: 0.2
- Min. LB: 0.05
- Target Health Factor: 1.05
- Protocol Liquidation Fee: 0.25
- Reserve Factor: 10%
- Usable as collateral? Yes
- Available to borrow? Yes
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 changes.
Copyright
Copyright and related rights waived via CC0.
Disclaimers/Disclosures
This proposal is being made by Delphi Labs Ltd., a British Virgin Islands limited company. Delphi Labs engages in incubation, investment, research and development relevant to multiple ecosystems and protocols, including the Mars Protocol. Delphi Labs and certain of its service providers and equity holders own MARS tokens and have financial interests related to this proposal. Additionally, Delphi Labs is one of several entities associated with one another under the “Delphi Digital” brand. Delphi Digital’s associated entities and/or equityholders or service providers of such entities may hold MARS and may have financial interests related to this proposal. All such entities, service providers, equity holders and other related persons may also have financial interests in complementary or competing projects or ecosystems, entities or tokens, including Osmosis/OSMO. 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. Delphi Labs may lack access to all relevant facts or may have failed to give appropriate weighting to available facts. Delphi Labs is not making any representation, warranty or guarantee regarding the accuracy or completeness of the statements herein, and Delphi Labs 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.