Summary
This proposal aims to increase the Red Bank stOSMO deposit cap from 1.5M to 5M, on Mars’ Osmosis outpost.
Motivation
Earlier this month, Mars prop 143 approved stOSMO as collateral, with a conservative deposit cap of 1.5M. Since then, stOSMO utilization has climbed to 65%. Today’s launch of the OSMO HLS market has further increased demand to deposit stOSMO.
Since the introduction of stOSMO as collateral on Mars, the Osmosis stOSMO pool has become much deeper; in fact, it is now the deepest pool on the Osmosis DEX! This increase in depth was due to Osmosis prop 641, in which Osmosis governance approved the deployment of 20M OSMO to the stOSMO pool.
Deep liquidity in the stOSMO pool is crucial for Mars, since that pool functions as the price oracle for stOSMO. With ~25M OSMO worth of liquidity in the stOSMO pool, as well significant OSMO liquidity in other Osmosis pools and on CEXes - Mars’ Deposit Caps Methodology would deem a 5M stOSMO cap acceptable.
Indeed, a 5M stOSMO cap would still be rather conservative. But there’s no need to raise the cap higher than demand. Assuming this proposal passes and stOSMO utilization again approaches 100%, it is likely another cap increase will be proposed.
Specification
This proposal aims for the following deposit cap increase, on Mars’ Osmosis outpost:
| Current Redbank Deposit Cap | Proposed Red Bank Deposit Cap | |
|---|---|---|
| stOSMO | 1,500,000 | 5,000,000 |
Risks
The Red Bank deposit caps serve two main purposes:
- They limit the exposure to any single token. This is important to mitigate idiosyncratic risks specific to any particular token and to mitigate liquidity risk, which may impede proper functioning of the liquidations system and could ultimately lead to bad debt.
- They mitigate looping attacks in which attackers are able to generate artificially large positions of certain tokens with the purpose of subsequently manipulating their price and effectively stealing assets from the protocol.
As the caps increase, so do the risks explored above. At the end of the day, a right level of the caps should strike the right balance between risk aversion and protocol usefulness. In this sense, we believe that while the proposed cap does increase risk for the protocol, it is still conservative given the high liquidity levels of the asset. At the same time, we believe this increase could allow the protocol to serve a larger segment of users.
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.
Disclaimer
I am an employee of Stride Labs.