Mars proposal would bring up to 10x leveraged staking and more to the Cosmos with “HLS”

Mars Protocol
6 min readNov 15, 2023

Mission briefing:

  • MRCs 62 and 63 propose a new specialized form of credit accounts on Mars v2: high-leverage strategies (HLS) markets
  • Unlike existing Rover credit accounts, which let you lend and borrow any of the protocol’s supported assets, each HLS market targets a single use-case.
  • By limiting the assets that can be supplied and borrowed, HLS markets can dramatically increase the amount of leverage a user can take on for that use-case

Earlier today, Mars contributors proposed introducing a specialized form of credit accounts to Mars v2: high-leverage strategies (HLS) markets.

HLS markets would bring maximum capital efficiency to very specific, highly-correlated strategies throughout the Cosmos. Unlike existing Rover credit accounts, which let you lend and borrow any of the protocol’s supported assets, each HLS market would target a single use-case, and — by doing that — dramatically increase the amount of leverage a user can take on for that use-case.

Specifically, the first two proposed HLS markets would enable leveraged staking with up to 10x leverage for two tokens: Stride Staked ATOM (stATOM) and Stride Staked OSMO (stOSMO).

Here’s how it would work for users:

  1. Supply stATOM or stOSMO into the relevant HLS market
  2. Select the amount of leverage you’d like to have on stATOM or stOSMO (up to 10x)
  3. Approve the transaction

On the backend, Mars would virtually “loop” your position until it hits your desired level of leverage. For example, if you deposit stATOM, the HLS market would effectively use it as collateral to borrow ATOM, then sell that ATOM for more stATOM — repeating the process until you hit your leverage target.

All looping, which some users do manually today, would be virtualized and abstracted away from the user, just as it is on Mars with margin trading today.

More importantly, though, because leveraged staking positions are so tightly correlated (i.e. stATOM and ATOM trade in lockstep), the risk of liquidation can be low. If your collateral falls in value, so too does the value of your debt, and vice versa. That means these HLS markets can dramatically increase the amount of leverage in these positions…. taking them from from a max of 3.33x all the way up to 10x.

That’s not all.

Remember, with liquid staking tokens (LSTs) like stATOM, users canbenefit from price appreciation and the underlying staking yield. Stride, for example, is currently capturing and auto-compounding staking yields of ~18.2% for stATOM holders. With up to 10x leverage on the underlying staking yield, users could potentially unlock APYs in the mid double-digits.

To calculate the actual APY, use the following formula:

(Staking yield * 10) — (Borrow rate * 9)

Right now, stATOM’s staking yield is 18.2 percent, and the borrow rate for ATOM on Mars is ~15.7%. That means users could capture an APY of ~40% on stATOM per the following calculations:

(18.21% * 10) — (15.69% * 9) = 40.89%

For stOSMO, the current staking yield is 9.25%, and the borrow rate is 3.94%. With 10x leverage, that would generate a yield of around 57% per the following calculations:

(9.25% * 10) — (3.94% * 9) = 57.04%

Keep in mind, rates are volatile and based on real-time supply and demand. The “expected APY” projected by the simulations might not actually be achieved. Higher leverage increases the likelihood of liquidation if the assets were to decorrelate for some reason.

‍HLS Risks and Parameters

HLS markets come with two new risks for Mars:

  1. Smart contract risk: Any new feature on Mars comes with the possibility of unforeseen implementation bugs and smart contract vulnerabilities. The materialization of these risks could translate into loss of funds for users. While the code being used has been audited, this obviously doesn’t guarantee that it’s free from bugs. As such, we suggest caution when using this new feature, especially within the first months of its implementation.
  2. Risk parameter-related vulnerabilities: If the risk parameters are set too aggressively, the liquidations system might not work properly which could translate into protocol insolvency. While we believe the proposed parameters are conservative enough, users should always have this risk in mind when using the protocol.
  3. Liquidation risk: Higher leverage means a greater likelihood of liquidation, which poses risks to users of the HLSs and to the Mars system (risk of bad debt if liquidations do not occur as expected/desired).

Today’s proposals suggest the risk parameters below for both markets.

After a minimum 5-day comment period, both proposals will go to a signaling vote indicating the community’s interest in deploying HLS on Mars. If the proposals pass, Mars contributors will utilize the Builder Multisig address to enable both markets.

The future of HLS on Mars

If HLS markets prove popular on Mars, additional markets could be enabled. There are obvious candidates for leveraged staking markets including Stride Staked dYdY (stDYDX), Stride Staked Celestia (stTIA) and Lido Wrapped stETH (wstETH).

By narrowing the use case for some credit accounts, though, HLS represents an entirely new category of offerings on Mars. That means the concept could potentially be expanded in other ways as well. For example, specific markets could use Osmosis’ new “supercharged liquidity” to build high-leverage strategies on top of concentrated liquidity pools — particularly pools with pegged assets such as stablecoin pairs.

Best of all, all HLS markets could benefit the entire Mars ecosystem. Although isolated to specific strategies, HLS markets would be borrowing assets from Mars’ protocol-wide lending pool in the Red Bank. That means they could push up borrowing demand (and with it the APY) for all Mars lenders. In turn, that could attract new depositors, which would deepen liquidity in Mars lending pools and bring new users to the Red Planet.

Rover credit accounts created an entirely new primitive for the Cosmos. Now, they could be customized to voyage into entirely new (and potentially much more rewarding) terrains.

- Mission Control

👉 Now’s the time to get involved! Do you have concerns or ideas to improve the proposed HLS markets or for other HLS markets? Please join the conversation in the Mars Forums now (see MRC-62 for the ATOM market and MRC-63 for the OSMO market).

🔴

Follow Mars on Twitter, join the Mars Discord for community support, and subscribe to Mars’ email newsletter for the latest updates from Mission Control.

About Mars

Mars is a novel interchain credit protocol primitive that enables non-custodial borrowing and lending for the Cosmos ecosystem and beyond. Its hub and outpost architecture allows Mars to operate on any chain in the Cosmoverse, and enables a new primitive: the Rover. Live now, Rovers give their pilots DeFi superpowers to engage in virtually every governance-approved activity they might encounter on a centralized exchange: spot trading, margin trading, lending and borrowing — all in a single decentralized credit account represented by a transferable NFT. Your Rover awaits at app.marsprotocol.io.

DISCLAIMER

Some or all features of mars v2 may not be legal to use in certain jurisdictions, including in the United States with respect to leveraged transactions. No person is solicited to use Mars v2 or receiving an offer to enter into any transaction, through this post or otherwise. Users are responsible for ensuring their own legal compliance and may be at risk of serious liabilities for violating their local laws or the laws applicable to other users interacting with them on a peer-to-peer basis through Mars v2. Remember, Cosmos, Neutron, Osmosis and Mars are experimental technologies. This post is subject to and limited by the Mars disclaimers, which you should review: https://docs.marsprotocol.io/docs/overview/legal/disclaimers-and-disclosures

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Mars Protocol

Mars is a credit protocol for the Cosmos ecosystem. Official site: https://marsprotocol.io