Mars Protocol Litepaper 1.0


  1. Summary

1. Summary

Mars is a bank of the future: non-custodial, open-source, transparent, algorithmic and community-governed.

Like all banks, Mars aims to attract deposits and lend out this money while managing illiquidity and insolvency risk. Unlike any other bank, Mars is a fully automated, on-chain credit facility governed by a decentralised community via a transparent governance process. All decisions are made by the Martian Council, composed of Mars stakers who put skin in the game to underwrite protocol risk in exchange for a portion of the protocol borrowing fees.

Mars Protocol is incubated by Delphi Labs and IDEO CoLab Ventures.

2. How it Works

At the heart of Mars is a fully automated, on-chain credit facility built on the Terra blockchain. Like existing money markets, interest rates are priced algorithmically based on utilisation rate. Unlike existing money markets, Mars utilises a dynamic interest rate model based on control theory, allowing for greater responsiveness and capital efficiency (more on this later).

To begin with, Mars will issue collateralised debt to users (B2C) as well as uncollateralised debt to whitelisted smart contracts (B2B). For the B2B portion, initial whitelisted smart contracts will be built by the Mars team. These will involve simple leveraged yield farming strategies on Mirror and Nebula. Eventually, standards will be established such that any smart contract can apply to receive a credit line from Mars.

The system is comprised of the following stakeholders:

  • Lenders: Deposit assets into Mars liquidity pools, earning an interest rate

Collateralised borrowing — Peer to contract lending

Similar to existing money market protocols, Mars will support non-custodial, over-collateralised borrowing. Users deposit assets into money market pools, receiving interest-bearing maTokens which represent their shares of the liquidity pool. They can then choose to borrow using their deposits as collateral. Lending thus serves two purposes: generating yield and, if the user chooses, acting as collateral to borrow against. Borrowers are liquidated when their loan-to-value (LTV) ratios fall below the required maintenance margin, which happens when their collateral decreases in value relative to their debt (or vice versa). The interest rates paid by borrowers and received by lenders are determined algorithmically, taking into account supply and demand by targeting an optimal utilisation rate (more on this in the Controller section below).

At launch, Mars will support UST, ANC, MIR and LUNA for lending and borrowing. Since Mars is asset agnostic — able to support any CW20 or native Terra asset — the community will then be able to propose further assets to be added. Each asset listing proposal must define the asset’s risk parameters (liquidation fee, max LTV, optimal utilisation rate, maintenance margin) and whether the asset can be used as collateral.

Example 1

Example 2

Uncollateralised borrowing — Leveraged yield farming strategies

Traditional money market products offer relatively low interest rates to users. This is because they offer only collateralised loans which are capital-inefficient (low LTVs) and target a small market since they rely on lenders who also want to borrow. Uncollateralised borrowing solves this by allowing Mars to tap into a completely new source of borrowing demand: non-depositor borrowers. This will generate higher borrow demand, utilisation rates and therefore higher yields for Mars lenders.

The first project that will be able to tap into this facility will be Mars itself. The uncollateralised credit line will be used within Mars to offer users access to leveraged yield farming strategies. Initially the protocol will launch with two simple strategies: MIR-UST on Mirror and ANC-UST on Anchor. These will allow users to do one-click farming with auto-compounding, and the option of adding UST leverage on top. While the term “uncollateralised” sounds risky, it’s important to realise that these strategies are only uncollateralised in the sense that the collateral doesn’t sit in a Mars liquidity pool. However, the strategies themselves are collateralised and Mars simply needs to trust the smart contract and liquidation logic in order to safely extend credit.

The following diagram shows at a high level how deposits work with the MIR-UST strategy, resulting in an effective 2x leverage ratio for the user.

This allows the user to farm with leverage with increased yield but there is a liquidation risk should the value of MIR drop. This process is shown step-by-step below.

Scenario 1: Value of LP asset remains constant or increases

Scenario 2: Value of LP asset decreases resulting in liquidation

Alpha-style leveraged yield farming as above will be the first application built, but we can also imagine levered Yearn-style vault strategies. An example would be a bLUNA ANC farming strategy.


Collateralised Borrowing

When borrowers’s loan-to-value LTV ratio falls below the required maintenance margin, which happens when their collateral decreases in value relative to their debt (or vice versa), they are susceptible to be liquidated. Any address can repay a fraction of a borrower’s debt (max fraction determined by the close factor) in exchange for an equivalent amount of the borrower’s collateral plus a bonus. Liquidators can choose to receive either liquidity tokens (which will be transferred from the borrower to them) or receive the underlying assets (which causes the borrower’s liquidity tokens to be burned).

Uncollateralised Borrowing

Liquidation for uncollateralised borrowing works similarly to that of the money market. For example, with the Mirror strategy, a user’s asset is in the form of staked MIR-UST LP tokens. If the value of these LP tokens falls below the liquidation threshold, defined as a percentage of the user’s debt, anyone can close the position. The assets are removed from the liquidity pool, and the UST portion immediately used to pay back the debt. The MIR portion can be claimed by liquidators who provide additional UST to pay off the remaining debt. For example, a liquidator who pays off 50% of the remaining debt is awarded 50% of these MIR.

3. Controller — Dynamic Interest Rates using Control Theory

The Interest Rate Pricing Problem

With traditional money markets such as Compound, the interest rate is set in a two-step process. First, a certain money market utilisation rate (amount borrowed / amount deposited) is targeted which reflects the riskiness of that asset. Then, a curve is hard-coded that aims to discourage utilisation past the optimal level by sharply increasing slope, and consequently interest rate.

The problem with this model is that the curve is fixed and cannot react to external market conditions. For instance, if there’s a particularly good stablecoin farm one week paying ~500% APR, then even at the ~90% interest rate corresponding to 100% utilisation on most money markets, borrowers will be unwilling to pay back their debts and depositors will be unwilling to supply more assets to the pool. Similarly, if external yields are extremely low, then the interest rate charged may be too high and result in sub-optimal utilisation.

This was extremely apparent during the first launch of Alpha Homora V2. Yields on Alpha Homora PERP/USDC pool were ~500% whereas USDC depositors on CREAM, who were lending to Alpha farmers, were only receiving ~50%. As a result, there wasn’t enough liquidity to enable farming on Alpha.

In traditional models, the only way to address this is by changing the money market’s interest rate model via a governance vote. This is slow, difficult to implement and requires an extremely active governance process that can constantly react to market conditions.

The Mars Solution — Reactive Interest Rates

Mars implements a different solution. Mars money market pools will still target an optimal utilisation rate, but rather than doing so via a curve, we use control theory to allow interest rates to adapt dynamically to market conditions in real-time.

In the traditional money market model described above, the interest rate is calculated based only on the current utilisation rate. Our idea is to look at the utilisation as a parameter that can be manipulated by another parameter (like temperature in a physical system can be manipulated using heating and cooling units). Keeping a response parameter constant is quite a common problem in control theory and there is a well known method to solve it — the proportional-integral-derivative (PID) controller and its variations. A PID controller continuously calculates the difference between the desired point (set point — optimal utilisation) and actual value (process variable — actual utilisation). Then it continuously corrects itself based on the proportional, derivative, and integral terms.

The Proportional-Derivative-Integral (PID) contains three terms, each with its own purpose:

1/ Proportional term: Yields a corrective response based on the error between target and actual utilisation. Kp is a constant which determines the magnitude of change in interest rate for a given error

2/ Integral term: Takes into account historical errors and integrates them in order to eliminate the residual error. Ki is a constant which determines how quickly IR should adjust based on previous errors.

3/ Derivative term: Estimates the future trend of the error based on its current rate of change. Kd is a constant which allows us to modulate the corrections to avoid overshooting.

We propose a way to implement this method in Credit Protocols. We assume that interest rate is the main factor that drives the utilisation and set that as the control parameter in our model, with utilisation being our response parameter. The overall algorithm to calculate the borrow interest rate can be seen below.

Our simulations show that the PID controller model is more responsive to changes in supply-demand conditions and thus achieve more stable utilisation. Mars Protocol is incubated by Delphi Labs who have helped us devise our dynamic interest rate model. We will be jointly releasing a research paper outlining the model, accompanying simulations and implementation code in the very near future.

4. Token Economics (MARS)

Mars is a bank of the future, operated and governed by a decentralised community via a transparent governance process. Like all banks, Mars aims to attract deposits and lend out that money safely without incurring excess risk. Mars will launch with a token (MARS). MARS’s token economics, incentive design and governance system is critical to achieving this goal.

The guiding principle behind MARS’s token economics is that of skin in the game: those making decisions should bear the consequences of those decisions, both positive and negative.

Staking — xMARS

MARS holders who wish to participate in governance can stake their MARS tokens and receive xMARS in return, with a 2-week unstaking period. xMARS has a few key properties:

  • Governance: 1 xMARS = 1 unit of voting power. Only xMARS can participate in governance, making decisions on asset listing, risk parameters, treasury spending and more.

Protocol Risk And Shortfall Events

The Martian Council makes all decisions regarding Mars Protocol, including asset listing, risk parameters and smart contracts to extend uncollateralised credit to. These decisions have consequences on third parties (users) and, in extreme cases, can lead to Shortfall Events.

A Shortfall Event occurs whenever the value of a borrower’s debt exceeds the value of his collateral, resulting in a deficit for lenders. This is distinct from an Illiquidity Event where utilisation rates are at 100% and lenders are unable to withdraw. In the latter case, LPs are illiquid but solvent whereas in a Shortfall Event the LPs are actually insolvent.

Shortfall Events can be caused by various risks such as smart contract exploits, bad liquidations and/or oracle attacks. To be clear, they should never happen under any conditions and can be mitigated by good risk management. To date, the only Shortfall Event that’s ever occurred in a money market protocol was on Cream, but this was due to an exploit in an Alpha strategy and is being fully repaid by ALPHA token holders.

Token Architecture

The MARS token architecture is designed to ensure that the Martian Council has skin in the game, underwriting protocol risk and protecting lenders from the consequences of potential Shortfall Events. Mars utilises a two-tranche architecture to protect lenders, comprised of an Insurance Fund held in aUST and the xMars staking pool, held in MARS tokens.

Value Flows

Initially, 80% of all interest payments will go to lenders, with the remaining 20% being split amongst the Mars Treasury, Insurance Fund and xMARS stakers. This should be seen as a reward for stakers, who are providing a crucial service in safeguarding the protocol for its users.

All parameters including the reserve factor and percentage of fees flowing to each bucket will be alterable by governance. We will be conducting research to help inform the necessary size of the insurance fund and xMARS staking pool given different levels of platform adoption.

Preliminary Token Distribution

The Mars token will be majority owned by the community, with 20% reserved for team & advisors, 10% for early investors and 70% for community, including a mix of airdrop, incentives and reserve.

The token distribution is subject to change.

5. Why Terra

Trustless Stablecoin

We build on Terra because we believe a decentralised financial system should not be reliant upon centralised stablecoins. The dominance of BUSD/USDT/USDC on existing DeFi ecosystems poses a systemic risk and remains crypto’s largest attack vector. Regulation, state-level attacks or simple negligence by centralised stablecoin issuers can lead to assets being frozen and/or significantly devalued. Under such attacks, any DeFi protocol that relies upon these assets as part of liquidity pools or as collateral (i.e. a money market such as Mars) would face potential insolvency. Fundamentally, we believe there’s no point having a censorship-resistant base layer blockchain if the applications on top of it are built around easily censorable assets.

Decentralised stablecoins other than $DAI have failed to achieve meaningful market penetration. $DAI, while widely adopted, is partially collateralised by centralised, censorable assets ($WBTC, $USDC) and thus inherits their vulnerabilities. From our perspective, $UST is the only truly decentralised stablecoin functioning at scale. As a team focused on building for the long-term, $UST was the clear choice.

Cross-chain Hub

The upcoming Columbus-5 version of Terra features support for Cosmos’ Inter-Blockchain Communication (IBC) protocol, enabling cross-chain communication between Terra and other compatible PoS chains. Terra also will have Wormhole bridges connecting Terra to Ethereum and Solana, eventually enabling arbitrary messaging between contracts on either chain.

We believe that the next generation of DeFi protocols will not be siloed on a single chain, but accessible from multiple chains. Future versions of Mars should also be cross-chain and we see Terra as the ideal homebase.

Low cost

Transaction costs on Ethereum are uneconomical for smaller market participants. We share DeFi’s core ideals of inclusion, making high transaction costs a non-starter. While L2s are coming, the only option available now is a side-chain. We feel that presents too large a tradeoff in decentralisation. Terra’s low transaction costs and confirmation times enable more users to participate and greatly improve UX. They also open up the design space, allowing, among other things, the on-chain computation required to run our dynamic interest rate model.

Burgeoning DeFi Ecosystem

Terra’s DeFi ecosystem already has >$2B TVL with an established core covering stablecoins, exchange, synthetics and savings accounts. Since Terra’s addition of support for Cosmos’ CosmWasm smart contract framework, there has been a Cambrian explosion of projects building on Terra. These protocols and users will require a well designed and efficient money market to service them. Mars Protocol intends to fulfil this role.

6. Trustless Governance

Many protocols employ indirect governance control — where a multisig with a few signers controls treasury and smart contract upgrades and enacts the will of governance. These systems place a lot of trust and control with these multisig signers which is undesirable for fully decentralised protocols.

Mars will employ direct governance:

  • Smart contracts in CosmWasm are upgradable by the owner address. In Mars the owner will be set to the governance contract address making it very difficult for any malicious code to be added to the protocol.

Later Mars intends to add additional safeguards such as delays on proposal execution and multisig veto, but these will be subject to governance approval.

7. The Future

V1 of Mars Protocol will encompass the features outlined in this document with a targeted Q3 2021 launch.

As far as future plans go, Mars Protocol is a decentralised project; anyone can permissionlessly contribute to its development by making a proposal to the DAO. Together, we aim to build the leading DeFi credit protocol; becoming the lender of choice for both consumers and dApps, initially on Terra but eventually expanding cross-chain. We hope the vision we describe inspires teams across the space to join us and help contribute to Mars Protocol.

The Mars team intends to continue contributing and making proposals to the DAO. Over the next two months, you can expect:

  • Dynamic Interest Rate Model: A research paper by Delphi Labs covering the dynamic interest rate model Mars will be using, including back-tests and implementation plan.

Mars Protocol is a completely new money market protocol purpose-built for the Terra ecosystem. It puts an emphasis on usability and composability, not just for crypto natives but for the industry’s next 1 billion users. By bringing true utility to all forms of value, Mars will be the catalyst for Terra’s next wave of exponential adoption. The future awaits.

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Authorship of this Paper. This paper has been authored by Terraformer 1 a Cayman Islands LLC, as the vehicle for a joint venture developing the Mars technologies (the ‘Mars Joint Venture’).

Lack of Centralised Management. Consistent with the goals of community governance described here and in the Mars LItepaper, after the public launch of Mars, the Mars Joint Venture should not be expected to have a material ongoing role in Mars maintenance, research, development or promotion; nor does the Mars Joint Venture plan to raise Mars-related funding after the Mars launch date. The Mars Joint Venture may, in its sole and absolute discretion, elect to undertake limited ministerial activities directly or indirectly related to Mars, such as maintaining availability of the Mars web interface originally created by the Mars Joint Venture, but no promise, guarantee or assurance of such ministerial efforts or any other efforts is being made, and the Mars Joint Venture may abandon them at any time. The Mars Joint Venture has no long-term business or funding plan after launching Mars, and may cease operations or be wound-up, liquidated or dissolved by its members at any time. The Mars Joint Venture is not making any representation, promise, guarantee or assurance that any MARS it retains for itself or reclaims from grantees or any funding or resources it otherwise has or obtains will be held, used or spent for the benefit of the Mars community. Any sale or other transfer or distribution of MARS or xMARS tokens by the Mars Joint Venture could occur without warning. Any such transaction would increase the circulating supply of MARS or xMARS tokens. Depending on the number of tokens sold, transferred or distributed, the terms of sale, transfer or distribution and the prevailing market conditions, such a sale, transfer or other distribution could have a material adverse effect on the price or value of, or demand for, MARS or xMARS tokens. Any use of MARS or x MARS by or in connection with the Mars Joint Venture could also affect governance outcomes. The Mars Joint Venture is not promising to participate in governance or, if it does participate in governance, to vote in any particular way, and participants in the Mars Joint Venture who receive MARS or xMARS may exercise their own governance powers in their own independent discretion. As a result of the foregoing factors, there could be disputes, disagreements or a lack of coordination among the Mars Joint Venture and its participants or any of such persons and other MARS or xMARS holders or Mars users, which may adversely affect governance results.

Nature of this Paper. This paper is only a presentation of information, ideas and speculation regarding possible technologies, the possible uses of those technologies and a possible community of users and builders of those technologies. The statements contained in this paper do not provide any advice, representation, warranty, certification, guarantee or promise relating to these technologies, any uses thereof or any of the other matters discussed in this paper, nor does this paper provide an offer or agreement to make such technologies available, maintain or update such technologies, or sell or buy any asset or enter into any transaction. This paper and the matters described in this paper have not been reviewed, approved, endorsed or registered with any regulator or other governmental entity, and the authors of this paper are not licensed by any regulator or other authority to provide any legal, financial, accounting, investment or other advice or services.

Forward-Looking Statements. The forward-looking statements in this paper are subject to numerous assumptions, risks and uncertainties, and thus the events described or predicted therein are subject to change or to fail to occur in accordance therewith. We undertake no obligation to update, supplement or amend any statement that becomes inaccurate or incomplete after the date on which this paper is first published, or to alert the public as to any such inaccuracy or incompleteness, whether such inaccuracy or incompleteness arises as a result of new information we receive, changes of our plans, unanticipated events or otherwise.

Technology Risks. The technologies and assets described in this paper are highly experimental and risky, have uncertain and potentially volatile value, and should be directly evaluated by experts in blockchain technologies before use. Use them solely at your own risk. You should not rely on this paper as a basis for making any financial or other decision.

Metaphorical Use of Financial Terms; Lack of Legal Recourse for Funds. When used in connection with Mars, the terms ‘debt,’ ‘lend,’ ‘borrow,’ ‘collateral,’ ‘credit,’ ‘leverage,’ ‘bank,’ ‘borrow’, ‘yield,’ ‘invest,’ ‘money market’ and other similar terms are not meant to be interpreted literally. Rather, such terms are being used to draw rough, fuzzy-logic analogies between the heavily automated and mostly deterministic operations of a decentralised-finance smart contract system and the discretionary performance of traditional-finance transactions by people.

For example, ‘debt’ is a legally enforceable promise from a debtor to a creditor to pay an interest rate and eventually repay the principal. Therefore, ‘debt’ cannot exist without legal agreements and cannot be enforced without courts of law. By contrast, with Mars, there are no legal agreements, promises of (re-)payment or courts of law, and therefore there are no debts, loans or other traditional finance transactions involved.

Instead, Mars consists of software (including embedded game-theoretic incentives and assumptions) through which people can share their tokens with other people or smart contract systems and, under normal and expected conditions and subject to various assumptions regarding the behavioral effects of incentives, probably get their tokens back eventually, plus extra tokens, most of the time or in most cases. Unlike in traditional lending, the ‘lender’s’ financial return does not depend primarily on the creditworthiness, solvency or financial skill of the ‘borrower’ or on legal nuances such as the perfection of liens or the priority of creditor claims in a bankruptcy — it depends primarily on the incentive model assumed by the software design and how reliably the software implements that model. Unlike a debtor, people who ‘borrow’ tokens from the Mars smart contract system are not required to and have not promised to pay the tokens back; if the ‘borrowers’ never pay the tokens back, no promise has been broken, no legal agreement has been breached and the token ‘lenders’ cannot sue the ‘borrowers’ to get their tokens back. Instead, by not repaying the borrowed tokens, the token ‘borrowers’ merely demonstrate either that they lacked sufficient incentive to want to do so — for example, because their smart-contract-bound ‘collateral’ was worth much less than the ‘borrowed’ tokens — or that a technical issue — such as congestion of Ethereum — prevented them from doing so. Regardless, the ‘borrowers’ do not have an obligation to repay tokens when they do not want to or cannot do so, and there is no legal remedy for damaged ‘lenders’ when insufficient incentives or technical problems result in a token shortfall.

When Mars is used to ‘lend’ tokens to a third-party smart-contract system, the situation is even less like traditional debt: The ‘borrowing’ smart contract has not posted ‘collateral’ and could malfunction or suffer a loss that results in complete or partial failure to return the ‘borrowed’ tokens to the Mars smart contract system and its token ‘lenders’. In this case, the token ‘lenders’ could suffer loss of tokens, but they will not have a legal remedy against the ‘borrowing’ smart contract or the Mars smart contract. Smart contracts are not persons, are usually not under the full control of any person or group of persons and may be impossible to repair, debug, update, pause or reverse. A malfunctioning, exploited or underperforming smart contract cannot be forced (in court or otherwise) to pay the ‘borrowed’ tokens back.

The Mars protocol incentivises MARS holders to provide a potential partial remedy to token ‘lenders’ when token ‘borrowers’ fail to pay their tokens back — MARS holders who stake MARS in the Mars Safety Fund’ can increase their share of the economic benefits of the Mars smart contract system. Assuming MARS holders adequately respond to this incentive and that MARS has monetary value, the Mars Safety Fund can be used to partially or completely compensate Mars token ‘lenders’ who suffer shortfalls when token ‘borrowers’ fail to repay tokens or the value of ‘borrowers’’ liquidated collateral is too low. But, remember: the Mars Safety Fund, like the Mars credit protocol, is merely a smart contract, not a person or insurance company — if the Mars Safety Fund fails to provide MARS to the damaged token ‘lenders’, or if MARS have insufficient monetary value to compensate for such damages, there has been no breach of a legal agreement and the damaged token ‘lenders’ will not have a legal remedy.

Any rate, APR, APY, ‘yield’ or ‘interest rate’ stated in connection with Mars for lending, borrowing, depositing, staking or otherwise transacting in a given token, strategy or smart contract system, (the ‘Rate’) is denominated in terms of a specific relevant token, not in terms of U.S. Dollars or other fiat currencies. Each Rate is a forward-looking projection based on a good faith belief of how to reasonably project results over the relevant period, but such belief is subject to numerous assumptions, risks and uncertainties (including smart contract security risks and third-party actions) which could result in a materially different (lower or higher) token-denominated rate, APR, APY, ‘yield’ or ‘interest rate.’ Rates are not offers, promises, agreements, guarantees or undertakings on the part of any person or group of persons, but depend primarily on the results of operation of smart contracts and other autonomous or semi-autonomous systems (including third-party systems) and how third parties interact with those systems after the time of your deposit. Even if a particular projected Rate is achieved, you may still suffer a financial loss in fiat-denominated terms if the fiat-denominated value of the relevant tokens (your deposit and any tokens allocated or distributed to you pursuant to the Rate) declines during the deposit period. Projected Rates are not interest rates being paid on a debt.

Thus, the transactions you can perform by using the Mars ‘credit protocol’, although they are superficially similar to traditional financial transactions in some ways, are in fact very different. ‘DeFi’ and ‘TradFi’ each pose their own unique set of costs, benefits, risks and protection mechanisms. Please bear this fact in mind when reading about Mars, and do not use Mars without a sufficient understanding of how doing so differs from traditional financial transactions. The only way to fully understand such factors is to have a strong understanding of the relevant technical systems and the incentive design mechanisms they embody — we strongly encourage you to review Mars’s technical documentation and code before use.

Mars is a credit lending protocol for the Terra blockchain. Official site: