cosmos

Prop 946: Lend ATOM on Mars v2 on Neutron

Summary

Lend 200,000 ATOM from the Cosmos Hub community pool on Mars Protocol on Neutron via the AADAO / Hydro committees to create a flywheel for DeFi in the AEZ by lowering borrow rates, attracting users and increasing volumes; whilst generating low-risk yield for the Cosmos Hub without Impermanent Loss.

The liquidity export from this proposal will be migrated to Hydro once it is deployed on mainnet (see the section below for more details).

Problem Statement

  • High staking rewards incentivize ATOM holders to stake rather than lend ATOM to credit protocols such as Mars or Umee, leading to shallow supply.

  • Shallow ATOM supply to borrow leads to high and volatile borrowing rate which prevent passive DeFi products such as leveraged staking vaults from being effective at reasonable scale.

  • This translates into lower volume through the Cosmos Hub stATOM and stkATOM POL initiatives, which could otherwise be optimized.

Objectives

  • Attract borrower demand to the AEZ by lowering borrowing rates

  • Enable the creation of DeFi vaults and products around ATOM at scale

  • Bolster the adoption of ATOM liquid staking

Background

Ethereum and its L2 ecosystems are widely regarded as the most developed DeFi ecosystems. Part of this success is path dependent: Ethereum underwent DeFi summer before it moved to PoS. As a result, lending became the accepted, “risk free rate” for yield on ETH. This contributed to large ETH lending supply accumulating in the ecosystem, which, once liquid launched, contributed to the large scale adoption of leveraged ETH positions such as leveraged staking/farming, and hedging strategies such as delta neutral/hedged LP.

Cosmos Hub, on the other hand, launched as a PoS chain before an ecosystem of products such as Neutron and Stride brough significant DeFi use cases for ATOM. As a result, users considered staking as the “risk free rate” for ATOM, which prevented the accumulation of Lending supply, and contributed to limit the adoption of ATOM based DeFi and liquid staking.

By bootstrapping the supply of lent ATOM itself, the Cosmos Hub community pool can remove this roadblock in a profitable, low risk way, and support the adoption of ATOM based DeFi and LST, which directly contributes to the success of Stride and Neutron’s DeFi ecosystem.

Proposal

Allocate 200,000 ATOM to the AADAO grant multisig on DAODAO, to be lent on Mars Protocol to incentivize increased ATOM borrowing by lowering rates and sponsor the development of DeFi products that borrow ATOM.

Lending is comparatively safer than providing liquidity because it does not require exposure to a secondary asset’s price and does not expose to impermanent loss. Since lending is overcollateralized, the risk of default is close to null as long as the protocol’s design and risk framework is sound.

Lent ATOM would also generate revenue for the Cosmos Hub from the fees paid by third parties borrowing ATOM. These are expected to increase significantly as DeFi products that borrow ATOM (see below) and leverage trading/perps are introduced with Mars V2 in the upcoming weeks.Justification The requested amount of 200,000 ATOM is intended to create an impactful lending pool that can effectively lower borrowing rates. A substantial supply of ATOM is necessary to make borrowing rates attractive and competitive, thus driving user adoption of ATOM and participation in DeFi products.

This amount ensures that there is baseline liquidity to support a variety of DeFi strategies, such as leveraged staking, single-sided LP vaults, leveraged LPing and other more advanced strategies without causing excessive volatility in borrowing costs. The second order effect of this is increased ATOM liquidity and demand in DeFi protocols.

How does lending ATOM lower borrowing rates?

Credit protocols such as Mars and Umee balance supply (assets lent) with demand (assets borrowed) by adjusting the cost of borrowing: the higher the percentage of an asset has been borrowed, the more costly loans become. Lending additional ATOM increases the supply available for borrowing. As a result, existing loans represent a smaller share of the ATOM lent, and the cost of borrowing is reduced. Lower borrowing rates incentivise protocols and users to borrow more ATOM to participate in DeFi, for example through leveraged staking, perps and other types of products, and therefore contribute to the growth of the AEZ’s DeFi ecosystem.

Example of unlocked products

Leveraged staking vaults

To sponsor the adoption of ATOM Liquid Staking, simple leveraged staking vaults can be developed to enable users to easily lend liquid staked ATOM tokens, borrow ATOM, liquid stake them and repeat the process until the desired leverage factor has been reached. The vault would continuously monitor ATOM and liquid staked token prices to reduce the leverage factor as needed to avoid liquidations.

Because ATOM and its liquid staked tokens are highly correlated in price, this strategy is relatively low risk and can be extremely lucrative for ATOM holders, and generate revenue for Cosmos Hub through the borrowing APR.

For context, such strategies represent a large portion of the DeFi TVL / activity in the Ethereum L1 and L2 ecosystem. Levered LPing Delta-Neutral Hedged Vaults

Automated Delta-Neutral Vaults can be built on top of Mars v2 and Astroport PCL pools with ATOM. By borrowing ATOM and (if not a stable) the paired token it would be possible to hedge out market volatility therefore reducing risk for LPers and potentially increasing Atom Liquidity and Trading Volume with minimal exposure to the counterparty asset’s price.

Single-Sided Hedged LP Vault

Automated Vaults can be built on top of Mars v2 and Perps on Neutron to reduce risk and increase revenue for the Cosmos Hub when deploying capital within the ecosystem.

This approach could enable the Cosmos Hub to provide single-sided liquidity to AMMs across the ecosystem without price exposure to other tokens. This is made possible by a combination of levered LPing and perps hedging on Mars.

Implementation

Upon successful passing of the proposal, the full amount of 200,000 ATOM will be sent from the Cosmos Hub community pool to the AADAO multisig (cosmos1syhp2rh3kgqpa5hjrkyfsqsh49mqyye5k9ejc70lev9pq5g9spxs7ya6zd) before the transition to the final Hydro multisig once it's established.

After the transition, in the case of successful bidding on Hydro, Mars Protocol will assume custody and manage the ATOM in alignment with our strategic objectives. If the bidding is not successful, the funds will remain with Hydro.

Signer Address
AtomAgent neutron10jyhmetv56cqlkqae5xg6j9fk4m940tnj0xvpy
lama neutron13ttpwjxmh8464gqm3a7z5kkf2n23y32w03qufd
Falcon neutron189cjyuft7m3rv52q63m3vqm8wr4plh69t5rh8n
aadaocosmonaut neutron1fstnrx7h63gq2aj2tc3mugqymlq5fuk27frfy2
LeftLedgerAtHome neutron1mwmxklgemulec7d8nhhs629e3lcryue9m5frs2
AtomicJoe neutron1xa6vdy5lzkwv685j3rvyuegwtq0z57lgt79du9
7_sig neutron1y4g78sp8xtt55u9axq7fe2wn48p6k0cxsmc7yl

Transition to Hydro

Hydro is an auction platform designed for the efficient deployment of liquidity across the ecosystem. Developed by the Informal team, Hydro is currently processing the community feedback provided on their forum proposal. The first auctions is expected to take place within the next couple of months. The following transition will occur once Hydro launches on mainnet:

  • The 200k ATOM will be transferred by the AADAO multisig to the Hydro committee multisig

  • The ATOM will count towards the ATOM bucket of the Hydro protocol, enabling Mars and other parties to compete for the allocation through their bids.

  • When the round completes, the Hydro committee will rebalance the position.

    • In the case of a successful bid from Mars Protocol, the corresponding amount of ATOM will be redeployed on the protocol.

    • In the case that Mars Protocol fails to secure the position through its bidding, the ATOM will remain with Hydro and be deployed as per the general auction.

Governance votes

The following items summarize the voting options and what they mean for this proposal:

YES: You wish to transfer 200,000 ATOM tokens from the Community Pool to the dedicated (tbd) AADAO wallet to be loaned on Mars v2 on Neutron.

NO: You do not wish to transfer 200,000 ATOM tokens from the Community Pool to the dedicated multisig (tbd) AADAO wallet to be loaned on Mars v2 on Neutron.

ABSTAIN: You wish to contribute to the quorum but you formally decline to vote either for or against the proposal.

NO WITH VETO: A ‘NoWithVeto’ vote indicates a proposal either (1) is deemed to be spam, i.e., irrelevant to Cosmos Hub, (2) disproportionately infringes on minority interests, or (3) violates or encourages violation of the rules of engagement as currently set out by Cosmos Hub governance. If the number of ‘NoWithVeto’ votes is greater than a third of total votes, the proposal is rejected and the deposits are burned.