Differences from TradFi Credit Agreements
Although the Red Bank is functionally similar to a traditional credit facility and the terminology of traditional credit arrangements may sometimes be used to describe its functions, it is crucial to understand that they are not the same.
The Red Bank uses software and incentives to enable transactions and motivate behavior--it does not involve legal agreements or the rights, obligations and liabilities they entail. The Red Bank's intended functionality is not meant to be enforceable against users in courts of law. The Red Bank also is not a literal bank, and does not fall under any specific prescriptive regulatory regime. Traditional lending terminology, when used to describe the Red Bank and other features of Mars, is being used metaphorically to help describe the functions of the software, but does not have exactly the same meaning in this context.
Some major differences between the Red Bank and traditional credit agreements include the following:
- The Red Bank is simply software code, not an entity, and cannot enter into, nor will any of the users of the Red Bank be entering into, any lending agreements, promissory notes or other legal rights or obligations with one another.
- Borrowers and lenders on the Red Bank have the ability to call the software's functions, and the software creates certain incentives for them--but there is no agreed upon legal remedy if they use the software in unexpected ways or if they do not respond to such incentives in accordance with the design assumptions used in creating the software.
- The "interest rates" (aka "APRs," "token rewards," etc.) payable to depositors through the Red Bank are not contractually promised and are not the obligations or liabilities of a counterparty. Red Bank borrowers do not pay interest on their token loans with new money, but instead the 'interest' on token 'loans' is deducted from the value of borrowers' Red Bank collateral.
- The interest rates paid by token borrowers are not determined by an agreement between lenders and borrowers (whether is fixed at the time tokens are borrowed or otherwise), but are determined algorithmically, taking into account supply and demand via a utilisation rate target. Unlike traditional lending interest rates, which may be capped under usury laws and other statutes, there is no agreed-upon or legally prescribed limit on the interest rate that can be charged to lenders by the Red Bank. Parameters determining interest rates (e.g. the utilization rate targets) are also subject to arbitrary changes by the Martian Council--and any such changes can affect an existing token loan without any legal procedures for serving notice on affected borrowers.
- There is no "credit line" that is promised to remain available through the Red Bank for some period of time. Depositors have not agreed to keep their un-utilized tokens on deposit and available to be borrowed in the Red Bank for any particular length of time. Assuming a depositor does not have an outstanding token loan & there are no protocol-level illiquidity issues, depositors may withdraw their tokens from the Red Bank (and thus cease "lending" them) at any time, and persons who were intending to borrow tokens from the Red Bank will have no legal claims against the withdrawing depositors for failing to lend them the tokens.
- Token 'loans' from the Red Bank do not have any maturity date or repayment plan, and there is no legal mechanism to coerce borrowers into repaying tokens in a timely manner. Borrowers are only incentivized, not required, to repay the borrowed tokens--and the incentive to repay is only active when the user is at material risk of suffering a punitive liquidation of their collateral. This means that if there is very high borrowing demand (aka 'utilisation') for a particular token and depositors wish to withdraw the same token, depositors may not be able to do so for an indefinite period--an illiquidity event.