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Mars General Risks
Protocol Risk And Shortfall Events
If the Martian Council suffers from a governance failure which causes losses to users, xMARS holders should be incentivized to compensate users in order to maintain the usage levels of Mars and thus preserve the value of their staked MARS.
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 utilization 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 normal conditions and can be mitigated by good risk management. To date, Shortfall Events in credit protocols have been limited, and, when they have occurred, resulted from exploits/economic attacks. However, when Shortfall Events do occur and are attributable to a governance failure of the Martian Council, the Martian Council should be able to respond to its natural incentives by tapping funds available to compensate the injured users.
To this end, the Mars system has two pools of funds available which can be utilized by the Martian Council to cover a Shortfall Event:
- 1.the Safety Fund, a pool of aUST funded continuously by a portion of Mars fees; and
- 2.the pool of MARS that has been staked by xMARS holders.
Ultimately, compensation cannot be guaranteed and is subject to the discretion of the Martian Council. However, based on the relevant incentives, we envision the Martian Council treating the Safety Fund as a coverage source of first resort and treating some socially defined percentage of staked MARS (e.g., 50%) as a coverage source of last resort. Thus, a likely coverage model for adoption by the Martian Council would be as depicted in the below diagram:
Overall, this model would be comparable in some ways to the governance model of MakerDAO, in which accumulated protocol fees are seen as the first source of recovery for making up system deficits and MKR auctions are seen as a last source of recovery for making up system deficits. History to date shows that MKR holders have responded to these types of incentives–for example, by auctioning MKR in the wake of Black Thursday.
Initially, 80% of all interest payments will go to lenders, with the remaining 20% being split amongst the Mars Treasury, Safety Fund and xMARS stakers.
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