LQ strategy | Becoming a value token
Since the publication of the initial article outlining the utility and vision of LQ, the Core Team has consistently emphasized its goal of creating a value token that offers passive income to LQ holders. This income stems from the margin interest derived from revenues generated by the lending products available on Liqwid.
In the initial phase, spanning from the launch of Liqwid in February 2023 to the present day, the protocol has successfully onboarded users who also serve as stakeholders, thanks to its market incentives and staking rewards.
As of today, the Liqwid protocol stands as the premier lending protocol on Cardano. However, overpaying for liquidity poses a significant risk, causing the LQ price to depreciate in comparison to ADA. This trend not only hampers the value creation potential for long-term holders but also jeopardizes Liqwid DAOs Safety Module which is the protocol’s LQ allocated to backstop the system in the event of any Shortfall Event. This means a focus on LQ liquidity and reduction in emissions must be embarked upon at some point, 14 months post Liqwid v1 and with the upcoming full v2 mainnet launch, this moment feels like a logical next step to implement these very necessary changes.
The below graphic represents the different imbrications and impacts of the LQ value and the LQ incentives.
Analysis of the last 12 months
As observed in the data available on the governance forum (see Liqwid Protocol - Data analystics over the last 12 months), the yield farming program, characterized by incentives for both suppliers and borrowers, succeeded in attracting liquidity. However, this achievement came at the expense of the LQ price and its holders.
Such inflationary measures are inherently unsustainable over prolonged periods, posing a threat to the value proposition of the Liqwid protocol and jeopardizing the development trajectory of the LQ price for the LQ holders, and impeding the addition of LQ as a collateral market on Liqwid.
It’s crucial to recognize that liquidity in Cardano is finite, leading to market inefficiencies where increased rewards fail to correlate with supply expansion or revenue growth for Liqwid.
While acknowledging the role of the yield program in rewarding early adopters and suppliers, it’s imperative to understand that these incentives are today not indispensable as Liqwid is the current leading lending protocol on Cardano.
Liqwid’s primary objective remains centered on generating value for LQ holders, with yield farming serving merely as a mean to foster liquidity and expand the ecosystem.
To this end, 3 proposals should be voted to create a better environment for the LQ holders:
1. Modification of the market incentives reward system
2. Modification of the staking reward incentive system
3. Modification of programmatic reward incentive system
1. Modification of the market incentives reward system
In light of these analyses and market dynamics (see here), we recommend voting on the following proposals:
- Stop immediately the borrower rewards from LQ 20’000 per month to zero.
- Reduce immediately the supplier rewards from LQ 100’000 per month to LQ 25’000.
- Allocate 50% of the suppliers’ rewards per markets based on the interest repaid, 50% of the suppliers’ rewards per markets based on the interest accrued.
Here below is an example of the calculations for the point 3).
Note: This system includes also some market multiplicators that can be activated at any time, and modify the values for accrued interests and repaid interest.
Conclusion:
In light of these analyses and market dynamics, we recommend modifying the market incentives reward system as proposed here above.
These changes would take place immediately after the vote if passed.
2. Modification of the staking reward incentive system
The LQ staking rewards are being decreased, following the decision to reduce the overall LQ inflation, as it is driving the LQ price down.
Therefore, the amount of staking rewards will be based solely on an annual rate of 5% for everyone (applicable to every stake and for every user). It’s important to note that the wallets of the Core Founding Team Members are excluded from the staking incentive and have until now not received any staking rewards.
The staking base rate can be improved with the use of an Aquafarmers on the Liqwid platform (as it is already existing today).
Aquafarmer boost on the Staking base rate:
- Common | 4%
- Rare | 6%
- Very Rare | 8%
- Legendary | 10%
Example:
John has staked 100 LQ during 1 month, and has a rare Aquafarmer.
After one month (30 days), he can claim: 100 LQ * ( 5% (1+ Aquafarmer boost | 6% )) * (period in days/365);
Results = 100 LQ * (5% *1.06) * (30/365) = 0.4356 LQ
Implementation date for this proposal if passed: (edit of 30 March 2024)
Since the original proposal to introduce the 50% APY after 12 months was voted on April 24, 2023, we propose to conclude it by the end of June 2024. Consequently, early stakers will receive rewards for three months before it ceases. (This includes the month of April, May and June).
Conclusion:
In light of these analyses and market dynamics, we recommend modifying the staking rewards incentives as proposed here above.
3. Modification of programmatic reward incentive system
The current programmatic rewards encompass all protocol cash flows distributed to LQ stakers.
Currently, the allocation for these rewards is solely based on the amount of LQ staked, but this will be adjusted to provide increased rewards for long-term LQ stakers. It’s important to note that the wallets of the Core Team are excluded from this calculation.
With the new system, all the stakes older than 6 months (and below 1 year) will be eligible for a boost of 3x, while all the stakes older than 1 year will be eligible for a 5x boost on the total amount of LQ stakes taken into account to allocate the programmatic distribution.
(Edit:16.04.2024: After consideration, 10x/6x/1x is way too big and discourage any new joiners, while it should be the main incentive to buy LQ token to profit from the passive income. Also, an end date is added to this feature - 31.Dec. 2024. The DAO can vote later to create a new mechanism or not, but the “early joiners” boost cannot be held for ever.)
Example: John has 3 LQ stakes on Liqwid and we are calculating the Staking boost in date of March 28,2024.
| A | Date of Staking | Staking boost | LQ tokens staked | LQ tokens eligible for programmatic distribution |
|---|---|---|---|---|
| Stake 1 | 03.03.2023 | 5x | 100 | 500 |
| Stake 2 | 30.06.2023 | 3x | 50 | 300 |
| Stake 3 | 02.01.2024 | 1x | 40 | 40 |
| Total | 190 | 840 |
The allocation of the programmatic rewards for all the LQ stakers is based on the modified staked LQ amounts after the boost. The programmatic rewards are also distributed monthly.
Note: A similar system has been put in place in Minswap and created positive impacts on the tokens price. They also cut the MIN inflation to reward the liquidity suppliersby a factor of 3 to 6x last year.
Conclusion:
In light of these analyses and market dynamics, we recommend modifying the programmatic rewards incentives as proposed here above.
General summary and “big picture” comment:
In conjunction with the anticipated reduction in LQ inflation and the implementation of the Liqwid v2 protocol, which includes a loan origination fee with revenues split evenly between the DAO and LQ stakers, we anticipate a significant improvement in the value proposition for LQ stakers. This dual approach is expected to induce a supply shock, consequently leading to an increase in the value of LQ tokens. Furthermore, the reduction in LQ inflation is poised to facilitate the listing of LQ as collateral on Liqwid.
It’s worth noting that the introduction of a Protocol-Owned Liquidity (POL) pool would further enhance LQ price stability and overall returns, as detailed in the accompanying post.
As discussed in this POL post, the creation of an ADA-LQ pool necessitates ADA funding, which could be facilitated by borrowing ADA backed by LQ collateral from the Liqwid DAO treasury.
These three proposals are interconnected, and their simultaneous execution is crucial for achieving the desired effects, effectively addressing multiple objectives through a unified approach aimed at reducing LQ inflation and improving LQ price.
- Yes, I support the proposal 1) Modification of the market incentives reward system as stated in the post?
- No, I do not support the proposal 1).
- Yes, I support the proposal 2) Modification of the staking reward incentive system (5% base rate) as stated in the post?
- No, I do not support the proposal 2).
- Yes, I support the proposal 3) Modification of programmatic reward incentive system as stated in the post?
- No, I do not support the proposal 3).
