Overview
Despite being one of the largest assets under management within the Liqwid protocol, the ADA lending market currently exhibits a low utilization rate of around 7%. This under-utilization suggests a significant opportunity cost, as the protocol could generate higher profits by lending a greater portion of its ADA reserves at more competitive interest rates. Such a strategy would incentivize increased utilization of the currently dormant 93% of ADA deposits. This proposal also aims to establish a new liquidity pool to support both OADA and sOADA for lending and borrowing, as well as isolated collateral in the ADA market on Liqwid.
Current Market Dynamics
To date, the ecosystem lacks mechanisms to facilitate meaningful arbitrage opportunities. However, with the introduction of Optim’s OADA, a new incentive structure has emerged. This development allows users to borrow ADA through Liqwid, mint OADA, and subsequently stake it as sOADA to earn yield. This strategy is profitable as long as the borrowing cost is lower than the yield on sOADA. At present, the borrowing cost for ADA is 5.57%, while the yield on sOADA stands at 6.9% for the current epoch.
Strategic Proposal
This newly created arbitrage dynamic represents a symbiotic relationship between the Liqwid ADA Market and the OADA System, enhancing their respective impacts within the ecosystem. Liqwid benefits from deploying currently idle capital to earn more profits for the protocol, while OADA benefits from the increase in assets under management to be used throughout their yield aggregation strategies across the DeFi landscape on Cardano. To further capitalize on this opportunity and ensure its sustainability, we recommend adjusting the ADA market’s interest rate curve. This adjustment aims to increase the portion of capital available for profitable utilization in the OADA system.
Specific Recommendations
Flattening out the ADA interest rate curve to allow a target utilization of at least half of the reserves before the kink point starts increasing the cost of borrowing to keep leveraging this synergistic dynamic at scale. For context and reference, 56M ADA at a 7% utilization and a 5.56% interest, yields around 218K ADA as profit for the entire market, which equates to an extra ~0.4% yield on top of the variable base staking return of 2.5-2.9%.
Alternatively, 56M ADA at a 55% utilization and a 4.5% interest would yield closer to 1.4M ADA as profit for the entire market, equating to an additional 2.4% yield on top of the base staking rate. The Liqwid DAO would directly receive about 140K ADA from this scenario and the market would provide an ADA supply yield of about 3.6%, compared to the current 3.1% return while also serving to deploy an additional 31M ADA out into the ecosystem, further developing the composability and growth of Cardano DeFi.
Conclusion
This proposal intends to flatten the ADA market interest rate curve to enable more synergy between Liqwid and the OADA protocol, jointly increase impact in the Cardano DeFi ecosystem, and enable more revenue accrual to the Liqwid DAO through increased utilization and interest.