A proposal to implement risk and market parameter changes in the Liqwid v1 ADA market. Given the upcoming launch of Liqwid v2 features which includes risk controls implemented in Aave v3 (borrow caps, supply caps, efficiency mode, isolation mode) the protocol is able to support more Cardano native tokens starting with Optim Bond Tokens. As a result we suggest the ADA market undergo the following updates:
- Implement a borrow cap at 80% of total ADA market supplies
- ADA Risk Parameter Updates: Increase the maxLTV from 75% to 80.9% and the LiquidationThreshold from 80% to 81%.
- Increase the base rate from 2 to 3%.
- Increase the utilMultiplier from 25% to 40%.
- In order to securely onboard new collateral types to the ADA market a borrow cap is used to limit the amount of ADA borrowed from the liquidity pool to a certain amount to minimize liquidity pool insolvency risk.
- Increasing the maxLTV from 75% to 81% allows ADA suppliers to open more capital efficient loans than previously possible (75% maxLTV is ~133% minimum collateral ratio and achieves 4x leverage, 80% maxLTV is 125% minimum collateral ratio and achieves 5x leverage). Increasing the leverage ADA suppliers can achieve borrowing stablecoins in the protocol from 4x to over 5x has been a request of multiple community members since v1 launch.
Important to note other than Liqwid v1 there are no other lending/CDP protocol on Cardano that use a liquidation buffer and there’s not strong user demand for this feature evidenced by protocols that have been live on mainnet for 1year+ still having not implemented it. Instead in these protocols users accept they must manage their debt positions or risk liquidations as soon as they reach their minimum collateral ratio/maxLTV. This is the standard set nearly unanimously by the lending/CDP protocols on Cardano and Liqwid should follow in this direction with a large reduction. Therefore we propose liquidation buffers be significantly reduced but not fully removed.
The only collateral asset that will continue to have a wide liquidation buffer is DJED. All other assets will have a 0.1% liquidation buffer.
A notification will be included in the app warning users of this in the borrow modal if this vote passes.
3. Increasing the base rate to 3% to properly configure the yield curve to reflect the ~3% risk free ADA staking reward rate. This will ensure Liqwid ADA suppliers are always earning a Net Supplier APY (real yield from borrower interest fees and staking yield alone) above 3% before including LQ emissions, even during periods of low market utilization as the base borrow rate at 0% utilization will be 3%. At current ADA market utilization of 3.17% this translates to a real yield of 3.009% as opposed to the current 2.78% Net Supplier APY.
4. Increase the utilMultiplier from 25% to 40% will accelerate the growth in borrowing costs as the ADA market sees more adoption and utilization. ADA suppliers will earn increased yields for their deposits as the demand for ADA loans in the protocol grows.
The multisig transaction to update these ADA market and risk parameters has been tested on Preview.
Do you support these updated ADA Market and Risk parameters to securely onboard additional Cardano native token collateral types to the ADA market?