DAO-Facilitated One-Click Loan Unwinding with 0.15 HF Buffer

Temperature Check
1

Proposal: DAO-Facilitated One-Click Loan Unwinding with 0.15 HF Buffer

Summary

This proposal introduces a DAO-managed mechanism to enable efficient, one-click loan unwinding in Liqwid Finance. By leveraging the DAO’s staked LQ tokens as collateral, the system allows borrowers to unlock a maximum of 0.15 Health Factor (HF) worth of additional collateral during repayment. The DAO temporarily secures a short-term loan to repay the borrower’s debt, captures the unlocked collateral through a safe process (similar to a non-adversarial liquidation), repays its own loan, and retains the fee as revenue.

Borrowers pay a 1.1% fee on the value of the unlocked collateral (adjustable via governance to 0.25-0.5% to cover minimum interest costs, smart contract development/audit expenses, and generate net DAO revenue). This complements the existing 1% loan origination fee (100% to DAO) and addresses unwinding challenges, especially as discussions around increasing the minimum HF for new loans (e.g., to 1.15) proceed in the governance forum.Increase Minimum Health Factor for New Loans

This feature enhances user experience by allowing repayments while the rest of the collateral release comes from the borrower’s current loan position (post-repayment).

Problem Statement

Liqwid requires loans to maintain a Health Factor above 1 to avoid liquidation, with recent proposals suggesting raising the minimum HF for new loans to ~1.15 for improved safety during volatility. However, this creates unwinding friction:

  • Borrowers often need multi-step transactions: repay debt first (requiring external funds) or risk HF dropping below safe levels if withdrawing collateral prematurely.

  • Price volatility during Cardano transaction confirmation can expose positions to unnecessary liquidation risk.

  • For positions with higher HF (e.g., 1.75), borrowers want to unlock additional collateral (up to 0.15 HF buffer) to enable full or partial repayment in a single, efficient transaction — without the rest of the collateral coming from external sources.

Without a buffer mechanism, max-efficiency borrowing becomes less attractive, increasing user friction and potential liquidations.

Proposed Solution

The DAO acts as an intermediary using its staked LQ to facilitate unwinds, providing a temporary 0.15 HF buffer.

Mechanics

  1. DAO Configuration:

    • The DAO uses its existing staked LQ tokens to back short-term loans required for the process.

    • No separate staking pool needed; operations run through DAO treasury and governance-approved smart contracts.

  2. Borrower Flow:

    • In the dAPP, borrower selects “One-Click Repay” and opts into the 0.15 HF buffer unlock.

    • The unlock is capped at 0.15 HF maximum (e.g., for a loan at 1.75 HF, this enables efficient unwinding of up to ~0.75 HF total collateral value, with the buffer covering the temporary over-withdrawal risk and the remainder from the repaid loan position).

    • Borrower pays a 1.1% fee on the unlocked collateral value (e.g., $100 unlocked = $1.10 fee).

    • Fee adjustable to lower or higher levels via governance to ensure coverage of DAO loan interest while generating revenue alongside the 1% origination fee.

  3. DAO Process

    • Smart contract triggers: DAO secures a short-term loan using staked LQ collateral for the exact debt repayment amount.

    • DAO repays the borrower’s debt directly.

    • Upon repayment, the protocol releases the full collateral (including the 0.15 HF buffer portion).

    • DAO captures the 0.15 HF unlocked value via a safe, protocol-integrated transfer (modeled after liquidation mechanics but borrower-initiated and non-penalizing).

    • DAO repays its short-term loan using the captured collateral and closes it out.

    • Any remaining collateral returns to the borrower.

  4. Outcome:

    • Full repayment: Loan closes completely.

    • Partial repayment: Position’s HF increases, improving safety.

    • The process minimizes volatility exposure and enables one-click efficiency.

  5. Risk Controls:

    • Max unlock: Strictly 0.15 HF per transaction.

    • DAO loans are transaction-bound, over-collateralized, and limited by DAO staking size.

    • Fee ensures interest coverage and buffers minor losses.

    • Disable feature if DAO collateral insufficient or during high volatility.

  6. Revenue:

    • 100% of fees (plus origination) to DAO treasury for protocol development, audits, and sustainability and revenue source.

Benefits

  • Borrowers: One-click unwinds with 0.15 HF buffer for max efficiency, reduced steps/fees, lower liquidation risk.

  • DAO: Generates direct revenue (1.1% or adjusted fee) to fund growth, no dilution of staked LQ rewards.

  • Protocol: Improves usability amid potential min HF increases (e.g., to 1.15), boosts TVL/retention, enhances safety-efficiency balance.

  • Ecosystem: Advances DeFi on Cardano with DAO as a revenue-positive facilitator.

Implementation Steps

  1. Technical:

    • Develop/upgrade smart contracts for DAO loan logic, buffer unlock (max 0.15 HF), and collateral capture.

    • Integrate with existing lending, oracles, and repayment modules.

  2. Governance Parameters:

    • Max HF unlock: 0.15.

    • Initial fee: 1.1% (adjustable as needed)

    • DAO staking threshold for activation.

  3. Timeline:

    • Discussion:

    • Vote: LQ holder governance.

    • Development & audit

    • Launch: Phased, test net, post-audit.

Potential Drawbacks and Mitigations

  • DAO Exposure: Short-term volatility risk. Mitigation: Strict caps, over-collateralization, oracle reliance.

  • Fee Sensitivity: High fees reduce adoption. Mitigation: Start at 1.1%, monitor usage, adjust via proposals.

  • Complexity: Additional contract risk. Mitigation: Comprehensive audits, test net validation.

Call to Action

Community feedback requested: Is 0.15 HF the right cap? Fee levels appropriate? How does this align with the ongoing min HF increase discussion (e.g., to 1.15)? Revenue source for protocol sustainability?

Increase Minimum Health Factor for New Loans
2

To me, this soundss like a dev effort for a very niche use case (people with loans <0.15 HF from liquidation with no other assets than their collateral to repay their debt).
Maybe I am missing something.

3

Hey Gil,

This would definitely require the Dev team to build it out. Could be niche, but its in the direction of one-click repay loan with collateral.

The feature would support any loan that wants to repay, with a particular spotlight on loans at or below 1.15, and extending up to HW 2.15.

As of this writing, there is approximately $45k in loans between 1.00–1.15 and about $2.9M between HF 1.13–1.30. These loans, in effect, have illiquid collateral when unwinding, as the 1.00–1.15 portion of the loan would not be accessible if a temporary check proposal were to pass governance.

In the event of a price drop, the $2.9M would be unable to tap into their collateral to unwind their loans. A one-click solution would allow this group to pay a 1% fee to unwind and repay their loans.

Ideally, there would be a “repay with collateral” button available for any loan. The concept above is a step toward that goal and aligns with similar repay-with-collateral functionality that exists on other lending platforms.

This would be a win for borrowers and would increase overall platform safety.

The fee paid would cover the cost to the platform to build and execute the smart contract, generate some revenue, and help protect against adverse price movement during the closeout of the loan by accounting for execution and market impact risk.