This proposal is to determine the future direction of the ADA market delegation strategy. The Liqwid DAO currently has ~49.8M ADA locked in the ADA market liquidity pool smart contract. For the first 3 months on mainnet a random set of 16 single SPOs were selected for delegation. During the last 6 months the DAO has voted on 16 single SPOs to receive delegation for 3 month increments via the ADA market delegation SPO cohort vote. Stake is divided equally amongst the 16 SPOs in each cohort. At current supplies this equates to ~3M ADA staked to each of the 16 SPOs. The Liqwid DAO has shown strong support for Cardano decentralization via this delegation strategy for the majority of the protocol’s first year on mainnet. After reviewing the performance of SPOs across cohorts and analyzing the impact of Fixed Cost and Margin Fee the DAO is now faced with 3 potential delegation strategies to decide for the future of the ADA market delegation.
Potential delegation strategies include:
- Continue the current ADA delegation strategy of DAO voting on 16 single SPOs to receive delegation in 3 month increments. Single stake pool operators submit applications and the list is voted on by LQ delegates and stakers. The 16 SPOs receiving the most votes form the cohort and receive ADA market delegation for the following 3 months.
- Return to the first 3 month’s delegation strategy of selecting a set of single SPOs randomly. Similar to the DAO voting option the SPOs selected as part of the random set each receive an equal amount of delegated ADA.
- Running an LQ private stake pool would allow the DAO to maximize staking rewards for ADA lenders as the Fixed Cost and Margin Fee’s would no longer be split across 16 single SPOs. Currently only one LQ private stake pool would be needed for the full ADA market to be staked.
- Reduce the Strategy 1 Active vote to 8 SPOs from 16.
Cardano DeFi protocols benefit from the network’s native liquid staking functionality which allows stake validators or individual wallets to be delegated to a Stake Pool in a non-custodial process (staked ADA remains in a wallet or smart contract with no need for locking). Liqwid v1 is a pooled lending protocol with markets that function as liquidity pools for lending and borrowing Cardano native tokens. Each liquidity pool includes 16 UTxOs for market actions with the ADA market’s action UTxOs also containing a stake key (16). This proposal outlines multiple potential options for the future delegation strategy of the ADA market.
Strategy 1: Continue the current ADA delegation strategy of DAO voting on 16 single SPOs to receive delegation in 3 month increments.
This strategy attempts to maximize support of Cardano decentralization by delegating the ADA market liquidity pool equally to 16 SPOs voted in by the DAO. The benefit of this strategy is it directly supports small SPOs to receive the delegation they need to consistently make blocks each epoch for 3 month increments. This is the strategy the DAO has enacted for the past 6 months and DAO has routinely voted to support single SPOs on the smaller end (often pools with sub 1M ADA delegated at the time of vote).
The downside of this strategy is it’s less capital efficient as the Fixed Cost and Margin Fees across 16 single SPOs reduce the total staking rewards accrued. The capital efficiency of this strategy also decreases the smaller the pool as a higher percentage of staking rewards each epoch are allocated to the pool operator due to the 340 ADA Fixed Cost.
Strategy 2: Return to the first 3 month’s delegation strategy of selecting a set of single SPOs randomly.
Similar to the first cohort of Liqwid ADA market delegations a random selection process based on threshold requirements. Threshold requirements could include: Fixed Cost set to 340, Margin Fee of 3% or below and required to run PoolTool GitHub - papacarp/pooltool.io: A public repo to keep track of issues and feature requests in pooltool to track how pools are performing each epoch. 16 SPOs from this compiled list of single SPOs who meet these requirements would be randomly selected to receive delegation for the next cohort. The benefits of this strategy are that it’s maximally decentralized and requires minimum voting by the DAO beyond setting the threshold requirements. There is no voting required by the DAO beyond this point other than any potential amendments to the threshold requirements.
The downside to this strategy is LQ delegates and stakers have no say in the 16 single SPOs that are selected and as noted above ADA delegated to smaller SPOs results in lower ADA staking rewards for ADA suppliers.
Strategy 3: Running a Liqwid private stake pool would allow the DAO to maximize staking rewards for ADA suppliers
A privately run stake pool is the most capital efficient option for generating maximum staking rewards for ADA suppliers and building protocol owned liquidity. Multiple factors in the ADA staking rewards formula lead to this result including the a0 parameter, and the Fixed Cost not being split across 16 single SPOs in the private pool strategy compared to Strategy 1 and 2. The a0 parameter has a minimal impact on rewards but grows in effect the larger the pool’s pledge amount. Privately run stake pools maximize ADA staking rewards by pledging the majority of the pool’s stake. Larger pledges impact a0 more and result in increased potential staking rewards as the pool will be scheduled to mint more blocks than an equal sized pool with a smaller pledge amount. By setting a significant part of the ADA market as the pledge for a Liqwid DAO private stake pool we could generate roughly 0.75-1% more rewards than staking with an equal sized pool with only 1-10k ADA in pledge. This amount has an outsized impact on ADA suppliers yield the lower the market utilization (currently ~3% market utilization) as most of the pool is staked and represents the majority of yield for ADA lenders. The current 10 epoch average for staking yield across the 16 SPOs in the 3rd cohort is ~2.75, the 10 epoch average before this for the last epoch was 2.71%. Here is what the Net APY for ADA suppliers is with an average staking return of 2.75%:
If an increase of 0.75% staking yield is achieved via a Liqwid DAO run private pool ADA lenders would earn a 3.5% which completely shifts the yield curve up and ensures even at low utilizations ADA lenders earn above the average staking yield.
In addition to this 0.75-1% yield the private pool receives the 340 ADA Fixed Cost each epoch for ADA suppliers. The benefits of this approach is it’s the most capital efficient option to generate the most staking rewards for ADA suppliers. The downside of this approach is the DAO is no longer directly supporting Cardano decentralization.
Strategy 4: Reduce the total SPOs from 16 to 8 and support the Strategy 1 Active vote to select the 8 SPOs to receive delegation.
Ultimately the difference between Strategy 1, 2 or 3 is a tradeoff between directly contributing towards Cardano decentralization and optimizing the ADA staking rewards for the ADA lenders.
Minswap, the largest DEX liquidity pool protocol on Cardano has opted for Strategy 3 for it’s first ~1.5 years on mainnet to maximally benefit their LPs and attract more TVL to their protocol. Smaller DEX liquidity pools such as WingRiders and Muesliswap delegate their ADA to SPOs via periodic onchain votes.
Which of the 3 potential strategies do you support for the future of the ADA market delegation?
- Strategy 1
- Strategy 2
- Strategy 3