Liqwid ADA Market Delegation Strategy

[DC1]

Summary

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:

1. 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.
2. 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.
3. 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.
4. Reduce the Strategy 1 Active vote to 8 SPOs from 16.

Overview

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.

Conclusion

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

[uscmigs]

From a capital efficiency standpoint can’t argue with option 3. Would the pool parameters be set to minimums (0% margin and min fee) given this is the protocols money?

If the decentralization aspect wanted to be maintain Option 2 does give that flexibility to set Liqwid min requirements around and some bit of entropy used to pick pools. I think doing votes for something like picking SPOs in the system is inefficient in itself since there is no quorum needed and no added benefit advantage given the way blocks are randomly selected to any particular pool…. It’s just another tx fee to users on something that is more maintenance to keep the system running then making a tangible difference in how the protocol works.

[uscmigs]

Similar to Minswap could the pooled DAO assets be used to vote in Catalyst via a vote as well?

[OctaFunk]

Abstain!
4th vote. Liqwid stake pool and decentralization!

That 3million going out to voted stake pools might not produce the best returms but in their shoes that delegation mignt be exactly what they needed to continue thier mission for several months further.

I purpose split the ada delegation in HALF!
50% goes to a private liqwid pool that is always producing and the res
t goes.to FOUR SPOs the community votes on.
This method prolongs the inevitably that Liqwid pool fills(and creates another(anti-decentralization)) while still supporting the entire Cardano Ecosystem around it.

[DC1]

The pool margins for a private pool are 100% margin (with 100% of the staking rewards automatically accruing to ADA lenders, Liqwid DAO would not be earning any staking rewards via this). The Fixed Cost of 340 ADA (minFee) is mandatory for all stake pools the difference being with a private pool this would also go 100% to ADA lenders. In the current delegation strategy the SPOs in each cohort receive the 340 Fixed Cost (which becomes more of a rewards loss the smaller the pool) and they receive the Margin Fee. In Strategy 3 ADA lenders would earn 100% of both the 340 ADA Fixed Cost and the Margin Fee (set to 100%).

[DC1]

Yes the pooled ADA will be used in Catalyst voting moving forward. A subDAO team for Catalyst voting needs to be formed within the DAO to set parameters for this.

[Dev]

I support the discussed option of Liqwid’s node to maximize returns for suppliers, with spillover potentially delegating to SPOS (eventually will need to be a moving target then as ADA rises and the need for a 2nd pool might occur). Hybrid model of SPO delegation with Liqwid node prioritized for maximizing value to users though does seem the best from a competitive stand point.

[itzDanny]

With the goal of maximising returns, I vote for strategy 3.

Liqwid is a young protocol and while support SPO’s is nice to be able to do, the protocols main focus should be incentivising lenders to supply assets. Strategy 3 would represent the biggest boost the incentives for supplying ADA.

[nufnuf]

50.3 million ADA is staked through Liqwid.
22.8 billion ADA is staked on cardano chain.
It’s nice being cute but kinda hard if we have very little liquidity locked in the protocol compared to what’s out there.
I would prefer to grow the revenue and TVL to a much bigger size. Then we can play cute.
DeFi market on cardano is growing fast and getting very competitive.
ADA not locked in our protocol is either locked in some other protocol or not in DeFi yet.

Sure, once we reach a certain size there could be an option for those who want to support SPOs that a certain % of their ADA could be diverted to them.
Their rewards from staking would be separated and not shared with those in the private staking pool, like a group managed account.

Having a private staking pool(s) would give us also further benefits.
Having no pool cost, no margin fee and high saturation is a combo that would keep it competitive with native staking and other DeFi protocols.
Private pool(s) could be used in various ISPOs or sidechains as Midnight, so the revenue from them would go back to delegators.

The decentralization process will be effectively moved from ADA delegation to LQ stakers.
As a governance token, staked LQ will be the key for any decision about what projects to support in Project Catalyst, what ISPO to engage, sidechains etc.
More reason why to hold and stake LQ.

[easy1staking]

As many have mentioned it’s a matter of tradeoff.

A few considerations:

1. minCostFee will go down. sooner rather than later, the communications are clear, it’s just a matter of when and not if. If smaller SPO will reduce their minCostFee, more ada will go as rewards to Liqwid
2. running your own stake pool will cost $$, so either maximise by staking all to your pool, or forget about running your own stake pool all together, and continue delegating to community pools
3. I understand currently staking rewards might not be ideal because of pool costs. Would you consider consolidate delegation to 8 whales and pools, rather than 16? This will still contribute to decentralization, but reduce rewards spent in fixed costs?

I know this could reduce chances of EASY1 Stake Pool getting a delegation in the future, but ideally I would go for:

1. no private LQ stake pool
2. keep delegating to community pools
3. consolidate into 8 whales, rather than 16

Totally agree that stake pool receiving delegation should have a proven track record of exception operational resilience. In the end, it’s not LQ money, its’ community money, so SPOs must show their skills and results.

my 2 lovelaces

[happystaking]

I like this idea. It’s a hybrid solution that increases the staking rewards while still maintaining a decentralized delegation strategy.

[easy1staking]

Last minute news, minPoolCost will go down on October 27th.

IOG's Response to the Parameter Committee Recommendation on PCP-001

[DC1]

These are great points and as you updated below minPoolCost is set to be reduced by 50% in the coming days. I think adding another delegation strategy option to reduce to 8 from 16 is prudent.

[Shaffalahien]

More than a couple stake pools hold LQ specifically for the ability to get enough stake to mint blocks. There could be a significant sell-off of LQ if they can no longer influence their chances. Encouraging large staked holders does have its advantages. I think option #1 helps both decentralization, AND LQ demand/use case.