Summary
This proposal aims to create a Liqwid DAO Core Team loan of $3,000,000 with ADA being borrowed against an LQ collateral position. These funds will serve to further develop and improve the Liqwid protocol as outlined in our 12 month roadmap article.
The DAO revenues from the programmatic rewards distributions will be used monthly to gradually repay the loan interest and principal.
The LQ tokens locked as collateral to originate the ADA loan will be transferred from the Liqwid DAO treasury wallet.
The Liqwid DAO Association executive team will also work to complete a fundraising round from external investors during this 12 months to secure years of future runway to fund protocol development, operations and maintenance.
Financing of the loan position
With the acceptance of this proposal, it is planned to borrow $3,000,000 worth of ADA, secured by a corresponding amount of LQ with a health factor of 3x, considering a 70% Loan-to-Value (LTV) ratio.
Edit 28.05.2024: The amount of $3M will be borrowed over time. The total collateral will be supplied at once and the borrowed amount will be done monthly (250,000 USD) in ADA, and then they will be sold instantly. By doing so, the DAO can keep a very high Health Factor, which minimizes the liquidation risk over time.
At the current price of $~1.6 of LQ, this represents an amount of ~8,035,714 LQ tokens. (see note 1)
Note 1: The calculation above is an approximation. The final amount of LQ will be determined based on the $ADA and $LQ prices at the date of the loan opening following the approval of this vote.
If the loan’s health factor falls below 2, the Core Team can add up to 2 million additional LQ tokens to the loan. If this is insufficient to achieve a health factor of 2, a new vote should be organized as soon as possible to add more collateral or to repay the loan, either partially or fully.
Usage of the ADA
The borrowed ADA will serve to finance at a minimum the next 12 months of Liqwid protocol development, operations, and maintenance. Working with professional market makers contracted by the Liqwid DAO Association the borrowed ADA will be converted into USD over time.
Loan Repayment
All revenues earned by the DAO treasury will be used exclusively to repay the loan and interests over time. Once the loan is fully repaid, a new vote will be conducted regarding the usage of future DAO revenues.
The loan operations are done by the Liqwid DAO Association executive team which are responsible to pay Liqwid Labs software engineers for the current and future development, operations and maintenance of the Liqwid protocol.
Proposed Market Parameters
The proposed LQ token risk parameters for the Liqwid DAO POL loan are:
Liquidation threshold: 70%
Liquidation discount: 15%
The supply cap for LQ will be set to $3.0M and a corresponding number of tokens will be calculated at the Liqwid’s listing date to match this value. LQ token borrow cap will be set to 0% of the total LQ supplied, forbidding any borrowing.
The loan will be opened on mainnet via a specific market, only accessible to the Liqwid Core Team. The ADA borrow transaction hash will be shared with the Liqwid community on Discord and Twitter once completed.
Update on the LQ issuance and allocation
Following this vote, the current LQ allocation will be as such:
LQ allocation (if both DAO loan votes are approved)
For more details about the data included within the table, please see here.
Conclusion
The Core Team recommends adopting this proposal and authorizing the loan of $3,000,000 worth of ADA, backed by sufficient LQ to achieve a health factor of 3, based on the proposed market parameters for the LQ tokens supplied by the Liqwid DAO treasury wallet.
Do you support this Liqwid DAO Core Team Loan proposal?
Yes, I support the Liqwid DAO Core Team Loan proposal.
No, I do not support the Liqwid DAO Core Team Loan proposal.
Can you elaborate more on the repayment strategy? Only the following DAO income will be used or previous earns as well?
Do you intend to repay in a weekly or monthly basis?
How about consider a portion of the borrowed ADA to set LQ limit buys to prevent massive shorts and liquidation?
will be monthly as programmatic rewards are paid monthly.
there is this proposal which will add 1m USD value to the LQ/ADA trading pair if approved. The DAO can also add further LQ from its allocation to the collateral to prevent shorts and liquidation.
Does it really cost $3M to fund development for 1 year? Is there a budget we can see?
Isn’t too excessive to use 38.27% of total supply as collateral to finance just 1 year of development? Specially after having another loan with 6.38% of the supply as collateral. What happens if after selling the ADA for USD, it does x10 for example? How would we pay for the loan then? It seems to me like a risky move for the DAO considering the size.
How much time are you calculating it would take the DAO to repay this loan with the current income?
Would it be sufficient to just use the current income to fund development instead of taking a loan?
Are the quoted parameters for the Liqwid DAO POL loan, as it says on the proposal, or for the Liqwid Core team loan?
Hey Julian to answer your first point, yes it really cost $3M to fund Liqwid development for 1 year. I have included a 12 month budget here showing the full cost breakdown across all Liqwid Labs departments including non-engineering roles. Liqwid salary rates are competitive with other Fintech and DeFi startup engineer salaries and Liqwid engineers are some of the most talented devs in crypto.
Liqwid Labs now has 13 full time software engineers across Haskell engineers who write Plutus smart contracts, Typescript engineers who work on the offchain contract code, Frontend engineers who build apps and APIs for Liqwid and DevOps engineers who operate and maintain the cloud infrastructure that powers Liqwid oracle bots and liquidation engine. We also have project and product managers who design, spec and implement new features full time (this includes all of the new features implemented in v2 and all of the new features outlined in the 12 month roadmap article).
About the fund-raising… “secure years of future runway to fund protocol development, operations and maintenance”. Is there any specific plan to do it? Like use that fund in Liqwids markets to create other revenue to the DAO or may be something else in teams minds?
With current market data across Liqwid Finance, $4 million in interest would be generated annually, of which 10% would go to the DAO. Not counting interest on the loan and assuming the ADA stays constant at around $0.45 for 10 years, it would take 7.5 years to pay off the loan Liqwid Finance needs to pay its operating expenses for just 1 year.
What would happen if ADA did 10x or 20x in this time (the debt would be $30 or $60 million)?
With what money will Liqwid finance its operations a year later in June 2025?
Are DC and Florian on the payroll of Liqwid Finance? How many gross monthly dollars does your payroll amount to with social contributions?
How many millions of dollars has it taken to date to fund Liqwid Finance?
ADA was taken to the Swiss stock exchange by Florian and an SPO was operated under the Liqwid Finance brand. Who keeps the profits generated over time on the payroll of Liqwid Finance funds and why do LQ holders not benefit at all from something the Liqwid Finance brand is used for?
It is essential to clarify these issues so as not to convey the image of a bankrupt brand because the image itself, although not real, can bring real bankruptcy if the crisis of confidence worsens at all levels.
As far as I’m concerned, I have an image of the CEOs of Liqwid (DC and Florian) compatible with that of teenagers with no seriousness about business. I’m worried that DC will use their time on Discord and instead of serving to enlarge the community, it will serve to veto and veto non-submissive members and that the community will become smaller and more and more angry. Are Liqwid funds well spent for that purpose?
This is your chance to show that the image you are creating is not real. Forward!
This assumes no additional revenue or price appreciation on the token… which I think is a bit of a stretch with a maturing defi market, likely LQ collateral options, more markets to be added, and potential integrations.
Not gonna lie it’s a little nerve wracking that the core team will be borrowing close to 40% of the supply to develop the product even more, smells a bit funny and what does cardano get for that price? The v2 is pretty much shipped…
I would support this proposal if the team could use the loan as an edge against LQ.
Considering that the team will not require the entirety of the loan immediately, they could take advantage of the upcoming bull market. They could eighter trade LQ or a portion of the remaining Ada loan for stables at higher prices (whatever option is the best) and then repurchasing it later at lower prices to repay the loan.
@itzDanny@Rschwab@Julian@thiagogcm
Dear all,
Here is a summary of your Questions and the Answers to them regarding this specific proposal for a loan to finance the next 12 months.
General loan questions:
Q: Can you elaborate more on the repayment strategy? Only future DAO income will be used or previous earnings as well. Do you intend to repay on a weekly or monthly basis?
A: DAO protocol revenues will be used monthly to partially repay the loan. This currently includes 50% of the loan origination fee prevenient revenue and 10% of the repaid interest revenue.
Q: How much time do you estimate it will take the DAO to repay this loan with the current income? Will it be sufficient to just use the current income to fund development instead of taking a loan?
A: The most likely scenario is that the loan will be repaid upon the completion of a new financing round.
The current DAO income is approximately 50k ADA monthly, which is not sufficient to repay the loan in the short term.
It is the goal of the Core Team to improve these earnings over time, but making any financial forecasts based on the growth of the Cardano ecosystem cannot be considered reliable at the moment. However, there is a probable case for higher monthly DAO revenues in the future.
The price appreciation of the LQ tokens is based on the value created by the protocol for its users through listed tokens and new products that generate revenue and offer attractive passive income for LQ holders.
Overall, Liqwid can be seen as a kind of leverage on the entire Cardano ecosystem, depending on its growth.
Loan details and various precisions:
Current sources of revenues of the Liqwid DAO treasury are from the treasury income (10% of the interest repaid) and from the loan origination fees (50% of these revenues are allocated to the DAO treasury).
The creation of this loan will not eliminate the programmatic rewards(e.g. LQ stakers will continue receiving programmatic distribution rewards).
The proposed loan is also subject to the loan origination fee. Same as a loan for any other user.
The LQ used as collateral cannot earn today any programmatic rewards as they are solely distributed to the LQ stakers within Agora.
Once the loan is repaid, the LQ used for the collateral will be returned to the Liqwid DAO treasury wallet.
Q: Liqwid DAO POL loan and Liqwid development loan have the same proposed parameters.
A: The proposed LQ token risk parameters for the Liqwid DAO POL loan are:
Liquidation threshold: 70%
Liquidation discount: 15%
Q: Why not borrow only a half of it for 6 months and then repeat it?
A: The amount of $3M will be borrowed over time. The total collateral will be supplied at once and the borrowed amount will be done monthly (250,000 USD) in ADA, and then they will be sold instantly.
By doing so, the DAO can keep a very high Health Factor, which minimizes the liquidation risk over time. We will adapt the final proposal to reflect this.
Addressing the liquidation risk
Q: How about considering a portion of the borrowed ADA to set LQ limit buys to prevent massive shorts and liquidation?
A: If an LQ buyback is considered, clear criteria should be established. Additionally, it’s proposed that if the health factor falls below 2, and after topping up with 2 million LQ, a new vote should be held to determine the next course of action.
In this current proposal, we could include the following sentence in the “Financing of the loan position” section: “The Core Team may also use the borrowed ADA to repurchase LQ tokens to prevent loan liquidation.”
Overall, the Core Team prefers holding another vote if this plan is considered.
Q: Isn’t it too excessive to use 38.27% of total supply as collateral to finance just 1 year of development? Especially after having another loan with 6.38% of the supply as collateral.
What happens if after selling the ADA for USD, it does x10 for example? How would we pay for the loan then? It seems to me like a risky move for the DAO considering the size.
A: Regarding the liquidation risk, we made these assumptions:
The borrowed amount will be increased partially monthly until reaching the proposed debt.
Normally, the LQ price is somewhat correlated to the ADA price, because LQ inflation has been reduced drastically.
The loan will not be made in stablecoins currently, because the liquidity is too low on Cardano at the moment. In the scenario of a major stablecoin / or similar assets with low volatility and enough supply would exist on Cardano, then we could consider borrowing desired USD amounts in these assets. We keep the flexibility to borrow the best assets (and can also consider DJED and iUSD).
General business questions:
Q: Does it really cost $3M to fund development for 1 year? Is there a budget we can see?
A: The 12 months are meant to scale Liqwid up to reach the next level. The high-level cost breakdown follows:
Legal: $20,000
Engineering: $2,020,000
Product design, business development, management: $500,000
Third party services (auditors): $100,0000
Infrastructure operations and maintenance: $200,000
Brand, design, marketing: $160,000
Additional information: “Borrowing & lending” is one of the most complex DeFi products in the blockchain space, and the performance of the Liqwid Team has been tremendous, though it may not be easily understandable at first glance.
Using the world of Ethereum as a benchmark, only two projects have dominated this space for years: AAVE and COMPOUND, with the rest being mostly forked protocols.
Liqwid is already at product parity with these two giants, and the Cardano ecosystem has a very slim chance of seeing another company offering a dynamic lending market. This reflects the tremendous work done by the Core Team from its founding in 2020-2021 to the delivery of the protocol in 2023. Our product remains unmatched, and we do not see any real competition or challengers.
The initial funding was intended to ship version 1 of the protocol, which has exceeded expectations and has been utilized up to this point. Further funding of Liqwid is necessary, as protocols like AAVE and COMPOUND have used a significant amount of their tokens for this purpose.
For your information, here is a market comparison including various successful protocols to understand where the benchmark is (Obviously, every ecosystem/protocol has a different story, but this provides a good indication of what to expect).
Why is it so complex to build a lending protocol on Cardano?
Borrowing and lending, especially pooled lending, which operates similarly to how an index fund works in TradFi, is one of the most complex products in DeFi today. It involves numerous moving pieces, such as oracles for price feed reflection, the emission of receipt tokens during lending (as in the case of Liqwid), enabling greater composability, decentralized liquidation mechanisms for bad debt avoidance, and many other features that simpler products like decentralized exchanges do not require.
All of this is difficult to conceptualize and even more challenging to implement in “blockchain language,” i.e., smart contracts. Translating this rationale into smart contracts requires a great deal of careful consideration and design to minimize the risk of bugs and exploits.
What made it even more difficult for Liqwid to reach its current stage was the state of Cardano tooling over the last three years. Liqwid started at a time when smart contracts on Cardano were not yet available. When they did become available, the tools were very crude and not ready for production, such as Plutus V1 (which lacked reference scripts or inputs), PlutusTx (a very difficult language to write and debug UPLC), and virtually no other off-chain options besides the initial iterations of CTL (Cardano Transaction Library), among other tools and issues.
Considering all these challenges, Liqwid’s performance has been impressive. We have contributed significantly to the open-source tooling available, creating libraries for aiding in writing and testing smart contracts like Plutus-extra, Plutarch-extra, Liqwid Libs, Liqwid Nix, and more. Agora is another great example of how Liqwid has helped the broader Cardano ecosystem mature its knowledge of building governance protocols.
Q: What does it mean “selling to external investors”. Any details?
A: Obviously, the higher valuation the better, but overall, the goal would be to raise at least $6M.
At a valuation of ~$60M, this is 10% of the tokens. (LQ price of $2.8)
At a valuation of ~$100M, this is 6% of the tokens. (LQ price $4.76)
Etc.
In the case of a sale, there would be a vesting period attached to the LQ token release. These LQ tokens would come from the loan being repaid and the subsequent unlocking of its LQ collateral, which will be sent back in the DAO treasury, but this is also subject to a future governance proposal.
Q: Why are you not making Catalyst proposals to repay the loan?
A: In the future we could make specific Catalyst proposals aimed at covering the budget for the next 12 months and repaying the loan.
Q: The protocol is not decentralized, the Community cannot make the decisions.
A: As of May 2024, approximately 5.5 million LQ tokens have been distributed, with only 2 million (36%) allocated to the Core Team. The remaining 3.5 million (64%) tokens have been distributed elsewhere.
Claiming that Liqwid is not decentralized is false and pure FUD (Fear, Uncertainty, and Doubt).
Appreciate the additional clarity on these questions and like the fact that the loan will be taken out in stages. reducing risk and maintaining a strong health factor is of the utmost importance.
Hi and thanks for the reply above,
I got a question concerning the sale to external investors
what do you mean by “external investors”
Do you plan to sell tokens to the community or few entities like in the past?
What is the reasoning if not to the community?
also, do you remember early 2022 when you released 1% of the lq supply to the community through an airdrop, claiming it was “fair launched, distributed”?
i am just highlighting the disparity between releasing 1% of the supply to retails and then selling 2 years later 3% to “external investors” . can you still proudly claim the LQ token was fair launched and owned by the community after that
we understand that the development must be funded indeed. we also believe that you should do everything to manage the community’s trust . for instance, you don’t manage the community trust when you slash staking rewards 90% as soon as people start earning what they staked 1 year for. or you don’t manage the trust when you claim you will go in a direction and then go to the opposite.
I am aware you believe you are doing everything right but more and more often I have a weird feeling and what was supposed to be a flagship unicorn is getting more and more discutable and the original vision and ethics are falling one after the other. I can only hope I am wrong (like often)
My query is, in the event that a core team loan was liquidated, and if the team had already sold the loaned ADA and used the funds, what funds would they then use to buy back any liquidated LQ collateral to repay the DAO ? I cannot recall this scenario being directly addressed by team yet.
