@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:
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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).
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The creation of this loan will not eliminate the programmatic rewards(e.g. LQ stakers will continue receiving programmatic distribution rewards).
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The proposed loan is also subject to the loan origination fee. Same as a loan for any other user.
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The LQ used as collateral cannot earn today any programmatic rewards as they are solely distributed to the LQ stakers within Agora.
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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:
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The borrowed amount will be increased partially monthly until reaching the proposed debt.
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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).
