Liqwid DAO POL proposal

Liqwid DAO POL proposal

Summary
This proposal aims to launch the Protocol-Owned Liquidity (POL) for the LQ/ADA pair, with ADA being borrowed against a LQ collateral position amounting to $500,000. Combining this borrowed amount with the same amount in LQ tokens from the treasury will allow the creation of a POL position worth $1 million. The generated revenues from this POL position will be used to gradually repay the loan interest and principal. Both LQ collateral used to borrow the ADA POL funds and the LQ used to pair with the borrowed ADA to establish the POL LP position will be transferred from the Liqwid DAO treasury wallet.

Description
The current liquidity for LQ tokens is relatively low, ~$520,000 (as per 13.05.2024), leading to high volatility in LQ token value. It should be noted that LQ issuance has been significantly reduced through two successful votes (** reduction of staking rewards and reduction of suppliers rewards**) following the soft rejection of our initial proposed POL launch and DAO “liquidity lease” transaction with Minswap DAO. Our team predicts the impact of these recently passed proposals combined with a larger Liqwid DAO POL liquidity position will decrease the LQ token’s volatility and encourage further LQ/ADA pair liquidity provisioning.

**However, liquidity is vital for ecosystem growth, and it is preferable for a protocol to own its liquidity rather than “rent” it through yield farming. By owning a POL position, the Liqwid protocol achieves multiple benefits:

  • It increases liquidity for LQ tokens.
  • It earns most of the trading fee revenues and yield farming rewards from Minswap Farms program.
  • It provides ultimate value and optionality to the Liqwid DAO and LQ stakeholders
  • It eliminates the need to “pay” or cash out LQ tokens for third parties.

This increased liquidity position will enable the Liqwid protocol to list LQ tokens as collateral, as sufficient liquidity is essential to ensure market liquidity.

Financing of the POL position
With the acceptance of this proposal, it is planned to borrow $500,000 worth of ADA, secured by a corresponding amount of LQ with a health factor of 3x, considering a 70% Loan-to-Value (LTV) ratio.

At the current price of $~1.5, this represents an amount of 1,428,571 LQ tokens.

Health Factor = (weighted $collateral / $debt) = 1,428,571 LQ *$1.5 * 0.7% / $500,000 = 3.0

If the loan is having a health factor equal or below 2, the Core Team can add up to 500k additional LQ to the loan. If it is not enough to reach a health factor of 2, a new vote should be organized as soon as possible to add more collateral or to reimburse the loan (partially or fully).

Loan Repayment
All revenues generated by the POL will be used exclusively to repay the original loan over time. Once the loan is fully repaid, a new vote will be conducted regarding the distribution of future revenues.

All proceeds earned by the POL will be managed by the Liqwid DAO Association executive team and converted into ADA to facilitate repayment of the POL loan.

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 $0.5M 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 the blockchain, in a specific market, only accessible to the Liqwid Core team, and the ADA will be borrowed from the normal ADA pool.

Technical Consideration
The core team has already tested and verified ability to create single action UTXO markets that enable only one action to be completed (In this case the creation of an LQ backed ADA loan to establish the POL LP position on Minswap).

Conclusion
The Core Team recommends adopting this proposal and authorizing the loan of $500,000 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 POL proposal?

  • Yes, I support the POL proposal.
  • No, I do not support the POL proposal.
0 voters

This feels like a risky gamble. The LQ market will have a a supply cap of 2 million USD and the DAO is going to supply 1.5 million of that out the gate. There is little to no wiggle room if this proposal doesn’t play out as intended because the DAO will not be able to effectively add 500k LQ to the borrow since the LQ market will be reaching its supply cap.

We are betting that price stabilizes somewhere and the min farm rewards will outpace the price depreciation of LQ in general. As the saying goes “Markets can remain irrational longer than you can remain solvent”. This proposal doesn’t leave us enough leeway if we are wrong.

Love it. Seems like a much better proposal than the previous Minswap POL token-leasing option. LQ is close to/basically at all time low, emissions have reduced, APR from staking (LQ rewards aside) has increased, and it allows us to own our own liquidity as a DAO, generate a revenue stream with a path to repayment while dampening future price impact from sales. This seems like a reasonable bet on Liqwid, by Liqwid DAO and a gamble I’m willing to take/support.