LQ User Distribution rate

[DC1]

UPDATE: 50% reduction of the LQ user distribution rate is being proposed until the full set of Liqwid v1 features are released (as opposed to the initial 99% temporary reduction included in the original temp check). This includes having everything live such as Agora on-chain governance proposals, LQ staking, initial user distribution releases, additional markets, and a smoother app user experience.

Once we are “Liqwid v1 complete” the shift to a dynamic emissions schedule where we target an APR of XX% (depending on the level of liquidity would be implemented using the same user distribution system, Minswap has implemented a similar model).
If TVL < 100M → 50% APR
If TVL < 500M → 25% APR
If TVL < 1B → 10% APR
If TVL > 1B → even lower APR
*these % figures are examples and are open to community feedback/updates.

Our core team feels this is a significantly more balanced approach to responding to recent community feedback, decentralizing the protocol ownership to early users, while implementing a sustainable long term LQ user distribution system.

For each of the first two months since the Liqwid protocol’s mainnet launch 207,812.5 LQ have been allocated to suppliers and borrowers. For the entire first month (February) there was a single ADA market, on March 1st the DJED market was launched on mainnet. During this short time Liqwid has grown to become the largest lending and borrowing protocol on Cardano.

If you compare Liqwid adoption rate to other lending protocols on Cardano that have been live on mainnet for 3-4x longer than Liqwid, the protocol’s usage, volume and adoption rate is incredible. In 2 short months Liqwid has had significantly more volume, TVL and nearly as many individual users as lending protocols live on mainnet for the past 6-8 months. Here is a view of the all-time transaction volume for every DeFi protocol on Cardano (source: https://dappsoncardano.com/).

While some of this early success can be attributed to Liqwid being the first algorithmic liquidity market protocol for pooled lending to launch on Cardano some of it is also due to the LQ User Distribution program, which allocates 47.5% of LQ tokens to users on a 4-year schedule based on their total lending and borrowing volume. The main purpose for the outsized LQ rewards allocation as part of the User Distribution schedule is to decentralize ownership of the Liqwid protocol amongst protocol users.

This is however not the first distribution of LQ with the specific intended purpose of decentralizing protocol ownership: In January 2022 1.5% of the LQ token supply was airdropped to community members in the Liqwid Discord Community server with the stated purpose of decentralizing ownership of the Liqwid protocol to the community. Many of the individuals who received the airdrop were actively involved in protocol and governance discussions for months on end with core team members in Discord and without the possibility of an airdrop having ever been mentioned. There was no prior expectation (as there has been for every single airdrop on Cardano since, mostly as a result of Liqwid being the first Cardano DeFi protocol to successfully complete it and users seeking the “next one”), no ability to game the system for the same reason and unlike ISPOs each user received an equivalent LQ amount irrespective of ADA holdings. In many ways this was the most fair, non-speculative approach to decentralizing ownership of the protocol to community members with the least ability to game the system (again mostly as a result of its simplicity and the fact no warning was given).

Fast forward to now and the LQ User Distribution system which again aims to decentralize Liqwid protocol ownership, now on a much grander scale of nearly half the LQ token supply and we are observing not only contention in the Cardano community over LQ user distribution speeds but also to some degree attempts to game the User Distribution system to maximize LQ rewards via recursive leverage.

As of yesterday, the core team have introduced temperature checks we hope will help to combat the recursive leverage observed in the ADA and DJED markets an important point should be considered: Compound Finance, the protocol which pioneered this form of user distribution (also known as yield farming) faced similar issues in the early days of their COMP distribution program. In some markets analysis shows as much as 80% of borrowed assets in some markets were recursive leverage for the purpose of maximizing COMP rewards.

These yield farming driven strategies impose significant liquidity risk to any lending protocol but especially to newly launched protocols with lower levels of liquidity such as Liqwid. It’s important to note that Compound was live since May 2019, at the time COMP distributions began (June 16, 2021) the protocol had grown to ~3M ETH (at the time equal to $7.57B) in TVL (source: Compound - DefiLlama)

Having the initial 2 years to bootstrap liquidity, launch new products, integrations, deploy new protocol versions and harden the protocol’s infrastructure was pivotal in the success of the COMP distribution program which has successfully decentralized the protocol’s ownership to its users. An interesting point to analyze though, in ETH terms the all time high peak of TVL for the protocol was in April 2021, months before COMP distribution began or was even announced. Also, important to note that 0 COMP was distributed retroactively meaning users who supplied and borrowed ETH and other Ethereum assets on Compound before the June 15th 2021, launch of COMP liquidity mining received no COMP for their lending/borrowing activity.

The data clearly shows that COMP incentives did not boost the protocol TVL and were only successful in their primary stated purpose of decentralizing the ownership of the protocol to its users. Liqwid has faced a lot of negative recent sentiment related to the launch of LQ rewards as part of the User Distribution schedule for the elevated inflation rate and a notion that the protocol’s base utility as the first algorithmic money market on Cardano could not realize the strong early usage it has without the use of LQ rewards. The data clearly shows this line of thinking is incorrect but with increasingly negative sentiment this has led our ore team to reconsider whether the LQ User Distribution is actually the best path forward for decentralizing the protocol’s ownership.

Could other options such: 1. as an increased yield to LQ stakers, 2. a future airdrop of some form or 3. other distribution methods actually be more effective and community aligned methods to decentralize protocol ownership without incurring the negative feedback from the wider Cardano community?

In the case of Compound multiple governance proposals have resulted in a net 80-90%+ reduction in COMP distribution speeds across markets. This began with an experiment to measure how much some % decrease in rewards impacted change in the protocol’s liquidity. This type of experimentation to arrive at 1. a more optimal distribution speed and 2. explore other available options for decentralizing ownership of the protocol proved successful for the Compound community.

The first 2 years of a DeFi protocol’s lifecycle are vital in terms of the strategic decisions protocol teams and communities must navigate to set up for a healthy and successful long-term future. Early Ethereum DeFi protocol’s like Aave and Compound used this time for diligent product developments, integrations and feature rollouts to grow to the TVL sizes we see today.

Liqwid has similar ambitions to grow and scale in TVL as this represents increased utility to significantly more users lending and borrowing Cardano assets. How we get there will be largely driven by our early actions today.

With all of this context now unpacked, let’s return to the main point of this proposal: the distribution rate of LQ rewards to protocol users. The current LQ distribution rates are based on the pre-protocol launch allocation of 47.5%, distributed equally over a 4-year period. After analyzing the ETH TVL data for Compound, reviewing the governance discussions and proposed paths their community took and with responding to community feedback related to the current distribution rate, the core team proposes the following updates:

1. To begin a series of experiments with respect to finding the optimal LQ distribution speed we propose first reducing the LQ distribution rate by 50% and observing the resulting data in terms of protocol liquidity flows. By reducing nearly all LQ incentives to lenders and borrowers we’ll be able to fully analyze the data and observe how the protocol’s liquidity levels react.

2. Working alongside engaged community members, explore alternative options for decentralizing the protocol’s ownership to Liqwid users.

*the LQ distribution rate will remain at the current speed until this proposal vote is complete. This will be one of, if not the very first proposal to complete an on-chain vote in the LiqwidDAO’s Agora instance.

Do you support a reduction in 50% of the LQ user distribution rate until the full set of Liqwid v1 features are released, and at v1 completion implementing a dynamic emissions schedule?

• Yes
• No

[Dub]

Regardless you still have to honour what is already owed up until this is passed.

[itzDanny]

Voted ‘No’.

We all want the protocol to succeed but reducing community rewards by 99% will go down like a lead balloon

Having read the two other temp checks im unsure why there needs to be a 99% reduction in rewards.

Reducing borrower LQ rewards to 0 and removing the ability to same market supply/borrow seems sufficient enough to disincentivise recursive borrowing without upsetting the community.

Just my 2 cents

[Arska]

Like I typed in the other proposal I feel like this is starting to go too much into witch hunting the people who want to maximize they’re rewards. Lets first come up with a better distribution system, if there even is one, before reducing the rewards of protocol users.

Also I think the product is too fresh and the TVL too low for any meaningful results from proposed experiments. One whale can already skew up the results by adding or removing liquidity.

[Dub]

Interestingly there’s nothing mentioned about team or VC tokens.

Let’s reduce that token supply 99% too.

Wondering how to project can call themselves a dao while yet again restricting public token distribution. Insider/Private members club only it seems.

[Falcon]

I believe this is overkill and a knee jerk reaction, at least at the current time.

We already have discussed three mechanisms to prevent recursive borrowing (100-0 supply, like kind collateral, and kink point). I believe these will practically solve recursive borrowing issues which to me is also the root of the “gaming” of LQ rewards distribution.

I believe those 3 mechanism will make the protocol and liquidity healthier and more “real”.

I believe the LQ rewards remaining as they are would still be considered a welcome reward for taking early risk, bootstrapping liquidity, and supporting ownership of the protocol.

I say we see how recursive borrowing fixes the issue first, and then maybe reconsider this after a month of implementation of recessive borrowing prevention.

[Shaffalahien]

I think if we want to encourage greater distribution of rewards and bootstrap liquidity at the same time we need to encourage large holders of collateral assets to use the protocol. LQ is the cornerstone of that strategy for now, so I don’t think removing this incentive is a good move until the protocol can offer other utility for users, so I vote “No” for now.

In the future I think that if we want to explore strategies to incentivize certain behavior that is fine, but we need to keep encouraging more early users of the protocol. As it stands this will put up a barrier that will limit distribution to the wider community.

Switched to “Yes” after the changes to the proposal. The adjustments make sense after a healthy discussion in the governance discord.

[FlorianVolery]

I want to add or precise the following information:

1. Mass LQ distribution is today a risk for the LQ holders and its price. If the inflation crashes the LQ price, how do you incentive in 6 months the additional users? We should pause /reduce now the LQ reward to be able to offer a sufficient reward for the future users and keep growing the ecosystem.

2. LQ rewards for Feb and March will be distributed as said (~1% per month). April too until the Agora vote takes place

3. The LQ reduction aims to pause / reduce the reward and LQ inflation until the v1 is completed (Agora launch, LQ collateral, Oracles, new markets, dividends, etc.)

This temperature check is not an eternal pause on yield farming, but rather a conclusion that we need a new system to reward the users, something more adapted to the $TVL we currently have.

Therefore, we should think about implementing a new dynamic LQ rewards adapted to the amount of TVL / users, which safeguard the LQ price and keeps being interesting for users (borrowers/suppliers)

[G30G43BR4]

#1 is really a non issue. User incentives in 6 months will work the same way as they do now - by distributing LQ. As the tokenomics show, these rewards are going to last for 48 months.

There is a baseline price for LQ determined by the dividends in combination with market interest rates. If TVL (and thus most likely total borrow) rise this baseline price will rise as well and thus keep the distribution APY on a level comparable to when TVL was lower.

[Lifeless_Ditto]

If this is done, I would honestly suggest a “locked LQ” similar to MINt, where you have to participate in the protocol (like governance, or staking), to unlock the LQ, and then you can adjust the unlocking rate there instead. But this solution sounds like it will take some time to implement. Its better to either

1. set a target APR instead and adjust distribution to it
2. propose an alternative solution where the community will still hold the majority instead of VCs and team allocation being the predominant inflation source (which allows them to better influence the outcome of a proposal)

[FlorianVolery]

The Core Team tokens are the salary for having develop Liqwid. The LQ tokens sold to VCs were sold by the Core team to finance and develop the protocol. They have reduce their own allocation for ensuring the development of Liqwid app.

Without any salary or reward, no one is building a DeFi app for free.

[Dub]

Interesting, so instead of also reducing the total amount of tokens they get and working to make that allocation more valuable you think they should get the same amount and everyone else should be prevented from selling?

What purpose does this serve other than to enrich the team at the expense of the winder community?

[FlorianVolery]

It serves the purpose of rewarding the community in the medium/long term and not only in the short term. Only the people here to just farm and dump the LQ tokens in the next weeks are concerned.

This proposal is bullish for all the LQ holders and will strengthen the LQ price to offer also attractive yield farming rewards for the future users.

[Dub]

Then ask the team for a minimum 50% reduction in their tokens emissions too. Why expect others to take a cut offering nothing in return? Or do you feel the community are less valuable to the project?

Again, the team want their tokens “to be paid” for the work already done, this is a defacto statement of intention to sell.

The concern here is just from the team and for their own benefit. They don’t want anyone reducing their pay cheque.

Farmers farm, the price drops, the yield drops and they leave, but they still boost your TVL and will also help the project find it’s fair valuation on dexes in the meantime.

[JoshieeTee]

the problem isnt just the fact that ALOT of LQ is being pumped into circulation, its only 1% ish per/month
but with only 1.5% currently sitting in circulation, its almost doubling the circulating supply in the first month,
the priority shouldnt be keeping more of the supply out of circulation,

What about taking some of the rewards allocated to the ‘borrowers’ and using them to incentivise Dex liquidity?

i know we had the proposal that called a halt to the MinSwap CZI, but that seemed more about not flooding the market,
Rough example, take 7.5% of the 47.5% allocated to Suppliers & Borrowers and use that to help bootsrap liquidity like NOW?

I personally wouldnt have an issue with 7.5% (or even larger) hitting the market if the majority was bootstrapping liquidity, and i know i would be alot quicker to provide liquidity to a dex if i wasnt if i knew some of that incoming sell pressure was alleviated.

any increase in trading liquidity would allow the protocol/DAO to take a slightly more aggressive approach with the rewars distribiuton speed, meaning a 99% reduction becomes a 30% one with gradual increase upto a whatever the new ‘optimal disdribution speed’ is?

[JoshieeTee]

I dont know if this warrants a seperate proposal or temp check, but moving some future rewards from ‘user rewards distribution’ to some form of liquidity bootstrapping incentives might be worth a wider discussion?

again i know the idea of taking some of the DAOs treasury for this purpose was thrown around, but this could be a possible with a small fraction of the user rewards?

again thinking long term

[DoctorA]

Let’s change tokenomics again with another internet poll.

Side vote:
Yes also to 99% of the rewards program being delivered in the form of applesauce.

[Dub]

I’m of the opinion making drastic changes to a proposal half way through the voting period voids the validity of the vote and calls the integrity of LQ into question.

Feels like the team are desperately throwing spaghetti at the wall and trying see what sticks.

[Dub]

Howdy friend. What’s the discord like now half the community been shut out?

[FlorianVolery]

Everyone who cares about the Liqwid protocol should vote yes.

Currently the farming rewards are totally disproportionate compared to the revenues generated by the users. To put the things in perspective, LQ protocol is currently giving per month $1.5-2m in total (207k reward monthly at an average LQ price of $8-10), while at the same time, the monthly revenues generated are around $33k.
->See the below calculation:
With $8M ADA, utilisation 40% (= $3.2M borrowed), and with ~12.7% rates for borrowers, it means that monthly the Borrowers accrued interests are:
12.7% x $ 3.2M / 12 = $33.8k monthly revenues

→ Basically, this is a huge gift for all the Liqwid users to reward them.

The upcoming Agora vote aim to reduce the LQ rewards inflation rate to

1. save money to continue rewarding the users in the future and
2. implement a better dynamic system with appropriate rewards.

You never have a sustainable system built with foundation where the costs are ~50x the revenues.