Summary
This is a proposal for creating a new liquidity market to support SHEN reserve coin lending and borrowing on the Liqwid v1 protocol.
Project and Token Overview
SHEN is the reserve coin of the DJED stablecoin protocol. The minted DJED is backed by ADA and uses SHEN as its reserve coin. DJED is a Cardano native overcollateralized stablecoin implemented by the Coti and IOG engineering teams. The protocol is unique for its 400-800% minimum collateral ratio for minting DJED. As SHEN forms the backbone of the DJED stablecoin protocol and trades close to the price of ADA, it makes for a secure collateral type for Liqwid users to lend and borrow with.
While the smart contracts are built by IOG and audited by Tweag the protocol has been live on mainnet for just over one month.
Liquidity Risk
The circulating supply of SHEN is 23,696,178.31 with 15,040,919.49 additional SHEN able to be minted now at current reserve ratio. Much of the minted SHEN is held in wallets as the on-chain liquidity on DEXs is more limited (WingRiders ADA/SHEN pool has ~$2.52m in liquidity, Minswap ADA/SHEN pool has ~$690k in liquidity)
Specifications
The Liqwid Labs developers have completed majority of the New Market support tasks needed to list the SHEN market including: testing the proposed interest rate model and risk parameters, configuring the SHEN oracle price feed, confirming SHEN token properties relevant for listing.
Suggested SHEN Market Parameters
The proposed SHEN interest rate algorithm parameters and resulting interest rate curve are as follows:
Great suggestion! I voted yes for SHEN, but here are my two personal impressions of the documentation.
1).It may be better to specify that it is not eligible for LQ rewards
Reason: Since SHEN is not a stablecoin, we thought it would be excluded from LQ rewards.
2).It may be easier to understand if the document explains how SHEN’s unique risks are reflected. It’s a little strange that the risk parameters for SHEN and DJED are the same.
(I may be doing something big wrong )
In other words, my gut feeling was that SHEN’s risk parameters should at least be rated as riskier than DJED.
Reason:
This is because SHEN takes the following two risks to protect DJED.
(a). Higher volatility risk than ADA
To make a very crude argument, SHEN will go up 20% if ADA goes up 10% and go down 20% if ADA goes down 10% to protect DJED. (Of course, this is not an exact calculated number.)
(b).Liquidation risk
If ADA crashes significantly, we will not be able to liquidate (SHEN burn) to protect DJED’s veg.
These are very solid points to consider. We can speak about a more conservative set of risk parameters for the SHEN market. To answer your point on LQ rewards, each asset supported on the protocol is eligible for rewards, regardless if it is a stablecoin or not.
In response to your feedback and correct points related to SHEN’s unique risks, the following mainnet parameters for the SHEN market are being proposed.
A reduction in maxLTV from 75% to 50%
A reduced Liquidation threshold from 80% to 55%
An increased liquidation discount from 10 to 12%
Our core team has discussed these risks and feels confident the updated mainnet parameters properly reflect the risk SHEN imposes on the protocol while also recognizing the value in supporting the DJED protocol’s reserve token.
One last point related to your feedback, SHEN market suppliers will earn LQ user distribution rewards beginning at SHEN market launch based on the interest accrued in that market. The community can apply the governance multiplier to adjust the rate of LQ distribution to the SHEN market (or any other market) in the future using the governance multiplier.
It is important to note that once the LQ multipliers are implemented (e.g. incentivizing specific markets more than some others), we expect users behaviors to adapt for earning these incentives.
Currently, every $ of interests paid or received is eligible for the same % of LQ rewards (as the current system split 50%-50% between the suppliers and the borrowers).
The multipliers will allow the Liqwid community to create positive loops for its ecosystem such as:
*Illustrative example: Users of any borrowing and lending protocol wants to have stablecoins and Liqwid has a low DJED supply.
A positive loop through DJED & SHEN incentives could be:
Liqwid open the SHEN market, users supply SHEN as collateral and borrow ADA against it
Users supply the ADA to the DJED protocol, mint new DJED and re-resupply the DJED on Liqwid.
LQ multipliers will be an important component of the User distribution incentive deployment (47.5% of the total LQ supply), where its overall goal is the user acquisition and TVL growth for Liqwid app.
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