Proposal: Enhancing Liqwid Protocol's Reward Mechanism to Align with Perpetual Borrowing Nature

Liqwid operates as a perpetual borrowing protocol, meaning that LQ rewards should reflect this perpetual nature. Tying LQ rewards solely to interest payments contradicts the essence of the protocol’s perpetuality. Therefore, the system ought not to incentivise suppliers and borrowers solely based on interest repaid; rather, LQ rewards should align more closely with the perpetual borrowing nature of the protocol.

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I disagree on this point: perpetual loans means lenders could potentially go years without receiving any interest if borrowers top up their loan’s collateral. The entire point of the shift is to generate revenue for lenders on shorter scale monthly timeframe given that the protocol allows for opening loans that technically never need to be repaid.

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@DC1 I have thoroughly read Proposal 29 and considered your reasoning. Here is my response:

The nature of the platform is perpetual borrowing, if you want to achieve “The entire point of the shift is to generate revenue for lenders” then increase the steepness of the second slope as you intend to do so. This is more beneficial for the suppliers in comparison to rewarding LQ for repayment. Borrowing is perpetual in nature on Liqwid and borrowers should continue to be able to borrow without being forced to repay. Rewarding them in LQ to repay will cause wash borrowing as we have seen with the ADA market via the Optim Bonds, interest is already accrued to the debt every 15-30 mins. Either way suppliers are benefitting by supplying. The current strategy to reward repayment has failed in the stablecoins market, I will explain my reasoning below, therefore a new approach is required.

The human brain responds x2 more to loss than it does to a gain, it responds x2 more to the ‘stick’ than it does to the ‘carrot’. We know this from the magnificent work by Prof. Daniel Kahneman, we need to implement ‘loss aversion’ in our strategy when we require market participants to ‘behave’ in a certain way.

Did rewarding repayment work for borrowers of stablecoins? It didn’t as they have leveraged up ADA and the carrot offered to them by way of LQ rewards isn’t getting them to repay the debt or in reducing the utilisation rate. It is more profitable for them to continue to keep their leveraged positions open to benefit from the increase (upside) in the value of ADA despite incurring higher APR and not benefiting from the LQ rewards.

Therefore, increasing the steepness of the second slope (‘stick’) is significantly a greater incentive for them to repay the stablecoins borrowed as opposed to the LQ rewards offered. The ‘carrot’ method didn’t work because they are benefiting from the upside of ADA despite the higher APRs they are currently paying. The upside they receive is greater than the cost of borrow.

Proposal 29:

“The proposed rewards scaling approach would distribute LQ to lenders in markets proportional to the value of repaid loans. This would incentivize new lenders to deposit in markets with the most realized interest income from loan repayments as they will have the highest LQ rewards yields.”

Why did you choose this approach? Why are you aiming to incentivise “incentivize new lenders to deposit in markets with the most realized interest income” instead of rewarding markets with the highest utilisation rate to bring down APR for borrowers to incentivise further borrowing? (targeting overheated markets).

Which one is better for the protocol?

  1. Suppliers deposit assets in markets with highest repaid loans in USD value? (the current approach) or
  2. Suppliers deposit assets in markets with highest utilisation rate to reduce APR for borrowers to incentivise further borrowing and growth of those markets?

Evidently the 2nd option will assist to naturally grow the protocol TVL greater than option 1.

Currently the reward for borrowing stablecoins and not repaying the debt while borrowers leverage up into ADA is greater than the cost of borrowing. Again, I am of the opinion that the steeper APR second slope will result in repayment of debt when the utilisation is very high or it will bring in fresh supply. Thus, suppliers would not need to be provided with LQ. The time which borrowers will repay the loan(s) is not known, therefore it is an inefficient method to distribute protocol resources based upon repayment.

Your comment in Proposal 29
“This incentivizes lenders to deposit in markets with the most USD value in outstanding loans.”

We did not achieve your above objective with the current LQ reward structure. We are incentivising suppliers to deposit in the ADA market despite the utilisation being circa 5-7%. The total borrow for the ADA market is only $2.2mn, for DJED and IUSD it is $3mn and $3.6mn respectively but these markets aren’t currently being rewarded. Stablecoin borrowers aren’t incentivised to repay because the upside is higher than the current cost of borrowing therefore they aren’t repaying. Thus the agenda to reward repayment by offering the LQ as a carrot has failed. It has only caused wash borrowing in the ADA market but has been successful in bringing millions of ADA to the platform.

The protocol LQ rewards could be more efficiently rewarded to increase TVL promoting real borrowing.


@DC1 please review, let’s get the ball moving.

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The reality is both option 1 and 2 are suitable to the protocol. It’s a debate over interest accrued vs. repaid but the truth is lenders on liqwid benefit greatly from both (so it probably makes sense to move to a quant based rewards model that rewards both markets with high repayment volume and high interest accruing equally).

please review, let’s get the ball moving

the ball is already moving we have already discussed a number of community agreed upon changes coming to Liqwid market rewards soon: 1. removal of all borrow rewards, 2. removal of the stablecoin target rate, 3. implement quant model that rewards lenders in each market based on total USD interest accrued vs. repaid (by default this model would distribute 50% of lender rewards to markets with most USD interest accrued and 50% to markets with most USD interest repaid), a Liqwid rewards subDAO team could be formed to measure market data (similar to Minswap Farm rewards Working Group) and implement bi-weekly updates to market multipliers (essentially minswap farm tier points system) and potentially a shift in the 50/50 ratio (e.g. if goals shift to incentivize markets with more USD accrued vs. USD interest repaid or vice versa).