Proposal to improve Liqwid: Operation Middle Earth

This proposal aims to increase Liqwid’s total value locked (TVL) and enhance the protocol’s functionality, particularly for large investors. To accelerate growth, it’s imperative to create a more welcoming environment for whales, those who bring substantial amounts of capital to the platform. Currently, the protocol lacks friendliness towards such investors, which hampers asset inflow and fails to adequately incentivise suppliers. For instance, once assets are supplied, there’s no option to withdraw when the market is highly overutilised, and the interest rate structure doesn’t effectively compel borrowers to repay or decrease borrowing below a certain threshold. It’s essential to address these issues to foster growth effectively.

Before responding to this proposal, please carefully consider its contents, including my previous proposals and discussions on Discord. It’s important to approach this with a comprehensive understanding of the implications and suggestions put forth.

Disclaimer: While I am a supplier and occasional borrower, I prioritise recommendations that benefit the protocol as a whole, even if they conflict with my personal interests. Ultimately, the protocol’s interests and long-term success should take precedence over individual gains, envisioning Liqwid as a banking protocol with billions in TVL.

My current recommendations to significantly increase TVL on Liqwid are as follows:

  1. Allow asset utilisation up to 99.99%.
  2. Enable asset withdrawal up to 99.99%.
  3. Increase the kink point to 70%, 75%, or 80% utilisation (to be implemented alongside steeper APR suggestions below).
  4. Increase the interest rate second slope beyond the kink point to 100% or 365% at 100% utilisation.
  5. Traders often pay up to 3,600% in some CEXs during extreme market circumstances, similar to our kink point, to maintain their positions. As traders use Liqwid for leveraging long or short positions, a steeper second slope is necessary to encourage debt repayment during such extreme market conditions.
  6. A governance vote should grant the protocol/team the power to double the interest rates in the second slope monthly for every month that assets have been overutilised in any asset class for more than 10 consecutive days without falling below the kink point. Ideally, this adjustment should occur automatically. The system will trigger a doubling of the second slope once a monthl at maximum. Note that this adjustment only applies to the 2nd interest rate slope, where assets are over-utilised and suppliers are locked in.
  7. Immediately cease incentivising borrowers to repay debt by rewarding LQ for debt repayment, as this practice wastes critical protocol resources. The proposed changes will compel borrowers to act in extreme market circumstances (above the kink point) to bring the market back below this threshold. The duration of consecutive days mentioned above can be subject to debate and adjustment.

The rationale behind this change is to enable the protocol to find a ‘sweet spot’ for interest rates on assets, where overutilisation becomes unsustainable (as we can see in the DJED, USDC and USDT markets). Without such measures, borrowers lack the incentive to repay or reduce debt, perpetually locking in suppliers. Liqwid is designed to be dynamic, allowing suppliers the flexibility to withdraw their assets. However, in extreme market conditions (utilisation above the kink point), human emotions such as greed, fear, or FOMO can override financial incentives, rendering APR less effective in encouraging debt repayment.

This proposal aims to address the ongoing issue of overutilisation by establishing a ‘sweet spot’ for interest rates that discourages perpetual overutilisation. Utilisation rates for DJED, USDC, and USDT have remained consistently above the kink point for many months, indicating the inadequacy of the current system. The proposed changes to the second slope, such as a 50% APR at 80% utilisation, are insufficient to address the issue effectively. The failure to take decisive action has resulted in whales having their assets stuck on the platform for extended periods, deterring further participation.

  1. The protocol must undertake more robust measures to bring utilisation back below the kink point.

  2. Maintain competitive interest rates for all assets below the kink point.

  3. Upon V2 implementation, aim to reduce the UTxO withdrawal rule to 3 or even 2 if feasible.

  4. Cease LQ rewards for suppliers in markets where the 2nd slope of the interest rate is active due to high utilisation, for the duration of its activation. A steeper 2nd slope should naturally encourage additional supply. The absence of new supply indicates that the slope isn’t steep enough. This change should be implemented alongside the proposed steeper 2nd rate.

  5. Discontinue LQ rewards for borrowers upon loan repayment to mitigate wash/farm borrowing practices. Instead, rely on a steeper 2nd slope to incentivise repayment or borrowing reduction, adopting a “stick” approach. Previous “carrot” methods have not effectively reduced stablecoin utilisation below the kink point.

  6. Offer additional incentives to bridged stablecoin asset suppliers to stimulate further supply and bootstrap asset provision. If the 2nd slope is adequately steep, the protocol won’t need to provide LQ rewards to suppliers. This reallocation of LQ resources can facilitate protocol growth elsewhere.

  7. Prioritise maintaining a whale-friendly environment by minimising intervention and keeping the protocol parameter changes aligned with their needs.

  8. Extreme market conditions, characterised by utilisation beyond the kink point, demand radical measures, as outlined in my recommendations above. Activation of the kink point signals aggressive borrower behaviour, necessitating a steeper slope to adequately reward locked-in suppliers and attract further supply.

  9. Enable a higher % of assets supplied to be borrowed

  10. Enable a higher % of assets supplied to be borrowed within the first interest rate slope by extending the kink point. Extend the borrowing capacity beyond the current kink point at the 1st interest rate slope, permitting reduced borrowing of a higher percentage of assets. This move aims to boost TVL and asset utilisation, but only in tandem with a significantly steeper 2nd slope.

  11. Enable suppliers to withdraw assets without caps, ensuring ease of movement akin to platforms like Aave, thereby fostering confidence among whales.

  12. Implement severe penalties for excessively high borrowing utilisation, particularly above the kink point, to incentivise prompt repayment. Extreme market conditions warrant corresponding actions and parameters.

  13. Incentivise asset supply in high-utilisation markets above the kink point by generously promoting and rewarding suppliers. Increasing the 2nd slope interest rate drastically aims to rectify extreme market conditions.

During periods of low utilisation, prioritise competitive borrowing rates to encourage borrowing and cater to borrower interests. Parameters should lean towards borrower-centric approaches.

When utilisation surpasses the kink point, indicating market extremity, implement aggressive parameters to safeguard suppliers. Focus on supplier-centric measures that promote debt repayment and stimulate new supply. In times of high demand for further supply, the protocol should offer significant incentives for supplying assets.

  1. The current second slope has failed to prompt borrowers to repay debt or reduce borrowing below the kink point. Similarly, it has not sufficiently incentivised suppliers to provide more assets to lower utilisation below the kink point again.

Low utilisation - incentivise borrowing with low borrowing rates.
High utilisation - incentivise repayment with extremely high rates.

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