I am writing to submit a draft proposal to improve the Liqwid Protocol.
Aim of changes:
- Increase TVL on Liqwid Protocol
- Efficiently allocate protocol resources with the aim of growing TVL incentivising long term supply and borrowing
- Prevent arbitrage and prevent valuable protocol resources (LQ rewards) from being wasted on temporary ADA borrowing
- Incentivise and onboard larger players to the protocol
- Reward risk taken by participants to increase bridged asset supply
Changes I recommend to improve the protocol:
- Reduce the maximum withdrawal rule in one go from 1/16 down to 1/3 of 90% available supply (ideally get rid of this rule).
- Increase the above from 90% of 1/16 drawdown to 100% so that suppliers can withdraw up to 100% of supply for any market.
- Rule for interest rate when utilization of an asset reaches 90-95% - higher interest rates.
- Rule for interest rate when utilization of an asset reaches 100% and above meaning that borrowing is no longer possible and borrowers are not repaying the debt causing borrowing to exceed 100% of supply by way of interest accruing – higher interest rates.
- Limit LQ rewards to 1:1
- Change LQ Rewards to reward assets based upon highest; 1. Utilisation % and 2. $USD value in assets supplied. Reward supply side.
- Incentivise bridged stablecoins supply more by way of paying; A. Minimum LQ APY reward (Minimum monthly/weekly LQ) rewards for stablecoins supplied and B. Minimum LQ APY reward (Minimum monthly/weekly LQ) rewards for bridged assets supplied.
- % of interest generated by the protocol should go towards an insurance fund/bug bounty program etc
- Remove LQ rewards for borrowing assets and repaying interest
- Increase minimum interest rate to match (Aada charges 25% of interest minimum for the fixed term loan)
Reasoning for above:
- Larger players cannot withdraw assets, for example 326k USDC available but maximum withdrawal in one transaction is only 5.7k USDC. This will put off larger players from bringing in volume to the platform. This is also additional risk for those who brought over bridged stablecoins, now they are stuck. Thus nobody is supplying it despite the higher supply rates current offered. Market has decided that the risk isn’t worth the reward.
Larger participants are currently held hostage by this rule, as they cannot withdraw the funds they supplied! If 5.7k USDC is withdrawn by a participant then in the next withdrawal transaction they can only withdraw a maximum of 5.5k USDC then a maximum of 5.3k USDC in the following transaction. The max withdrawal amount decreases with every new withdrawal! A participant who supplied 1,000,000 USDC to the protocol would never be able to withdraw their funds without doing hundreds of withdrawal transactions. Imagine placing your money into a bank and the bank telling you that you can only withdraw a maximum of 5.5k at a time, then on the second withdrawal the max withdrawal drops down to 5.3k then the later one down to 5.1k and so on.
In the above example where 326k USDC is available suppliers should be able to withdraw at least 1/3 of it in a single transaction at 100% face value instead of 90% face value.
- Higher interest rates once 90% utilisation is reached will bring in more supply as the current reward structure isn’t bringing in more supply to stables (USDC and USDT), rates are not rewarding enough, if rates were rewarding enough for risk taken then users would have supplied more USDC and USDT etc.
- Prevent interest repaid to LQ Rewards arbitrage e.g. currently we are facing this with the Optim bonds.
- LQ APY to reward most borrowed assets on Liqwid to promote the increased supply of those assets mostly borrowed by utilization AND USD value. Increased supply reduces borrowing costs thus increasing borrowing and protocol TVL.
- Insurance policy to protect LQ participants, a small percentage of all interest generated to go towards protection from loss, hacking and bug bounty program. Percentage of interest automatically should go to wallet(s) as an insurance policy offering assurance to the participants of the protocol that it can handle errors/hacks etc. Institutional or big money isn’t coming onboard primarily because of this reason.
- Efficient allocation of LQ assets to incentivise asset supply which increases TVL, bringing down borrowing costs (APR), which in turn increases borrowing and further supply into the protocol by borrowers who provide collateral to borrow. This cycle promotes actual TVL growth on the protocol.