Proposal: Update to LQ emission schedule

[G30G43BR4]

This proposal aims to implement an updated model to the emission of LQ rewards to users supplying liquidity to the protocol.

If this proposal passes it would override any changes made by the vote on a “Transition to Dynamic Rewards Emissions”. {1}

The aim of this proposal is to have an emission schedule that on the one hand gives holders of LQ clarity about the amount of LQ that is going to be emitted and on the other hand is efficient at attracting liquidity to the protocol.

What are the main issues with the proposed “Transition to Dynamic Rewards Emissions”?

• There is no minimum amount of LQ to be emitted which leads to an unknown timeframe for emitting all LQ

• In its current form the proposed emission is going to lead to a sub market level APY which would lead to the protocol possibly loosing liquidity (see screenshot)
  

• Having emission drop with usage dropping can lead to a downwards spiral. This is why the idea of a dynamic emission should be that it decreases if selected metrics are performing well and increases if they are not

What are the proposed temporary changes to the LQ emission?

• Drop the monthly LQ emission to a static 80k LQ
• Increase the monthly LQ emission based on updates to the protocol:
  • 10k LQ once APYs from emission are shown in the app
  • 5k LQ for each of the next 3 markets launched
  • 5k LQ once the Interest Dividend is enabled
• Change the DJED market modifier from 3x to 1x
• Add a minimum LQ allocation of 500 LQ per month for each market

What is the impact of these changes?

Nota bene: All numbers shown below are estimates based on market parameters and market prices from May 5th, 10:15 AM UTC.

The emissions of LQ are reduced by initially around 60%. Right now there is a lot of friction in converting the high APYs for supplying DJED (roughly around 150%) into a growth of supplied liquidity. There are multiple possible reasons for that. To name a few: DJED can not be minted at the moment, the APYs are not transparent to the users as they are not shown in the app, the protocol is still young and users might be hesitant or simply not know about it. By reducing the emissions now more LQ can be emitted at a later when these points have been addressed, which allows for a more capital efficient use of the emissions.

The minimum allocation of LQ to a market is added to help the initial bootstrapping of new markets.

These changes will reduce the APYs for supplying assets to Liqwid. The changes are primarily impacting the DJED market as can be seen in the screenshot:

This is due to the removal of the 3x modifier to the DJED market in combination with the drop in LQ emissions. Since no additional DJED can be minted at the moment a high APY on DJED is not going to attract a lot of additional liquidity. The modifier can be changed anytime in the future if the market situation requires it. Update: The minimum allocation per market has been forgotten in the above screenshot. It would apply to SHEN as well and put SHEN APY to around 8% while slightly reducing the DJED and ADA APYs.

The drop in LQ emissions to users of the protocol will also impact the distribution of governance weight since the team vesting of LQ tokens can not be changed due to contractual reasons. However, this proposals provides the users with more clarity on how much LQ is going to be emitted in future time periods.

How would the future emission model work?

The main goal of this proposal is to lay the foundation of the emission schedule for the following months. While this emission schedule could be left untouched there are also the options to move to either a different static emission schedule or a dynamic emission schedule.

The goal of applying a dynamic model to emissions is to reduce the emissions in times when sufficient growth is apparent and increase the emissions to support growth when needed. This can allow the distribution of rewards to last for a longer timeframe.

This proposal will provide a framework model for a possible implementation of a future dynamic emissions schedule. The specific factors and metrics shall be decided upon in a future proposal.

The dynamic emission model proposed would look as follows:

• monitor one or multiple metrics (TVL, borrowing demand, market dominance, etc.)
• change the LQ emissions based on the change of these metrics
• keep the LQ emissions within set boundaries (lower and upper cap of emissions)

In order to dynamize emissions, one or multiple metrics are needed that impact the emissions. One metric could be e.g. Liqwid’s TVL compared to the Cardano TVL or Liqwid’s TVL compared to the TVL of Cardano lending protocols. If in a month on month perspective the TVL of Liqwid performs better than the “benchmark” emissions would be reduced and the other way around. This avoids a downward spiral of a reduced usage of the protocal resulting in a reduction in LQ emitted which in turn could lead to a reduced usage again. {2}

The lower and upper cap to the LQ emissions provides the users with transparency about how long the LQ emissions will last for at minimum and at maximum.

{1}: Liqwid App
{2}: Rethinking Emissions Schedules. What are Emissions and Emission… | by Marco_112358 | Medium

• Yes
• No

[JimRobins]

Nice work mate. I voted yes in the emissions vote. Mainly because I trust the teams desire to do the best for the protocol. I know we are going to get less rewards initially, but I tend to think long term and felt some short term pain may be for longer term benefit. In saying that though, I much prefer the idea of a stepped response. Incremental changes rather than brutal hits. I look forward to reading some of the discussion on your proposal, but wanted to thank you for going to the trouble of putting this up for debate. Well done.

[Shaffalahien]

A solid proposal in my mind. I think it addresses the issues facing the protocol in a more stable way. The potential unpredictability of the “Transition to Dynamic Rewards Emissions” and likely damage it could do to liquidity are more adequately addressed here. It is careful with emissions, but doesn’t strangle them. With the reduction in LQ emissions to suppliers we can come up with plenty of programs that continue to help decentralize ownership without losing a sizeable group of liquidity providers. If this proposal was put into effect we would see rewards extend to over a decade at competitive APRs, or repurpose these rewards for programs that encourage community support of the protocol for years.

[JimRobins]

Providing rewards over a longer term, could potentially be a positive thing for the Lq token, creating a predictable return on investment. Definitely worth further discussion, I think?

[itzDanny]

I have voted “No” in the current live vote and would vote in support of this proposal should it reach mainnet vote

[Shaffalahien]

Yes, and we can dial all of that in with the proposals for new programs to distribute LQ to community supporters. Bug bounties, DeWork, and Liquidation Incentives are the current ideas circulating. I think starting slow with those emissions while people get involved and things get ironed out would help “bank” some LQ for other useful ideas and incentives blitzes during opportune times in the future.

[redsparrow]

It is obvious that with current APRs, LPs will go away, there are other dapps with much more attractive APRs.

I don’t like this proposal. The suggested implementations seem to me to be arbitrary, random numbers…

I would vote yes only because the current APRs are ridiculous.

I would like to see some proposal with a minimum floor for LQ allocation. we don’t want low APRs and lose liquidity to other dapps, we need to be competitive. We could think of a maximum allocation per month as well.

Minimum and maximum monthly allocations would be designed so that the supply was distributed in x months.

We could think of an APR curve, where the highest yield would be paid to the first users and lower yields for LPS that enter many months later, after all, the risks are greater at the beginning. Do we need the supply to take longer than 5 years to be distributed?

The Liqwid team freaked out when they saw the price drop, but I don’t know why, they don’t seem to understand supply and demand.

Since the tokenomics of this project went out the window with the vote where the Liqwid team voted with all their might, we could increase the APR for LQ stake and encourage people to hold and participate in governance instead of dumping ASAP.