Summary
In an effort to help the Liqwid DAO onboard the OADA system in an incremental, conservative manner, this proposal aims to establish a new liquidity pool to support OADA for lending and borrowing only. Proposals to support additional parts of the system such as sOADA and isolated collateral in the ADA markets will be individually put forth in the future as the OADA system and Liqwid’s synergy matures.
Token Overview
The OADA System is a liquid staking derivative and yield aggregation system employing a two-tranche token structure to create OADA, a monetary premium ADA-pegged asset, and sOADA, a yield-bearing asset. OADA is stripped of all system-aggregated yield, while sOADA bears the yield and risk of the system. In the event of losses, sOADA would incur losses, leaving OADA unaffected. However, the system is designed to maintain a low-risk profile utilizing only very conservative yield accrual strategies as it evolves.
OADA can be staked to become sOADA, which can be unstaked for OADA at any time. To redeem OADA back to ADA, users must swap it using the Splash stableswap OADA/ADA. The system provides deep liquidity for this swap to facilitate exiting, making it the only way to return to basic ADA after minting. OADA maintains its peg within a one percent range (0.99-1.01) through automatic buybacks and arbitrage opportunities managed by the system’s Algorithmic Market Operations. The AMO interacts with the stableswap to maintain and arbitrage the peg via minting, burning, and adding and removing LP.
Since its launch, OADA has amassed 15M ADA in TVL and continues to grow its assets under management daily, further reinforcing the stability and impact of the system. Liquidity in the OADA/ADA stableswap has grown to about 22M in TVL, handling approximately 16K ADA in daily volume with a daily APR of about 0.03% yield for liquidity providers.
Project Overview
Optim Labs has been a leading development team in Cardano since the ecosystem’s inception. Core team members have previously worked as early contributors to Minswap and as the leading instructor for MLabs’ Plutus internship program and have remained prominent members of the community ever since. Optim’s commitment to the safety and security of their protocols can be evidenced by their double audit of Liquidity Bonds by Tweag and MLabs, setting the precedent of auditing redundancy early on. Similarly, the OADA system was audited by Anastasia Labs as well as during a bug bounty program held earlier this summer.
To date, Optim’s products have handled a historical TVL of about 170M ADA over two years without any security issues or operational problems. Furthermore, the Optim DAO has spearheaded a strong commitment to decentralization by sharing control of the protocol’s core functionalities with a council of trusted members from the Optim and Cardano communities.
OADA Market Reasoning
The OADA system is a pioneering product, serving as both a liquid staking derivative and a yield aggregation mechanism uniquely designed for the eUTxO model on Cardano. It is set to usher in a new era of complex and composable DeFi money legos, propelling the ecosystem forward. Establishing a symbiotic relationship between OADA and Liqwid lending markets early on will ensure that the vision and mission of both products remain aligned and synergistic, enabling both protocols to grow their impact across DeFi together.
As the stable pegged asset in the system, OADA bears much less risk than sOADA and can be more closely compared to raw ADA in its risk profile. For pricing data feed purposes it can actually be safely assumed that the ADA/OADA price is 1:1 without exposing the system to accruing any bad debt, which, while perhaps not intuitive, can be illustrated by the following examples.
An OADA depeg to the downside would actually improve the health of the loan by increasing the LTV ratio as the price of OADA falls against the collateral used for backing. Alternatively, an OADA depeg to the upside would make liquidations more profitable as liquidators would be able to mint OADA, pay back the loan, unlock the collateral, mint more OADA than they started with, then arbitrage the price down to the peg by using the stableswap pool to sell for even more ADA in exchange.
The primary use case for a OADA lending market is that the user would supply OADA into the market for a higher yield than supplying ADA because as long as the cost to borrow is less than the yield on sOADA, both the lender and borrower profit from this dynamic. They are essentially trading risk and using the OADA Liqwid market as a price discovery mechanism for the cost. So if we consider staking sOADA to be the higher risk profile yield strategy and lending ADA to be the lower risk profile one, then lending OADA becomes the mid risk profile alternative. Offering users more risk profiles to better suit their desired exposure is a net positive in user experience overall. It’s also important to consider that the added market stimulation this would spur directly benefits the Liqwid DAO and LQ stakers with additional profits.
Additionally, an OADA Market actually helps stabilize the ADA market by allowing it to cool off in a safer and less volatile manner as it provides an alternative asset to borrow for the same arbitrage opportunity purpose. The way this plays out in real time is that if the cost to borrow ADA starts getting high there’s two reactive forces that come into play. The first one is that people with already open loans are incentivized to close them. The second is that ADA holders are then more incentivized to supply at the higher yield. Both of these market reactions will lower utilization and thus bring the interest down to a healthier level.
Since OADA is so easily converted back to ADA, then OADA suppliers are incentivized to swap out and supply the ADA market instead. This would decrease OADA supply but increase its utilization rate and thus increase the interest. So as ADA interest is falling OADA interest would rise at the same time, which at some point will incentivize depositing OADA instead of ADA. Essentially, both markets would help each other find a healthier interest rate equilibrium by balancing each other out.
Conclusion
This proposal intends to add an OADA market for lending and borrowing on the Liqwid protocol. Onboarding OADA as an asset is the foundational cornerstone from which a symbiotic OADA <> Liqwid synergy can be based upon, and from which future dynamics can be extrapolated on when other parts of the system, such as sOADA and isolated collateral, are integrated into the Liqwid protocol as well.