Summary: This proposal is to transition the LQ user distribution rewards from a fixed schedule to a dynamic emissions schedule based on the protocol’s interest revenue generated each month.
Currently the protocol is rewarding protocol users based on a fixed four year schedule with linear emissions of 207,812.5 LQ each month (0.99% of LQ supply).
The current system provided a strong incentive among some early claimants, especially because they received the LQ tokens at no cost, to sell as many tokens as possible while LQ market price discovery is in effect. This incentive misalignment creates a negative feedback loop where people panic sell because others are selling, and the result is that the value crashes.
As the supply shock of February has had adverse effects on the protocol’s public sentiment, the token release must be more gradual, as several community members are calling for a lower inflation rate.
Also, the current LQ rewards are a high cost for the LiqwidDAO, providing extreme APY% to the current users and does not increase the decentralization as the majority is captured by a minority of users, nor attract exponentially much more TVL/users.
According to the below data, we can see that the top 10 wallets obtained respectively for February 56% and for March 65% of the total LQ rewards, mostly due to their maximisation of the rewards allocated to the borrowers.
Continuing with high LQ inflation combined with TVL & users stagflation would result in a dilution for the LQ holders, which could lead to a death spiral (mass rewards and low usage, leading to massive drop in LQ token price).
In response to these requests and to protect LQ holders and users from speculators interested in extracting as much value from the Liqwid community as possible, we are proposing to introduce a dynamic emissions schedule and move away from the four year fixed schedule.
In this new system, the total LQ distributed will be a percentage of the $ amount of the interests paid by the borrowers. The LQ rewards will be split pro-rata between the suppliers of the markets generating these interests. We propose to start the dynamic system with a ratio of 100% for all the markets (meaning the 3x incentive for DJED will be returned to 1x , which is 100%). In the future, we will be able to tailor-made this ratio (Total LQ value in $ / Total Accrued interests in $) per market through governance votes.
If the proposal is accepted, the LQ tokens issuance will be reduced by 68% over the next 8 months according to this forecasts.
Assumptions for this forecast are:
- Have the dynamic rewards based on 100% of the interest paid by the borrowers for all the markets.
- If we have a monthly accrued interest of USD 60,000 (based on March data), and an average LQ price of 3 (illustrative example), this would give 20,000 LQ monthly issued for this reward program.
Overall, this proposal supports the goal of Liqwid to develop a DeFi platform with sustainable cash-flows and being able to keep building, while giving proportionate LQ rewards to the users.
The dynamic reward system is adapted to the TVL and users growth, which is represented by the amount of interest paid by the borrowers. This system provides flexibility and can be customized at any-time.
Also, this new system has the advantage of reducing the LQ emissions and stabilizing the LQ price, while the IT infrastructure is hardened, and new features and products are developed. This LQ reward reduction safeguard the ability of the Liqwid protocol to incentivize users at medium and long term and to keep dry powder for further ecosystem development in the future.
The Medium/Long-term goals of the Core Team are:
- Keep growing the user base and increasing the TVL. We do that by staying competitive with LQ rewards and its price development. Rewards are adapted to the TVL growth and serve to meet our internal targets for users’ acquisition.
- Avoid mass inflation to keep dry powder in case of future financing required for Liqwid IT development costs.
- Become a self-sufficient protocol that can generate its own cash-flows for future growth.
The Core Team believes that dynamic rewards are the solution to give adequate rewards, stay competitive in the future and mitigate the risk of being strongly diluted in the short term.
Why was the LQ reward system not adapted before?
Core Team expected Agora (the governance module) to arrive much earlier in March already and would then have enabled governance votes on the LQ rewards as previously planned.
Unfortunately, delays and development complexities are hard to predict, and the Agora launch was postpone and this on-chain governance vote is only happening now
How is Liqwid doing against competitors?
The current technology stack puts us far-ahead any competitor in the lending/borrowing category and no protocol will be able to match us in the near term. The dynamic reward system will allow the Liqwid protocol to keep its ability to attract new users and grow the TVL.
We note that the upcoming features for Liqwid will include new Oracles for new markets, LQ as collateral and a revamped UI/UX.
Also, Liqwid has the best tokenomics for the users and the LQ holders/investors, as the below graphic is showing.
