Transition the monthly fixed LQ user distribution rewards to a dynamic reward system

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.


Great idea, I will vote yes.


i will vote yes also


Maybe reducing emissions is necessary, but I don’t think the proposed scheme will have the intended effect.

The APR would drop to around 8% for the Djed market, ad 1% for the ADA market, which will cause many borrowers to leave, causing the APR to drop even more (below 3% for the Djed market).

I think there needs to be a negative feedback loop in the way the emission rate is computed, so that the emissions are increased (or at least kept stable) when the TVB drops to incentivize suppliers & borrowers to come back.


you mean APR in $ADA will drop?

Right now, you’re proposing to distribute 100% of the interest paid as LQ to suppliers, I think this could be tweaked to incentivize people to come in early while TVL is low:

Set a dynamic scheme where we increase the APR dependending on liquidity (or TVB), random numbers below, should be tweaked:
If TVL < 50M → 200% of the interest paid in LQ rewards
If TVL < 100M → 150% of the interest paid in LQ rewards
If TVL < 200M → 100% of the interest paid in LQ rewards
If TVL > 500M → 50% of the interest paid in LQ rewards

There should also be lower (10k/month?) and upper caps (200k/month?), to avoid giving too little rewards if all borrowers leave, and avoid distributing 5M LQ per month if the TVL explodes and the LQ price decreases


I’m OK with reducing the rewards emission rate if there’s also a reduction of the core team tokens distribution rate otherwise it’s not fair


I would vote NO to this proposal in its current form, although I do support an LQ emissions reduction.

I agree with @LapinMalin that incentives for early adopters should be at a higher rate than those arriving later in TVL terms.

I like the idea of Lapins proposed dynamic scheme above with some undecided % of interest paid in LQ rewards (to be debated), and would attract a YES vote from the wallets I control.


So if you do support the LQ emission reduction, then voting YES will solve this, which is the main reason of this vote.

Regarding the exact APR that will be implemented as part of the dynamic system, as written, they are dynamic and can be changed. I would then propose a second vote after the introduction of the dynamic rewards to set the APR that are deemed the best (given a price/costs ratio). These APR can be change many times and this flexibility in reward design gives the protocol ability to react better.

Bear in mind that APR in % are highly depending on the LQ price, which impact the reward. The supply shock should impact positively the LQ price, and per extension the rewards given.


Can you define fair?

Yield farming is for free and is not a given right anywhere in the world. Team tokens are allocated for the individuals who are working and developping Liqwid.

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I don’t think this proposal (in it’s proposed form) is good for the growth and the mid- to long-term perspective of the protocol.

Liqwid is competing for liquidity in the Cardano DeFi market, that is currently rather small compared to other chains. If Liqwid drops the rewards for supplying liquidity to Liqwid below what is offered by the competition, liquidity will move to other products as the price elasticity of yield farmers can be assumed to be very high.

This is crucial as it is important for Liqwid to get a headstart in terms of available liquidity, since people tend to prefer the largest, well known and most used solution (centralization effect). Having slightly higher than market average reward APRs is exactly how you can archive that.

Yes, this will draw liquidity from yield farmers, which might be inclined to dump their rewards after distribution, but this just opens up purchase opportunities for people bullish on LQ and the tokens will end up in the hands of mid- to long-term supporters either way.

In addition to that I think Liqwid should not make the LQ rewards APR static, but rather the LQ token emission static. This way you allow the APR to be above market levels on purpose in order to draw liquidity from other products and thus reach a higher liquidity at the market level APR.

Once the rewards APR is shown in the app that emission can be reviewed via governance in a regular manner (once every 3 months or once every 6 monts e.g.) in order to adapt to changed market situations.

By having a static LQ emission you also avoid a possible chain effect of initially lower than market level APRs leading to less TVL, which in turn leads to lower rewards, which further reduce the rewards and so on.


I do not support the extent to which rewards are proposed to be reduced by in this temp check. Also I believe that earlier adopters should be rewarded at a higher rate than later adopters in TVL terms, and I cannot see how this proposal caters for this notion.

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WEN Vote. I am eager to on chain this as soon as possible a bit of catching up to do on my part to fully understand the dynamic pros as well as possible cons but I approve of the proposal so far.

I think it should be vice versa, the more TVL the larger share of rewards should be paid in LQ, because if you have such TVL your token is not seen as garbage to be sold once received

Stop managing LQ price and improve your product. Currently organic use is pretty much nonexistent. Take incentives away and you’ll see a few thousand dollars in monthly interest in the DJED market. Nobody wants to short ADA, so virtually no rewards will go there. Where will your ADA supply come from when Liqwid APY=staking APY? I for one would rather hold my ADA in the safety of my wallet.


( I can’t find the voting button (isn’t it implemented?) )

I think an easy way to balance the pros and cons is to transition gradually.

Distribution amount based on the old reward system: Distribution amount based on the new reward system
Start at 100:0 and change the ratio by 1% every other day to 0:100 after 100 days.

Opponents have argued that “early people should be given more incentives,” so this approach is consistent with their argument. At the same time, it will be migrated to the new system over 100 days.

What about a hybrid emission cycle. Dynamic rewards based on the above, but with a minimum static distribution (i.e. 50k or 100k baseline). This way we could reduce emissions, still allow them to be dynamic based on interest paid, but also prevent it from being a 90% decrease overall.**

I have read through comments in Discord and in this forum. While I acknowledge the points presented by the team and definitely these points are valid. Nonetheless, I am still inclined on not having the LQ distribution reduced, especially when circulating supply is still very small.

The action of reducing emission when circulating supply is still very small will cause future LQ buyers to wait on the sideline. The logic is that why would one buys a token when he knows huge portion of it is still not released.

I understand that this benefits the current LQ holders in the short term as inflation reduction will cause less selling pressure of LQ, leading the LQ price to stabilizing. Nonetheless, this will severely impact LQ pricing long term, because future buyers are deterred from buying and holding this kind of token, in fear of 90% tokens yet to be released.

The issue is not really about reducing emission, it is about distributing LQ in the most decentralising way, rewarding supplier only and same-market slashing are already good steps to avoid excessive gaming of the reward system.

In view of the expected bull run in crypto market within the next 12 months due to Bitcoin halving, LQ holders do not need to worry so much about short term price volatility as price will go back up as long as the core team is able to deliver its milestones.

According to my rough estimation, with the current pace of distribution, by April 2024, the total LQ distributed would be around 5 million (i.e. 24.1% of the total supply), still quite low in my opinion, but definitely better than current situation.


As @JohnnySachs explains in his post in discord #gov-discussion, with the currently proposed level of ~90% emissions reduction, the team will gain control over the voting after just a few months if this proposal goes live, due to the amount of vested tokens going to the team compared to rewards going to the community. Therefore the team could vote into existence any proposal they see fit, without the community actually having an effective voice. How is this not a concern for a protocol supposedly with a decentralised governance model ? Why would anyone bother even voting ? Just looking for answers and trying to understand this aspect.

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If I understand the proposal correct, you are proposing a LQ emission model, where the amount of LQ to be distributed for a rewards epoch is not known beforehand. It would be calculated at rewards distribution and depend on 2 factors: 1) protocol revenue from interest paid and 2) LQ price (probably an avg. over the rewards period).

In this scenario I could see a possible “attack” vector where a whale or a group of people use their funds to drop the LQ price for a rewards period, which in turn increases the amount of LQ paid out as rewards. The LQ needed to drop the price could be less than the additional LQ gained from more LQ being distributed as rewards (especially if DEX liquidity is low). In the most extreme case this could lead to all LQ allocated to User distribution being distributed in a single reward period.

Has this scenario been assessed by the team? If yes, could you please share some detail on it? Is it an issue and if so how do you plan to avoid this? Or is this not an issue and why?