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

Temperature Check
21

I am also of the opinion that this should only be pushed forward if the team also agreed to an emissions reduction for their tokens too.

However the sooner we can get a decent amount of tokens circulating the sooner it is going to be to complete price discovery. Imo its better to pull the plaster off clean, let the market decide the fair token valuation and build from there. Sticking tape on a bucket with holes in it will just lead to a prolonged bleed while we wait for fair value to be realised, which will be worse for protocol image.

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22

I have read this thread and some of the discussions in discord and some of the arguments against carry some weight for me. I also read the proposal Minswap made before switching to their dynamic release schedule. I really liked how the proposal was written, discussion the pros and cons of that proposal. I do think it is a good approach to have a dynamic emission that tries to balance between reducing the rewards without losing TVL, users and usage.

But I do think the current parameters for rewards distribution, 100% supplier bonus, no wash borrowing and 3x DJED rewards should be kept in place for at least some month until maybe around 20% of the total supply of LQ is out in the wild. After that a well thought out dynamic emission schedule / algorithm could be introduced.

What is my reasoning for this:

  • I do think the small circulation supply of LQ is a problem, the rate of inflation will also drop sharply with the current emission schedule and finally you will also reward the early users of the protocol more. I personally hope to get some more cheaper LQ to stake. I got my first five LQ for Sundae Swap LP (not one of my brightest ideas) for more than 500 ADA so I still need to reduce the average price because I do not want to sell my LQ. :wink:

  • keeping the current rewards for a few months gives you time to really put some time and effort into a dynamic rewards system, maybe controlling not only the monthly emissions but the rewards for each asset in relation to the usage of the supply, how to integrate the treasury and maybe the buy backs of LQ for the fee switch…

  • stability / trustworthiness of the protocol and it is parameters. Of course, I do understand flexibility and sometimes quick changes are required. But sometimes changes, proposed changes or at least the communication of these seems somewhat erratic. And we have yet to see the effects of the changes introduces mid- April on the rewards, why have significant changes two weeks after that?

  • that the top two wallets got ~30% of the rewards is somewhat concerning and I feel dumb for not wash borrowing myself, but the reduction of the rewards changes nothing regarding this “problem”.

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23

Yes, Suppliers will still receiving LQ as incentivization mechanism but with lower rates as the current one. The dynamic system offers flexibility to adjust the APR, while the fixed reward system cannot.
We can always increase the APR through gov. votes, which is why it is called a dynamic system.

If we keep as it is, and the LQ price goes to zero, then you have nothing to pay for the team to create product.

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24

The dynamic system offers flexibility to adjust the APR, while the fixed reward system cannot.
We can always increase the APR through gov. votes, which is why it is called a dynamic system.

Currently, no one knows the sensitivity analysis between % increase of APR and % increase of TVL. Only thing we know for sure, is that the current system is destroying LQ and the ability of the protocol to grow and incentivize future users.

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25

Yes, early users are being incentivized and will be kept being incentivized. What is changing is the amount of rewards, which is much more reasonable and adapted to the current protocol’s revenues.

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26

Currently, the amount of LQ distributed is destroying the LQ price and this is not rewarding the LQ holders either which are massively diluted through fixed LQ amounts independent of the protocol usage.

Staying like this until 2024 and waiting for a potential bull run (no one as a crystal ball) is not a strategy, nor a reaction.

If the LQ price crash to zero you do not have any incentive for the future users which you may have in 2024.

This upcoming vote if for the LQ holders, not for the speculators or the yield farmers that want rewards for free. Anyone holding LQ is interested by having the LQ price going up and they should vote yes for that. If you are here for the long term, then you vote yes.

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27

You are partially correct about an attack vector, but it resides with the current system. I will not tell the details, as I do not want to give bad ideas.

Voting yes to the dynamic reward system is also a solution to mitigate this risk. With dynamic rewards, the goal is to give an amount of LQ in $ (LQ price x LQ amount) which is a ratio of the protocol revenues (paid interests by the borrowers).

Having the LQ price in a downward spiral is a risk for the protocol longevity as I explain in the original post. The dynamic reward is much more flexible and can be adapted at anytime through a governance vote, while the fixed system does not give any room for maneuver.

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28

If the community wants an active voice, they can always buy the tokens, as I remind you that the public did not pay anything for the LQ what were distributed (315k airdrop + 207k Feb) until today, as we did not perform any ISPO, Zap-in, or public sale.

The reality is that you cannot have a decentralized protocol without sustainable cash-flows/revenues created by the protocol. Also, I do not know any example of a company where people are not paying anything and own the things with a majority from day 1. You are talking about an utopia, but if you know an example, please let me know.

Decentralization never happens in one day, but rather gradually, as the protocol grows and expand. If no product is build by someone who is incentivized, then there is no utility, no value, and a dead token and community.

The Cardano ecosystem is today to little to have a sufficient TVL allowing Liqwid to self finance itself, but I strongly believe this will come one day, but rather in a few years.

The dynamic system will distribute more and more LQ with the growth of Liqwid’s TVL and the Cardano ecosystem (more projects creating more good tokens, leading to more TVL, more revenues, more LQ distributed, and finally more decentralization).

The fixed rewards system today is providing way to much rewards compared to the TLV, and put in danger the longevity of Liqwid. Crypto adoption will take years, and Liqwid needs to stay competitive over the time, until we reach self-financing and Cardano growth.

2 Likes
29

Hello @castler , thank you for your detailed answer, but there are a few comments I want to make regarding your last 4 paragraphs.

  1. No one knows the right sensitivity analysis. E.g. for 1% more of APY, how many % of TVL do you get more. DEXs have much more data and examples to try measuring it. We will also do our analysis, but this is something dynamic, as the market is moving. → First step is to remove the fixed rewards system.
  2. No, this assumption is 100% wrong “the rate of inflation will also drop sharply with the current emission schedule”. Release March and April will double the supply, and keeping like this is increasing even more over time. Finally, reading you want to buy cheap demonstrates that you are just thinking about filling your bags, while I am having in mind the utility of the LQ stakers and community as a whole. I have a long term view, while you have a short term view and just represent yourself with such an argument. (you may rephrase it)
  3. Waiting is a bad solution. We have seen the results of February, and the same will happen with the March rewards. The solution is to act now (reduction of LQ issuance) and the model is known. → Avoiding the cause of the crash and moving to something dynamic.
  4. Yes, the majority did not take a loan (only 6% did it in February) and the current system gives way too much to the borrowers. Also, the fixed system does not improve the decentralization.
  5. You second quote is also wrong “but the reduction of the rewards changes nothing regarding this “problem””. If the problem is mass-inflation leading to LQ token crashing, then yes, having a supply shock is changing that.
  6. Governance will be done through Agora and will offer the platform for discussing/implementing any future changes.
  7. Regarding the value proposition for the LQ stakers, please see my thread there (copy-past from the Discord where users ask the same questions).
    On the long term, LiqwidDAO ‘s goal is to generate value and long-term incentives for the LQ holders and converting the yield farmers (users) in LQ holders.

picture LQ stakers models
picture LQ stakers models705×428 56 KB

As you have read in the governance forum proposal, the change of LQ emission system from fixed to dynamic will create a supply shock over time. This is part of the goal to reward the LQ stakers with passive income and LQ utility.
The LQ utility features are: 1) voting 2) earning a staking reward (30% over 6M, and 50% over 12M) and 3) earn a percentage of the protocol revenues. [Point 2 and 3 through a governance vote]
These 3 governance votes (dynamic rewards + Points 2 and 3) combines together will create a positive price momentum for the LQ token.

By having a positive LQ price uptrend, the APR is also increasing for the yield farmers, who have their LQ rewards being more valuable, and the LQ tokens can be used as collateral too, as its price do not suffer anymore from extreme crashes.
Finally, the dynamic rewards system can be adapted through governance votes at anytime. If 100% rewards on top of the interests is to low, this can be easily change , but only if the LQ price has stabilized before.

2 Likes
30

Thank you @FlorianVolery for your reply. I think having an honest and maybe sometimes controversial discussion with your community is the best way to improve proposals. I am not a native English speaker, so it may very well be that I did not get the point across I was trying to make.

To your second point:

You are right the inflation is higher when you release 200k tokens compared to 20k tokens per month. What I meant was the supply shock lessens with each month because of the growing total amount of tokens, and there for the sell pressure decreases on its own. I still think it would be a good idea to keep increasing the total supply and I would like the opportunity to increase my holding.

And I am sorry I got to say I get a little offended when you write I have a short-term view concerning LQ. If I had a short-term view of Liqwid I would have sold my LQ long time ago with a little loss rather than sticking with it and trying to get more to stake. And I certainly would not stake, vote, or engage in any kind of discussion concerning the future of Liqwid. Hell, I have been far too honest, minting “only” three aquafarmers, providing 2k ADA on the day you launched and supplying another 2k ADA in March for a whopping 17 LQ rewards total tomorrow. I used the drop in price to get to a total of 87 LQ (which are staked) for an average price of now ~12$ per LQ so yes, I would like to buy some cheap LQ and still I am interested in long term growth of the protocol.

To your point five:

Well, I still think I am not wrong about the point I was trying to make. And I am not talking about the token price dropping, but about the concentration of LQ tokens from rewards in just a few wallets. From your own statistic the top 10 wallets got 60% of all rewards - how is that (the percentage) going to change if the rewards got cut from 200k to 20k? And to be clear I think it is good that you care about that, but sadly I do not think there is anything you can do about it.

After I saw that the top two wallets got 50k rewards in February and your statistic with the 60% in 10 wallets I also got a reality check about “decentralization”, fair distribution and community owned protocols and governance. I just wanted to give you my two cents.

3 Likes
31

I agree with this approach the most. I’m down for the aforementioned dynamic emissions, but would like to see better APRs, though I also agree that is difficult to define at the beginning and will need to constantly be tuned. Perhaps after the next rewards unlock and new price discovery happens will be a good time to attempt to create some reasonable APRs that would then benefit from the slow appreciation after rewards supply distributions reduction. I believe it’s fair, but will require patience, something difficult in crypto.

32

You could adjust the APR with a hybrid model as well right? Without a 90% reduction in emission rate. You argued on here earlier that it wont affect governance but how can that be true if team vesting periods remain unchanged? It affects governance by greatly extending the time until the team allocation can be challenged by community allocation if the team aligns. I don’t see why we are going to such extremes. I think it disincentivizes new investors because of the DAO’s ability to update emissions gives them no guarantee against higher inflation in the future. What are the pros and cons of a hybrid model (50k static + dynamic rewards based on interest - capped at static rate) vs fully dynamic that based on your estimations could be as large as ~90% reduction in emissions in short-mid term?

33

Yield Farming is for free???
I thought you had to supply your liquidity for that especially in a very new protocol which comes with risks.
If a protocol gives you a Yield it’s because It wants your liquidity it’s not out of charity.

In “worst case scenario” with 0 liquidity a lending protocol dies and the tokens become worthless even if the team has worked hard 10 years…

1 Like
34

No no no no no no

Who wants to provide liquidity with these percentages? Yield is higher even at the worst Liquidity Pool-Farms. Also the Team will still recieve stable rewards, and can stake their LQ for 50% yield. That will just lead to complete centralization of the protocol.

This is the WORST. Why are people voting yes on this?

35

LQ price is doing great! People have been buying up the dips. After a few epochs the impact of emissions will be very low.

36

I have changed after reading your opinion posts. At first I was advocating a fixed pay-as-you-go rate but now I will vote for a dynamic rate. I am in Liqwid to stay and I defend the long-term value of the project.

Now, I have an important question for me. If the main objective is to increase the value of the LQ token so that the dynamic APR is high and the cost in LQ low… what are you waiting for to implement the measure included in point 3 (earn a percentage of the protocol income )? What are you waiting for to present points 2 and 3 to the DAO?

37

happy to be here m8s

38

Hey Florian, as someone with a background in economics you should know that any average Joe today gets a 5% APY in money markets in the U.S.

You might know why local banks are failing in the US and part of it is because they are not passing interest on to account holders. Banks are paying only ~0.1% when money markets 5%. Capital flight. It’s exactly what you guys are proposing here on Liqwid. If people were more aware of the current APRs, liquidity would probably have dropped much more than 25% after this implementation.

“Yield farming is for free and is not a given right anywhere in the world.”

This is an unfair statement. Yield farming is a tool created to stimulate liquidity and distribute governance in the DeFi ecosystem and there are numerous examples of high APRs in the space.
Yield farming really isn’t a free lunch. People are taking risks and deserve to be compensated for it, especially in the first few months of a dapp, after all we don’t have insurance/FDIC.

You can’t just criticize yield farming and “forget” to mention that the liquidity provider has no support in black swan cases.

Also, I see a lot of crying from the Liqwid team. You are getting 200000 LQ per month, which is about 800000USD per month, that’s a lot of money.

Why didn’t Liqwid care more about boosting $LQ staking with higher APRs instead of bombing protocol APRs to liquidity providers?

I read another comment where you are mentioning a falling price loop that would drive LQ to 0, this makes no sense unless you think the community sees no value in the project.
Judging by emission and inflation in the first months, it was natural to expect a drop in prices, supply and demand.

You could have created a smarter mechanism where LPs and the team wouldn’t have to worry about too much price dumping if there was a higher APR per $LQ stake, but once again the Liqwid team made a dubious choice and turned the community against it.

Honestly, this whole experience seems more amateur than I would expect from a finance project.

39

Thank you for your feedback, and I will share a few economic insights with you in order your understand some of our decisions. :slight_smile:

  1. 5% APR in the banking world:
    a) Liqwid uses a dynamic money market which currently sets the rate for DJED at +5% given the utilisation rate.
    b) I remind you that LQ rewards are paid on top of the current suppliers rewards. Finally, they can be adapted anytime.
    c) Also, interests are adjusted to the demand, and currently, there is no demand to borrow ADA (utilisation ~5%) and SHEN (utilisation ~1%).
    d) yes we could increase the base rate for DJED
    e) Stablecoins represent 80% of the markets on COMP and AAVE, and there is a reason for that. → Once stablecoins are on Cardano, only these assets will really matters for Liqwid, and APR will be massive there.

  2. Team “cries”. → You just relay the non-sense you read somewhere, as the team never said anything about it. Otherwise, please post any links here?
    a) Team tokens are the remuneration for the Team to have created Liqwid and worked 2+ years on it (including the financing). Nothing more or less, and this was since day 1.
    b) you should perform a bit of research on the tokenomics of similar projects, and then you will see that the project was financed & created at a very reasonable “costs”. Once you have some real arguments, please post them here. :slight_smile:
    c) without any tokens allocated to a Team, you cannot create magically a protocol.

LQ price falling: You can read again my post about sustainability and long term vision, same as creating value for LQ stakers. (rates have been raised)

I hope, you appreciate me taking the time to answering you,