Summary:
Since recently, ADA borrower LQ rewards have been capped at 1:1 the USD-nominated value of the repaid interest. Multiple reason the cap was reduced:
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Multiple community members on Discord have noted the original 3:1 rewards were being heavily concentrated to Optim bond token leveraged ADA borrowers completing looping strategies.
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Up until the last few months, very little ADA interest repayment revenue was being generated, so even with the 3:1 cap, the majority of the 20k LQ monthly borrower rewards were still not being distributed (only 5-7.5k LQ were distributed).
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As per general observation by a number of community members and core team members, the ADA borrower rewards are a heavy source of sell pressure for what many feel is “artificial real yield”.
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Multiple upcoming catalysts: Liqwid v2 mainnet, the broader macro crypto bull cycle and current catalyst in Liqwid ADA market’s increased utilization and open loan value.
*Also important to note the initial proposal did not define a specific multiplier level or a cap/floor on the multiplier, the proposal only defined 20k LQ per month as the max upper bound amount of tokens to be distributed to ADA borrowers based on repayment volume each month. The remaining parameters needed for the rewards quant model to properly calculate rewards amount each day/week were undefined; this was left to discretion of core team in the attempt to achieve goals of 1. increased ADA loan repayment volume and 2. increased ADA market utilization.
Proposed Change:
This proposals seeks to remove the 20k LQ monthly ADA borrower rewards that were introduced with proposal 29 in early November 2023: https://app.liqwid.finance/governance/proposal/29
Reasoning:
In Proposal 29 in early November 2023 Liqwid DAO voted to introduce monthly borrow rewards (20k LQ) to ADA borrowers based on the USD amount of interest repaid. The goal was to stimulate ADA borrowing demand at a time when ADA market utilization hovered consistently around 2-3% for the majority of Q3 and 4 2023.
The result of this proposal has been a boost in ADA borrow volume with utilization now hovering between 6-8% consistently. Also important to note the Liqwid ADA market has grown more than ~50% in deposits since the initial proposal passed in early November.
Alongside further updates such as the introduction of Optim 1 month Bond Tokens as collateral in the ADA market enabling 9x+ leverage on ADA stake value the protocol has seen some of the market dynamics at play as Liqwid ADA borrow rate has now increased to a level that makes the leveraged ADA staking trade unprofitable for Optim BT holders (before LQ borrow rewards are applied). In Ethereum DeFi a relatively simple positive yielding looping strategy (assuming liquidity remains constant and safe lido smart contracts) exists where ETH holders can mint stETH and borrow ETH on Aave against their stETH (and repeat the process multiple times until they achieve desired leverage amount). There are multiple aggregators that even automates this process for users so only a single Tx needs to be signed to loop and to unwind the position in future. This is only possible because raw ETH on Aave yields 0 staking yield thus ETH lenders are okay earning low yields because anything is more than 0. This creates low borrow rates for stETH holders who can lever up their staked ETH position (which continuously earns 4-5% base and increases in value daily via lido rebasing).
For this to be possible ADA borrow rate on liqwid would need to be consistently < 3%, and to be clear it was near that level before borrow rewards were introduced. At current ADA borrow rate > 6% this is no longer true meaning Optim bond token holders can’t make the math properly math for the leveraged ADA staking trade to be profitable without making up the difference in LQ borrow reward yields. This type of inorganic borrow demand is simply not a long term viable path for the protocol and by most metrics one could say the stated goals of the introduction of borrow rewards (increase ADA market utilization, increase ADA interest repayment volumes) have been achieved.
TLDR: Cardano’s innovative liquid staking model means leveraged staking trades similar to the Lido stETH-Aave ETH trade users loop to juice their staking yields is not profitable on Cardano (without LQ rewards).
Conclusion:
Removal of monthly borrow rewards is the logical next step for the Liqwid protocol at this time given ADA’s market dynamics, the broader macro environment and crypto bull cycle and the upcoming Liqwid v2 launch which naturally increases organic ADA borrowing demand. The Liqwid core team is in favor of this proposed update to remove LQ borrow rewards.
Do you agree with the proposed update to remove LQ borrow rewards?
- Yes
- No