Summary
This proposal seeks to redesign the interest rate models for the stableswap LP token markets on Liqwid Finance, specifically:
The proposed changes shift these markets away from an interest rate model primarily derived from the lending characteristics of their underlying stablecoin assets toward a model aligned with the native yield profile of the LP tokens themselves.
The objective is to better reflect the economic nature of these assets, encourage new DeFi strategies involving LP tokenized liquidity positions, and improve utilization and market activity within these currently underutilized markets.
Motivation
The current LP token interest rate models mirror the dynamics of stablecoin lending markets. However, LP tokens fundamentally differ from standard stablecoin assets in both utility and expected user behavior.
Historically, borrow demand for these LP tokens has remained limited despite strong lending yields available in the underlying stablecoin markets. This suggests that market participants may not view LP tokens primarily as borrowing assets for traditional lending strategies.
Instead, LP tokens derive most of their intrinsic value from:
- DEX trading fee generation
- Liquidity incentives
- Yield-bearing exposure to stablecoin liquidity provisioning
- Composability within broader DeFi strategies
As such, the current high-rate borrow model may unintentionally suppress potentially productive use cases by making LP token borrowing economically unattractive.
This proposal therefore aims to:
- Align borrowing costs with the actual yield profile of LP tokens
- Encourage leverage, arbitrage, and liquidity access strategies around LP positions
- Improve utilization and overall activity in these markets
- Establish a more suitable long-term framework for LP-token-specific interest rate management
Specification
This proposal recommends the following changes for both stableswap LP token markets:
Proposed Parameter Updates
| Parameter | Current | Proposed |
|---|---|---|
| Base rate | 5% | 0% |
| Optimal utilization ratio | 90% | 80% |
| Optimal rate | 25.76% | Match LP token historical APR |
| Max rate | 47.39% | 4x LP token APR |
Initial APR Targets
| Market | LP APR | Proposed Optimal Rate | Proposed Max Rate |
|–|–|–|
| Minswap USDM-USDA LP | 0.2% | 0.2% | 0.8% |
| SundaeSwap USDCx-USDM LP | ~0.2% (estimated *) | <1% | <4% |
* This value should be considered an initial approximation. At present, there is no robust on-chain or protocol-native system for accurately tracking historical LP token yield data on Sundaeswap. Future infrastructure improvements may enable more precise and responsive adjustments according to grounded data, alongside analyzing periods other than 30D for Minswap.
Parameter Committee Authorization
This proposal additionally recommends enabling the parameter committee established under LIP-145 to periodically adjust:
- Optimal rate
- Max rate
In order to maintain alignment with the evolving historical yield profile of the LP tokens over time.
Rationale
This proposal represents a strategic shift in how LP token markets are modeled within Liqwid.
Rather than attempting to price LP token borrowing similarly to the borrowing costs of their underlying stablecoins, this model instead treats LP tokens as yield-bearing productive assets whose borrow demand is more likely to emerge from yield-focused DeFi strategies.
Under this framework, LP token borrow rates become economically viable relative to the yield generated by the LP positions themselves.
This may unlock demand from strategies that were previously unprofitable under the current interest rate model.
Potential Strategy Enablement
Yield Boosting
The simplest potential use case:
- Provide liquidity on a DEX and earn LP yield
- Supply LP tokens on Liqwid
- Earn additional lending yield on top of the native LP yield
This creates a passive yield enhancement opportunity for liquidity providers.
Yield Arbitrage
A more advanced strategy involving active rate monitoring:
- Supply yield-bearing assets on Liqwid
- Borrow LP tokens at relatively low rates
- Redeem LP tokens into underlying stablecoins
- Lend those stablecoins on Liqwid or deploy elsewhere
If stablecoin lending yields exceed LP borrow costs, borrowers may capture spread opportunities. This strategy can also be looped.
Liquidity Access While Providing Liquidity
LP holders may:
- Provide liquidity on a DEX
- Supply LP tokens as collateral on Liqwid
- Access borrowing liquidity without exiting liquidity positions
This enables LP providers to maintain market exposure while utilizing their liquidity elsewhere in DeFi or real-world applications.
LP Token Looping
An advanced leveraged yield strategy:
- Provide liquidity on a DEX
- Supply LP tokens on Liqwid
- Borrow assets against LP token collateral
- Acquire additional underlying assets
- Provide more liquidity
- Repeat
This allows users to increase effective exposure to LP yield while paying borrowing costs in other markets.
Expected Impact
- Higher utilization: Lower borrowing costs may increase LP token borrow demand
- Improved capital efficiency: Underutilized LP markets may become more economically active
- Expanded DeFi composability: Enables new strategies involving LP token collateralization and leverage
- More appropriate market pricing: Aligns LP token borrow costs with their actual yield profile rather than unrelated stablecoin lending dynamics
- Increased supplier attractiveness: Greater utilization may improve lending yields for LP token suppliers relative to current near-idle conditions
Risks & Considerations
- Behavioral uncertainty: Borrow demand may remain limited despite lower rates
- Yield variability: LP token APRs can fluctuate substantially depending on trading activity and incentive programs
- Leverage risk: Some enabled strategies involve liquidation and interest rate exposure
- Data limitations: Current LP APR estimation infrastructure remains limited and may reduce precision in parameter targeting
- Potential underpricing risk: Borrow rates that are too low may create temporary inefficiencies or excessive leverage incentives - this can be offset by increasing the steepness of the second slope by the parameter committee
Forward-Looking Considerations
This proposal may establish a new framework for how productive yield-bearing assets are treated within Liqwid Finance.
If successful, similar approaches could eventually be explored for:
- Additional LP token markets
- Other composable DeFi assets with externally-derived yield characteristics
The proposal may also help generate valuable empirical data regarding LP token borrowing demand, strategy behavior, and utilization sensitivity under low-rate conditions.
Next Steps
-
Vote on the proposal
-
Implement the updated LP token interest rate parameters
-
Monitor post-implementation metrics, including:
- Utilization
- Borrow demand
- Supplier APY
- Strategy adoption
- Liquidity stability
- Liquidation activity
Loan origination fee
Based on feedback from community member @Rschwab, the proposal resulting from this temperature check will include an option to disable the loan origination fee for these markets, alongside the proposed interest rate adjustments.
Poll
Do you support the proposed redesign of the stableswap LP token interest rate models?
- Yes, I support the proposed updates
- No, I do not support the proposed updates