Technical Frequently Asked Questions
Liqwid is an algorithmic and non-custodial liquidity protocol for earning interest on supplied assets and borrowing Cardano native assets. Users of the protocol can interact with money markets implemented as a set of pooled liquidity smart contracts. Users supply assets (a lender) when they call the market contract's mint function and borrow against their supplied assets as collateral (a borrower) when they call the borrow contract. The Liqwid DAO Token LQ unlocks voting power for protocol users to participate in the protocol's decentralized governance and when staked is used as a reserve asset generating two layers of yield for LQ stakers (liquidation profit and percent of total revenue).
The lender deposits assets into a Liqwid market contract and receives interest-bearing qTokens. Deposited assets transferred to the market contract are instantly available to borrowers. Lenders can remove assets from the market contract at any point in time assuming sufficient liquidity exists.
The borrower can instantly borrow assets from the protocol provided they lock sufficient qToken collateral. The collateral factor is different for each supported asset, e.g., ADA has a collateral factor of 70 meaning for every $100 worth of ADA supplied users may borrow up to $70 in any asset from the protocol.
There is no maturity date for the loan and interest rates on the borrowed amounts are updated each block based on lender supply and borrow demand per asset. Borrow interest accrues to the borrow principal to update the balance and the total balance must be repaid exit the market and redeem the full collateral amount.
If the loan is not repaid before the borrower’s account liquidity goes into negative, the system liquidates the borrow and seizes the collateral to repay the suppliers. This protects the Liqwid protocol from credit risks.
Access to a global liquidity pool unlocks the following benefits:
The Liqwid protocol is a set of interconnected smart contracts functioning as a decentralized money market on the Cardano network. Holders of supported assets can earn interest by depositing them in the Liquid protocol. In return the user will receive interest bearing qTokens which represents a user’s claim on the market’s assets. If a user deposits ADA, they will receive “qADA”.
qTokens are Cardano native tokens which function as interest bearing assets much akin to a savings account. As borrower interest accrues in a market, the exchange rate of qToken to the underlying pool of assets increases. The redemption of an underlying asset can be performed at any point in time by burning qTokens assuming sufficient liquidity exists.
The difference in value between the qToken and the underlying token is the time value of money, which corresponds to accrued interests to be received on the supplied assets by qToken holders. The value of the asset XYZ deposited by the suppliers will increase over time due to the accrued interests.
*The exchange rate between the underlying asset to corresponding qToken is increasing over time to capture the continuously accruing borrow interest.
*Please note market and pool are used interchangeably and both refer to the same Liqwid market smart contract that users supply assets to and borrow from.
*If sufficient liquidity does not exist for qToken suppliers to fully exit the market (due to high market utilization), users may partially withdraw assets from the protocol up to the amount of remaining assets. The protocol has liquidity buffers (market reserves) to ensure sufficient liquidity always exists for suppliers to exit a market.
*The above is an example to visualize the qToken to underlying asset exchange rate change. For protocol math purposes the actual exchange rate will begin at .02, not 1:1.
Yes, ADA suppliers can stake their coins and receive rewards in their staked wallet while they are supplying to the ADA market.
The value of the ADA deposited by the supplier will increase over time due to the accrued interest. The staking reward for ADA will accrue in a user’s staked wallet and not impact the value of supplied ADA.
When using Liqwid, suppliers do not lend assets directly to the borrower, rather they deposit their assets into a market smart contract, which next determines the value of deposited assets and mints the equivalent value worth of qTokens within the user's wallet. When borrowing against supplied assets as collateral, the smart contract will determine the LTV benchmark for borrowing based on the supplied asset.
Users supply assets to the protocol when they call the mint function in the market contract and confirm the asset transfer in their connected wallet. Upon successful transfer of assets into the market contract qTokens for that asset (e.g. qADA) are minted in the user's wallet. Interest is not distributed to qToken holders, rather interest is built directly into the qToken to underlying asset exchange rate. As a result any user holding qTokens is earning interest.
qTokens accrue interest via their exchange rate to the underlying asset; as total borrow interest repaid increases, qToken become convertible into an increasing amount of the market’s underlying asset, even while the number of qTokens in the user wallet remains constant.
*The interest rate (APY) earned by suppliers is unique to each Liqwid market.
Building on sound macroeconomic models, interest rates (the cost of money) should increase as a direct function of demand; when borrow demand for an asset is low, interest rates should be low, and vice versa when borrow demand is high relative to supply. The utilization ratio U for each Liqwid market a combines the supply and demand into a single variable:
Governance processes will determine future updates to the demand curve which is represented as a function of utilization Ua. Borrowing interest rates will vary by Liqwid market and will also be updated via governance mechanisms as required in the future.
*Lending interest is built directly into the qToken Exchange rates.
The risk-free rate of return is the theoretical rate of return of an investment with zero risk. The risk-free rate represents the interest an investor would expect from a risk-free investment over a specified period of time. The real risk-free rate can be calculated by subtracting the current inflation rate from the yield of the Treasury bond matching your investment duration.
In the traditional finance world, the risk-free rate is around 2%, and corresponds to the US T-bills 10 years. Currently this rate is around 1.3%. (Source: https://www.wsj.com/market-data/quotes/bond/BX/TMUBMUSD10Y/ )
Stablecoins have a risk-free rate of 0%, because they do not have a limited supply and can be “printed” at any time. Cryptocurrencies with a limited supply have a risk-free rate of 2%. This risk-free rate is also used by the DeFi lending leaders such as AAVE or Compound.
As mentioned earlier, the interest rate depends on the Utilisation rate (Ua), which reflects the ratio between the borrow demand and the amount supplied to the market by lenders. The interest rate of a market A depends on its Ua and fluctuates dynamically as followed:
▪ For every asset, an interest rate is calculated depending on the supply/demand for this asset.
▪ Arbitrages between assets/interest rates is performed by the users by supplying different assets.
▪ A user can supply any supported asset to the protocol.
1.6.1 Initiate a loan
The borrower needs to supply a supported asset as collateral on the Liqwid platform to be able to open a loan. Each supplied asset will unlock some value the user may borrow against depending on the assets assigned collateral factor.
Once the asset type and amount are selected, the borrowed assets are transferred from the market directly to the borrower’s connected wallet. The maximum amount to borrow is determined by the collateral factor set by the system for the asset type the user supplied as collateral.
Example: In the situation where 1 ADA has an exchange rate of 2 USD, the borrower is depositing 1,000 ADA as collateral. The market value of his pledge is USD 2,000 and the collateral factor for ADA is 70% x USD 2,000 = USD 1,400. This is the maximum amount to be borrowed before the user reaches negative account liquidity and risks liquidation.
1.6.2 Are there any fees to open the loan?
There are zero fees to open a loan in the protocol. Borrow interest accrues at the market rate on the loan balance.
During the lifecycle of a loan, the liquidity cushion could reach zero or the account liquidity approaches negative. This occurs when the value of the collateral is falling relative to the value of the borrowed asset plus accrued interest.
To actively remove the credit risk of the protocol, materialized by the exposure to defaulting loans, a liquidation incentive has been created. The mechanism is that any user (liquidator) can bring asset to a liquidator pool, which assets will be used to be exchanged against the seized collateral of a defaulting user to reimburse the original asset that was borrowed.
Example: In the situation where the ADA exchange rate drops from 1ADA for 2 USD to 1ADA for 1.5 USD. The market value of the collateral is USD 1,500 and the collateral value is USD 1,050. If the borrowed amount (nominal+interest) is greater than the adjusted collateral value (USD 1’050), the borrow will be liquidated.
Liquidators can supply assets in the liquidation pools. Once a wallet is liquidated, the seized collateral is exchanged against the assets from the corresponding liquidation pool. The discounted collateral price used for the liquidation allows the liquidator to directly seize collateral at a 10% discount. The reward is claimed pro-rata among all the suppliers of a liquidation pool during a liquidation event.
Illustrative example: User Z supplied a value of USD 100 ADA and borrowed initially USD 60 AGIX. At some future time, the total borrow balance increases to 70 USD (incl. nominal + interest) reaches 70% of the LTV (the liquidation threshold for the ADA market). When the liquidation threshold is reached the protocol seizes the ADA collateral and sends them to the AGIX Collateral pool (reward pot for corresponding Liquidation pool). There a value of USD 77.77 of ADA (70/0.9) is exchanged against a value of USD 70 AGIX from the Liquidation Pool. The remaining 22.222 ADA are sent back to the liquidated borrower’s wallet. The AGIX Liquidation Pool suppliers are sharing USD 77.77 of ADA pro-rata to their original share of AGIX in the Liquidation Pool. The original supplier(s) of AGIX 70 are getting their assets back.
Liquidation Pool Workflow
*Note that liquidation pool suppliers will receive default borrowers seized collateral as qTokens.
Much like a corporation where shareholders can vote, earn the profits as dividend, and suffer the losses, LQ holders can vote, receive a staking reward and get exposed to the “loss”, while they are depositing their LQ tokens on the platform in the safety pool. When a liquidation pool is empty or not large enough to liquidate a default borrower, the LQ stakers are responsible for this liquidation event.
In such a case, LQ tokens are exchanged pro-rata with a 10% discount against the seized collateral. LQ tokens are transferred to the suppliers of the borrowed assets pro-rata in the qToken staking pools.
Example: User Z supplied a value of USD 100 ADA and borrowed USD 65 AGIX. At some future time, the total loan to value reaches 70% (liquidation threshold). Then the protocol will seize 100 ADA and transfer them to the AGIX liquidation pool. If this pool is empty or not large enough, then a value of USD 77.77 of ADA (70/0.9) is exchanged against a value of USD 70 LQ from the Safety Pool. The remaining USD 22.222 ADA are sent back to the liquidated borrower’s wallet. The LQ Safety Pool stakers are sharing USD 77.77 qADA pro-rata to their original share of LQ in the Safety Pool. The original suppliers (qAGIX stakers) of USD 70 AGIX receive LQ for a value of USD 70.
Liqwid interest rate models include a utilization ratio we define as the kink point, above which the slope of the rate curve steepens to disincentivize new loans and to incentivize borrowers to repay existing loans and suppliers to deposit assets and capture the increased APY.
Once the system reaches a max utilization rate threshold on a selected asset, no more new borrowing of the selected assets can be performed by the users. The system blocks any new loan if the specific asset supply does not increase. Borrows can still be repaid and suppliers are still able to deposit assets in this market.
Note: The max utilisation rate threshold will default to 90-95% for most supported assets.
Liqwid developers have built an oracle mechanism that combines a Plutus contract with an off-chain oracle reporter submitting Tx’s to update price feeds with data sourced from public key signed exchange APIs. The price feeds will use a time weighted average price (TWAP) method and average all the reported prices off-chain before updating on-chain. All the work done off-chain can is completely verifiable by users on-chain.
The interest paid by the borrowers is distributed to the suppliers who provided the assets to Liqwid markets. Interest earned is directly accrued to the value of your qToken. The part of the value created which is not distributed to the suppliers is called the “Net margin”.
The reserves act as a liquidity buffer and insurance mechanism to ensure suppliers have sufficient exit liquidity. The collateral factor plus these market reserves gives the protocol a significant cushion so that it can always make good on interest owed to lenders.
The DAO is collecting reserves to further develop the protocol and fund developers building products that scale adoption across the Liqwid ecosystem.
The staking reward represents the percent of the value captured distributed back to LQ stakers, who deposited their LQ tokens on the protocol to be used as reserve assets in liquidation events.
A DAO is a Decentralized Autonomous Organisation. It functions like a general assembly, where all shareholders of a corporation can submit proposals and vote on changes. Every LQ token unlocks 1 voting power in the DAO, but only staked LQ tokens in the Safety Pool for a full epoch can use their voting power to cast a vote.
Proposal topics can range from the whitelisting of new assets to changes in a market’s interest rate model parameters (or any other protocol parameter), but also include protocol code updates. The DAO also determines the used of the DAO treasury to finance improvement of the protocol or community ecosystem.
The use of the DAO is decided by Liqwid community members, which together form a “borderless corporate entity”. Community members are empowered to introduce Liqwid Improvement Proposals (LIPs) to improve the protocol or grant proposals to build products and integrations for Liqwid ecosystem users.
▪ “Liqwid Improvement Proposals” (LIPs) are a path to change the functioning code, decided on by the community of LQ voters.
Liqwid protocol contracts are deployed on a decentralized public blockchain, meaning it is not controlled by anyone, or by any group or organization. Therefore, there are no sole administrators of the Liqwid protocol holding keys that access administrator functions in the contracts, such as interest rate setting. All changes must be performed through a vote of LQ holders in the protocol’s governance contracts, the heartbeat of the Liqwid DAO.
The Core Team will continue to build products on the protocol by leveraging the SDK and developing composable products with other Plutus DeFi protocols. Core Team will also remain active in the Liqwid DAO governance processes. The team has several ideas on secondary product offerings for scaling protocol usage and will continue to develop new tools to drive additional value for the Liqwid ecosystem and LQ holders.
As the DAO will be responsible to decide the future of Liqwid, every user can support the protocol by staking LQ, participating in governance processes and voting on proposals.
Also, the Core Team cannot solve / develop all the blockchain features, especially the one that are important for many other DeFi protocols. Therefore, the Core Team also propose some features in Catalyst for IOG to develop them, where Cardano users can also lobby for their proposal there.
Once you are eligible to submit proposals and vote, you can participate in any active vote by delegating your voting rights to the address of your choice:
▪ Your personal wallet
▪ Another user
▪ An application
If you receive voting right through delegation, you can vote by using the delegated voting rights.
Anybody with 1% of circulating LQ delegated to their address can propose a governance action; these are simple or complex sets of actions, such as whitelisting a new asset, changing an asset’s collateral factor, a liquidation rate, changing a market’s interest rate model, or changing any other parameter or variable of the protocol.
Proposals are executable code, not suggestions for a team or foundation to implement.
All proposals are subject to 3 days voting period, and any address with LQ voting power can vote for or against the proposal. If quorum of 10% of circulating LQ is reached and a majority of at least 50.0001% votes submitted are for the proposal, it is queued in the “Timelock” and can be implemented after 2 days.
Decisions are made based on LQ stake-weighted voting. Change in system are performed when:
1. Minimum total vote required for proposal to succeed (quorum) defines the percent of LQ in circulating supply that must vote, defaulted to 10%.
2. 50.0001% of the votes submitted are “for” for the proposal).
Note: The total voting rights correspond to the total LQ token supply issued at the time of the vote snapshot, deducted from the DAO treasury LQ tokens.
3.1 External audit
The Liqwid protocol Plutus on-chain code (validator scripts) will be externally audited by the Tweag team.
We do not have an exact timeline prior to audit start but it is expected to last a total of 4-6 weeks to complete. The protocol will launch on mainnet following the audit.
Non-exhaustive audit task list includes Property based testing (QuickCheck), Unit testing, Penetration testing of every function in each Liqwid validator script, initial findings report, final audit report.
3.2 Internal audit
The protocol on-chain codebase is currently undergoing an internal audit.
LQ is the Liqwid DAO Token and forms the foundation of the protocol's decentralized governance. As Liqwid’s native asset LQ is used in governance processes and as reserve asset in layer 2 liquidation events. LQ total supply is fixed at 21 million and tokens have 1:1 voting power in the DAO. When LQ is staked, it allows its holders to participate in governance, earn a part of the staking reward and earn additional yield from the layer 2 liquidation mechanism. 70% of total LQ is set aside for community distribution with another
The token distribution is as follows:
Liqwid is committed to a Fair Token Launch: No ISO, no pre-sale, no VC funding. The core team bootstrapped the project development via grant funds raised in Project Catalyst.
A total of 14,700,000 LQ will be distributed to the Community over 3 years starting the genesis epoch. The token release schedule is deflationary with a baked in yearly halvening of the total remaining amount of LQ to rewards early adopters.
*Liqwid epochs will last one day (24 hours) in length.
*73 epochs per annum is for 5 day epochs in Cardano. One day epochs in Liqwid means 365 epochs each year.
Total LQ Supply Allocated for Community Distribution
*Total Supply refers to the total LQ supply allocated for community distribution: 14,700,000 LQ.
Fair Vesting LQ tokens allocated to the Core Team will be distributed according to a linear vesting schedule that will periodically release LQ to the core team, advisors, and tech partners over the course of two years starting at genesis epoch. The tokens allocated for the founding team, advisors, technology partners and future hires (25%) are held by a Plutus vesting smart contract that releases the tokens linearly on a per epoch basis for two years. The vesting period begins at the time of v1 launch.
● Total amount of LQ tokens: 21,000,000
● Percent of LQ tokens allocated to Core Team (core developers, founding team and future hires), Advisors, Technology Partners: 25%
● Total amount of LQ tokens vested: 5,250,000
● Length of vesting: 2 years
● Release schedule: linear release each epoch
LQ tokens are allocated every epoch between the suppliers (50%) and the borrowers (50%). The allocation is then distributed per market, where a multiplier can be added to incentivize supplying and borrowing from a market, stablecoins for example. The total LQ per market are distributed between the suppliers and the borrowers based on the amount of interest generated in the market during the epoch and the multiplier.
The distribution per user in each market is done pro-rata to their total supply balance or borrow. This mechanism rewards the users that generate the most value on the protocol and finally for the early adopters and community members.
The total amount of LQ tokens is and will only ever be 21,000,000.
Policy ID: da8c30857834c6ae7203935b89278c532b3995245295456f993e1d24
Asset name: 4c51 (asset13epqecv5e2zqgzaxju0x4wqku0tka60wwpc52z)
LQ was minted in the first multi-asset block using a timelock script.
The distribution percentages are designed to facilitate the most decentralized community-led protocol that effectively mitigates governance risk and ensures power doesn’t reside in the hands of a few.
At Liqwid v1 launch on mainnet users will earn LQ by supply assets to a Market and borrowing. The one-time LQ Discord Airdrop was completed in December 2021. There is no pre-sale, no ICO or other sale of any kind for LQ.