A deep dive into a brand new Qnomics
TL;DR
This article explores the tokenomics of the new Q token, designed to substitute EQ tokens in Equilibrium. The primary purpose of this shift is to relaunch the project’s financial model and support the rise of its EQD stablecoin. Q will help to activate liquidity incentives, unlock strategic partnerships, and renew the lease of a parachian slot on Polkadot. The design of the Q token reflects the specifics of the EQ.finance product line with EQD stablecoin as its key. Q tokenomics introduces staking mechanics that direct a fraction of protocol income to the staking pool.
Why are we doing this shift?
The rationale behind these amendments was extensively covered in this article earlier. To reiterate its main thesis, the Polkadot ecosystem is experiencing substantial rebuilding, and we are shifting our focus toward servicing the market of Liquid Staking Derivatives to reflect these changes.
Ecosystem fundamentals support these amendments. Polkadot has one of the highest inflation rates among all DPoS chains, currently at around 18% APR and over 40% of the DOT supply stake. As said, this alone provides the basis for Liquid Staking Derivatives in the ecosystem.
To be successful on this route, we need to ensure that the project economy can sustain pivoting the product vision and drive the further success of the renewed product offering. As we can recall, the current EQ tokenomics seems to be a weak basis due to:
- Lack of reasonable liquidity incentives
- Unclear perspective for parachain slot renewals
- Inability to cover user acquisition costs
- Uncertainty of further project funding
As such, we’ve come up with a plan to relaunch tokenomics by substituting existing EQ tokens with new Q tokens. The Q tokenomics (Qnomics) design improves on all the above and accounts for the financial specifics behind the main product — EQD stablecoin. It also introduces vast staking opportunities for Q holders and empowers them to participate in the protocol governance. This article gives a comprehensive overview of Q and the ways how it improves the current status quo.
How EQD issuance drives Qnomics
Here’s what the high-level diagram of the protocol business model looks like:
Let’s look at the above diagram from the perspective of every system participant:
- Borrowers mint EQD stablecoin against a variety of collateral assets. To manage their credit position, borrowers pay variable interest rates in accordance with the risk profile of their position. Borrowers pay interest in Q tokens. Borrowers can purchase Q tokens in advance in the Q/USDT AMM or have their collateral sold periodically for Q tokens in the Q/USDT AMM.
- Insurers provide liquidity and ensure the stability of the EQD stablecoin in case of borrowers default. Insurers receive 80% of the interest borrowers pay. During the liquidation process, the borrower’s obligations are transferred to insurers, and insurers secure repayments with their liquidity and receive collateral assets from the defaulted borrower.
- Q token stakers. Stake Q tokens and receive 20% of the interest paid by borrowers. Can use staked tokens in governance decisions for the protocol.
From the protocol management perspective, the process above ensures the balance among liquidity pools that help maintain price stability for the native Q token. Potential price fluctuations can only occur if there is a delay between the purchase of the Q token by borrowers and its sale by insurers.
Stability pool
We’ve introduced the Stability pool to prevent sharp price fluctuations. This pool contains a certain Q token allocation and USDT. This pool automatically smoothes out the situation in case of increased demand for the Q token when current holders cannot satisfy it. In this way, the buying pressure is redistributed and the collected USDT is used for the reverse situation when demand cannot meet supply.
The stabilization pool is designed to reduce internal inflation among token holders and provides a fair interest rate relative to the dollar, which protects participants from hyperinflation.
We’ve performed quantitive modeling to evaluate the dependency between EQD and Q performance and demonstrate how the Stability pool smoothes out the volatility curve. Here is the list of the initial parameters for the model:
Smooth increase in the volume of EQD minted throughout the year and its subsequent retention:
Here’s how our model reflects Q FDV based on the above parameters. Note that a Stability pool is activated at the mark of $0.3 per Q, which has kept FDV from growing before then. After investors started dumping Q to the market, the pool was activated to accumulate tokens within the protocol again:
Staking mechanics
Here are some highlights of the Q token staking mechanics.
1. Protocol calculates staking quota to target 16% APR in USD terms. If total Q staking doesn’t reach the quota, the effective APR will be higher than 16% APR. On the other hand, if the quota is filled completely, no more Q staking is allowed.
Protocol calculates the current quota in real-time on every user action and allows or disallows Q staking. Here is a formula for the quota:
fee — 20% of interest fee payable to stakers
r — current interest rate
r_tgt — target interest of 16 APR%
Pq — the price of Q token
Quota grows with the rise of the EQD supply (more debt = more rewards) and with the rise of interest rate r. The quota drops when the Q token price rises.
2. The actual reward users receive depends on several factors:
a) The amount of Q tokens locked
b) The length of the lock.
c) Value of EQD minted
d) Value of the Insurance collateral
The exact formula is way too complex to be presented here. Deriving the formula involved careful crafting of factor loadings (weights) to maximize rewards when medium-size and small-size Q token holders lock their tokens for a longer duration.
3. Users may lock their tokens for the following periods and enjoy the governance voting power multiplier along with the increased rewards (the reward weight grows approximately linearly with the lock time).
Here we treat 1 month as 28 days and call it an epoch. Users lock their tokens for the lock period starting the next epoch during the current epoch. Users who have locked tokens in this epoch start to receive rewards in the next epoch.
4. Users can claim the Q token rewards earned for the epoch after the epoch ends.
Q token distribution
The table below shows the final token distributions with details on cliff and vesting mechanics provided in the last column.
The Token Swap
As the community has voted in favor of the token swap, we will prepare a separate token swap page where users will be able to swap their EQ tokens for the Q token allocation. The swap will start on January 2, 2024, and last 14 days until January 16, 2024. The exact swap rates are:
- 1Q = 500 EQ
- 1Q = 4000 GENS
- 1Q = 0.001 DOT + 300 EQ
The Q token will become the native token of the EQ.finance parachain after we secure the next parachain slot. The EQ token will, in turn, become a regular parachain asset.
We’ve opened up a bridge between Genshiro and Equilibrium for GENS tokens to facilitate a swap for GENS tokens. Deposit GENS directly to Equilibrium from Equilibrium’s app UI.
To facilitate support for the EQ tokens bridgeable from Ethereum, we’ve opened up a bridge between Ethereum and Equilibrium. We use our own bridge (Chainsafe’s pallets) for the lack of alternative / easier-to-use options.
Final remarks
We’ve spent substantial time and effort to develop a system with enough checks and balances to sustain the potential growth of the liquid staking derivatives market in the Polkadot ecosystem. As usual, the protocol’s success will depend on numerous factors, including the general user perception and support. But the main driving factor for the entire system we propose is, of course, the circulating supply of the EQD stablecoin: the wider EQD is adopted across the ecosystem, the more use cases it has, the more EQD there is in existence, the more fees are recycled in the protocol.
EQ.finance is set in a perfect position to ignite the native stablecoin of Polkadot finally!
About EQ.finance
EQ.finance is the first liquid DOT hub of the Polkadot ecosystem. It enables liquid DOT holders to leverage their LDOT, vDOT, eqDOT and other wrappers for dollar-pegged EQD stablecoins. EQD is the first interest-bearing decentralized stablecoin of the Polkadot ecosystem. It is collateralized by a weighted basket of assets and can be used as a universal unit of value within the DeFi ecosystem. eqDOT is a liquid DOT staking wrapper that allows users to participate in DeFi on Polkadot while earning DOT staking yield.
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