Introducing Liqwid
Website/Twitter/Discord/GitHub/Whitepaper
Liqwid is an idea & whitepaper initially conceived in Q1 2020. At the time, the world was just beginning to see the reality of two nightmares unfold. Covid19 was spreading at a seemingly unstoppable rate forcing entire economies to grind to a halt at a time when 60% of global debt is yielding less than 1% & nearly $16 trillion of global debt yielding negative rates. These two macro forces formed the catalyst for the relentless money printing or as Fed chairman Jerome Powell calls it “Not Quantitative Easing” (QE). When you consider these factors the resulting shift of capital into higher risk yield streams can be simply summed up as the “physics of macroeconomics”.
At the same time, there is a decentralized financial system, referred to as DeFi, pioneered by the Bitcoin network and now smart contract enabled public blockchain networks that are flourishing in the global digital economy with cryptocurrencies and digital assets. The debt levels, referred to as total value locked (TVL) in decentralized financial protocols, has grown from hundreds of millions this time last year, to the nearly $12 billion TVL today. This DeFi surge can mostly be attributed to the fact yields on these instruments are significantly higher than their yield in legacy centralized finance (CeFi). The higher yields on DeFi instruments are a result of assumed higher risk levels combined with the process efficiencies provided by smart contract and decentralized autonomous organization (DAO) technologies. Due to these factors and other protocol incentives annual percentage yield (APY) is significantly higher on decentralized protocols than what can be found in the traditional centralized finance system. Historical trends in the physics of macroeconomics are signaling assets will continue seeking higher yield which is starting to play out in real time when you consider the DeFi TVL growth rate. The emergence of DeFi (powered mostly by the efficiencies smart contracts merged with DAO’s produce) represent a 0 to 1 innovation in both legacy traditional finance & financial tech “fintech”. As a result we expect the DeFi TVL growth rate will continue at this pace, potentially even accelerating with CeFi and global macro political developments.
Famous global macro investor turned Bitcoin bull Raoul Pal often states “everyone is short on the way up” to describe the phenomena cryptocurrencies and digital assets as an emerging asset class pose to traditional legacy macro funds & investors. In many ways this sums up the asymmetric bet Bitcoin and other crypto assets represent, the magnitude of volume global debt and real estate markets command for example, dwarf the total market cap of digital assets and at some point the physics of money take control. This means in a world with unprecedented global debt volumes with negative real yields we are also witnessing sustained yields that make DeFi instruments significantly more attractive to suppliers. The physics of macroeconomics functionally translates into the flow of capital from over inflated traditional legacy CeFi instruments (currently yielding sub 1% or negative real rates) into higher yielding more efficient DeFi instruments (smart contract efficiency gains and perceived risk equate to higher yielding returns).
What does it all boil down to?
Even if smart contract technologies *only* provide a 5–10 basis point (0.05 — 0.10%) improvement in efficiency, all global debt will move to decentralized blockchains long term. If you consider how aggressive the search for secure 1%+ yielding debt products are becoming for global macro investors it’s obvious the DeFi space is ripe to innovate on the CeFi model and it’s being developed on Cardano’s public blockchain infrastructure to ensure it scales to the demand of a global user base.
If you take away a single concept from this article, let it be this: The demand for legacy traditional CeFi instruments to exist within the DeFi product offerings has never been higher and Liqwid is an idea whose time has come.
DeFi Primer: How does blockchain mitigate risk and manage to beat a centuries-old banking system?
- What do the legacy traditional CeFi equivalents of Liqwid resemble? Money markets refer to the organized market in an economy that enable borrowers and lenders to enter sub 1-year financing contracts, (2) lenders are incentivized to provide liquidity to money market accounts because of their superior security and liquidity (money market instruments are on the low end of the risk curve),(3) short-term “investment pools” as CeFi calls them include money market mutual funds, local government investment pools & sub 1-year investment funds of bank trust departments, (4) money markets provide an access for many retail investors to earn a real yield on on their savings and (5) the existence of a developed money market lubricates the functioning and increases the efficiency of a nation’s central bank (money market determined rates serve as an indicator of real time monetary and banking conditions by central banks).
I hope this article can serve to spark a larger discussion on the path our core development and founding team is on to drive for a community-led future. Several of the concepts detailed in the sections below will be validated & *updated* as implementation details are de-risked.
Let’s begin to explore:
For starters: (1) Liqwid Finance is not a bank ; it’s open source financial infrastructure (2) Liqwid does not have a “target region/user” ; Liqwid’s functional implementation is an open source lending protocol on a distributed decentralized cloud, by design this means global.
Liqwid Finance is not a bank nor does it hold any financial institution licenses.
Liqwid is governed by its members. Only members can introduce proposals or vote on updates. A Liqwid DAO & governance module will be introduced to coordinate operational strategy of the protocol into the future. All member decisions are recorded and enforced by smart contracts on the Cardano blockchain. Liqwid is simply a protocol — a set of rules and instructions executed by blockchain computer programs called smart contracts. Specifically, Liqwid is an open source automated liquidity protocol for lending. So how can open source technology earn you a better interest than a bank?
The yield products in the decentralized markets which are yielding higher APY than their equivalent yield in traditional CeFi markets are primarily crypto backed loans. Borrowers are opting to stake their digital assets and receive digital assets in return, instead of selling their digital assets (crypto) for fiat currency for various reasons (e.g. zkProof user privacy features and reducing taxable events). For most of DeFi’s short history these loans have been mostly crypto backed loans to developers & traders but the ecosystem has proven to be robust and innovative. The operational efficiencies gained from replacing a bank (heavy overhead costs) with open source software (near-0 overhead costs) will inevitably attract significantly higher value, longer duration loans to decentralized ledgers. These efficiencies are enabled by replacing core banking functions with smart contract logic with the ability to hold digital assets as collateral until both sides of the transaction fulfill their contracts’ agreed upon terms and conditions algorithmically. The removal of custody, settlement, and escrow with their heavy fixed costs built into the legacy CeFi system — to algorithmically optimized money robots lowers the fees charged to perform key banking actions.
In reality, capital is still inefficiently allocated in current DeFi markets. A majority of DeFi lending products require crypto collateral and legacy traditional finance runs on uncollateralized lending [1]. The landscape is rapidly evolving with new products like flash loans and credit concepts that while still unproven, make it clear the space is quickly iterating in the direction of uncollateralized lending.
The efficiency of smart contracts integrated in decentralized autonomous organization (DAO) technologies enables more robust debt instruments to be built & provides a level of transparency and security impossible to reproduce in the traditional CeFi financial system.
As discussed above, these efficiencies should extrapolate to mortgage debt and corporate debt moving to decentralized DeFi platforms on a longer timeline. As DeFi developers continue building the DeFi product versions of CeFi instruments, this will encourage more complex derivatives based on debt, equity and yield to move to decentralized protocols. The $253 trillion (322% of global GDP) in debt based products will continue to move to more efficient technologies over time. We believe the migration of debt and debt based derivatives from less efficient traditional legacy CeFi markets will be one of the largest transfers of wealth in human history. Liqwid exists to bring the proven innovations of DeFi to global users while facilitating this transition.
When you consider the total value of the worlds illiquid assets that can be tokenized and brought on the blockchain and the burgeoning algorithmically crypto-backed stablecoin products (de facto algorithmic Eurodollars on decentralized platforms) it’s clear there’s a massive market for people who want exposure to crypto (1) without the time, stress and volatility of the entire risk curve of owning, lending, or receiving digital assets & (2) will never have the interest to build a decentralized autonomous organization (DAO) to create a smart contract which algorithmically scripts both sides of the loan or contract. Nearly 100% of global debt is still structured via traditional legacy CeFi markets. Traditional financial organizations have different risk tolerance levels which enable varied structures at each point of the yield curve with the riskiest (VC’s or hedge funds) wanting to put the least money down with the highest return for their deal (or hedge). On the opposite end of the spectrum, more conservative investors (lenders) are often willing to give up a large portion of upside opportunity in order to access safer instruments. “Riskless” products, as traditional finance describes them have materialized in the crypto space since users who hold the tokens of “Proof of Stake” (PoS) blockchain networks can use their tokens to increase their odds of winning block production rights which yield an inflation reward when validated by the entire network of block producers (called stake pool operators “SPO” in Cardano).
What is the time value of money?
The time value of money concept can be directly translated to “$1 dollar today is worth more than $1 a year from now” due to its growth potential. Interest rates are a key quantitative representation of the time value of money. When investing in bonds or money markets, for example, the interest (supply APY) increases the value of deposited cash over time if left to compound every period (interest reinvesting to the principal amount). In Cardano’s Ouroboros staking protocol a period is called an “epoch”, lasts 5 days, and staking balances automatically compound each epoch. Liqwid will use Cardano’s epoch-based timing for various protocol functions.
As outlined above, the problem with low-risk bonds and money markets in traditional finance cannot always provide an investor with the required return expected on their investment from the appreciation of assets overtime, due to various risk factors organic to interest rates, like inflation and central banks.
How do interest rates protect against risk?
There are two types of risk-free interest rates — real and nominal, which discount the effects of risk on interest. Nominal risk-free interest rates refer to the interest rate before accounting for inflation.
Using nominal risk-free interest rates as a base, then accounting for inflation, creates a real risk-free interest rate, which includes all potential macro political risk linked to changes in a national economy. In this case, inflation represents the risk of a dynamically changing national economy independent of the bond (or debt instrument) risk itself.
Nominal risk-free interest rates are devalued by rising inflation (caused by the Fed’s currency debasement) to capture the risks produced by a national economy (in this case the US). Similarly, Cardano is building a distributed digital economy and instead of a central bank (US Feds) we use the Ouroboros algorithm to automatically coordinate the blockchain’s network security, as a result of this labor Ouroboros pays an inflation reward in the form of Cardano’s native asset ADA. This becomes the effective nominal risk-free interest rate since stake pool operators (and delegators) are incentivized to “bond” their ADA stake to the Ouroboros protocol each epoch to gain ADA rewards each block produced (at an algorithmically set % called the emission rate in Cardano).
A three-month US Treasury bill (T-bill), for example, is backed 1:1 by the “full faith and credit” of the US government (military), which has never defaulted on its debt obligations, meaning real risk-free interest rates and inflation expectations are the key variables likely to impact expected rate of return.
In the current recessionary environments (and anytime recession fears are heightened) the demand for risk-free assets should increase (driving the price up and reducing their effective yield) as the security of returns they provide become on average more highly valued by investors.
The assets themselves can also directly affect the interest rate on an investment, reflected in the time to maturity (duration), liquidity and default risks of the bond or debt instrument. In DeFi protocols such as Liqwid an additional risk exists in the form of smart contract risk. With the introduction of Cardano’s Financial domain specific language (DSL) termed Marlowe, many of the financial contracts described above (bonds and fixed term debt instruments) can be constructed using the Marlowe DSL and static analysis tooling provided. Our core development team explored this in depth during the recent Wyo2020 United Nations “blockchain finance for social good” hackathon competition.
How can these various risks influence interest rates?
Maturity, liquidity, default and smart contract (in DeFi) risks are important to investors, particularly if they hold instruments like non-investment grade corporate bonds or emerging market debt in their portfolio. These risks affect the likelihood of returning the principal and the additional rate of return (earn rate) on an investment required to compensate investors for taking on the specific risk.
Marlowe enables Payment at Maturity (PAM) smart contracts in line with the Actus financial contracts taxonomy [2] to represent fixed income instruments as well as template derivatives (options, swaps) DeFi product designers are innovating on top of. All open source and combined with a no-code Blockly web development environment as represented in the PAM “money lego” smart contract block shown above. Maturity refers to the length of an investment. Under normal circumstances, longer-term investments carry a greater risk premium. In general, the shorter time period of a bond or debt instrument means it is *less likely* to default than its long-term equivalent, making long-term bonds and debt instruments less attractive to investors.
Offering a risk premium on interest rates for longer term bonds and debt instruments makes an unattractive (perceived risk level) asset more enticing (unless expectations for the future are considerably more uncertain than in the short term, which traditional CeFi refers to as “inverted yield curve”). Liquidity risk reflects how easy it is for an investor to withdraw cash from an investment at fair market value, at a time of their choosing (in crypto assets specifically users can mark-to-market 24/7 as the digital asset markets are global and by design never close). Bitcoin is highly regarded as one of the most liquid securities purely based on the fact the markets don’t close and anyone can mark-to-market at any time they choose.
Default risk refers to the potential for a contracts’ promised return on investment not being realized. Including default risk into the expected rate of return of an investment compensates investors by offering greater returns for a higher risk of default. Liquidation incentives built into the Liqwid protocol incentivize traders (5% discount premium on collateral repaid + 1% governance tokens) to call the liquidate contract function to repay a percentage of a borrower’s unhealthy loan value to mitigate Liqwid’s aggregate default risk across all Liqwid Pools). Liqwid users (arbitrageurs, developers, bots, traders) who call the liquidate contract function repay up to 50% of the borrowers collateral in their loan account balance. In exchange, they receive a proportionate amount of the borrowers collateral but at a discounted price (5% discount price premium + 1% governance tokens).
In our examples above corporate bonds by smaller issuers trade infrequently. The result is interest rates of a small issuer’s bond often have a liquidity premium, returning more money over time to repay a risky investment that is difficult to divest if returns fail to meet expectations.
Lenders may forgo an investment if the perceived risk level is too high compared to the premiums placed on interest rates to account for this risk, although each lender has their own unique risk tolerance level.
- Automated Liquidity Protocol with credit scoring + Decentralized ID (DIDs)
Liqwid is building the first automated liquidity protocol that merges credit scoring algorithms with DID’s (Atala Prism) to establish decentralized lending pools, de facto smart contract controlled money markets on the Cardano blockchain. Before the advent of smart contract technology it was nearly impossible to precisely trace and connect yield to a dividend portion of capital, trustlessly & transparently. In the Liqwid Whitepaper we present a non-custodial, decentralized protocol for automated frictionless borrowing of Cardano-native tokens without the pain points of existing protocols. Our proposed system design uses smart contracts algorithmically optimized for calculating interest rates (“money robots”) based on real time supply & demand levels of a Liqwid Pool, crypto-economic incentives, credit scoring and DAO technologies. Our protocol establishes efficient money markets bundled with an open source stack (API’s, data feeds, smart contracts) to empower developers with tools to unlock a web3 universe of open financial (& credit, data, insurance, social,..) applications on Cardano.
The traditional finance CeFi money market operating model, already losing market share to the digital fintech loan app model, will be completely disintermediated with the introduction of smart contracts and credit scoring protocols within the DeFi space. Liqwid is dedicated to advancing global economic inclusion on our platform using the efficiencies of smart contract and protocol incentives to offer lower interest rates and the creation of decentralized credit scoring linked the Liqwid user’s Prism address.
Browser company Opera built subsidiary lending firms on top of the traditional CeFi web2 digital money service infrastructure growing across African nations and India but their entire operating model is no different than payday lending schemes ripe with predatory practices and high default-risk products marketed as “0% collateral safe loans” to at risk borrowers who (for various reasons) often (1) default on the loan & (2) enter a compounding debt cycle.
Liqwid is offering the web3 alternative. Fees for borrowers start at 25 basis points (0.25%) and can be dynamically priced to 0 as users bootstrap high credit scores. Including monetary incentives and disincentives to cold-start credit scoring is a powerful model Liqwid will explore fully in development.
We plan to create the first cross platform (Cardano, Ethereum and Ergo) decentralized automated lending protocol controlled by DIDs, a community governed LiqwiDAO & Treasury, credit scores and sound economic incentives. Decentralized from day one to ensure the ownership of the protocol remains in the hands of the Liqwid global users.
Liqwid aims to offer several Liqwid Pools for various crypto assets on the Cardano such as ADA, a wrapped Bitcoin as well as stablecoin-denominated (USD, EURO, INR, RMB, NGN, ZAR) markets. Each of these stablecoins already has an Erc20 equivalent stablecoin equivalent that can be converted into a Cardano native custom token via Cardano’s Erc20 converter contract to begin earning interest each block. Liqwid’s integration devs will build 1st an on ramp and next work with fintech web 2 firms to jointly develop off ramps that enable users of their digital currency wallet to go web2->web3 and back for both the crypto digital asset users as well as the traditional finance CeFi mobile money infrastructure [3]. Algorithms used to calculate users credit scores based on repayment & default history and several other data points integrated into a user’s Prism decentralized identifier. Liqwid protocol layer mechanics linked to the credit scoring algorithm incentivize new users to bootstrap high quality credit scores within Liqwid Pools. Liqwid also incentivizes developers to build layer3 (L3) applications (L3 dApps) on Cardano using Liqwid open source API’s, SDK’s and smart contracts to innovate in the web3 world of products.
All Liqwid users (borrowers, lenders, SPO’s, developers, LiqwiDAO members) are incentivized via the Liqwid governance token ($LQ) representing voting rights and ownership of the protocol’s future revenues. LiqwiDAO is currently being developed and with the introduction of this operational governance structure will enable a credit delegation feature that represents the first version of decentralized credit unions in the DeFi space. A separate blog post that unpacks the entire governance of the protocol is being written and will be released shortly.
2. Initial Product Offerings
- Liqwid Pools forms the base of the Liqwid protocol and will be implemented 1st on Plutus testnet(the high level roadmap on our website maps to this) & next on Plutus mainnet.
- Liqwid Ramps, qCredit Scores and qCredit Delegation will follow the implementation of Liqwid Pools on Plutus mainnet (in that order).
2.1 Liqwid Pools: Opposite to the traditional CeFi lending model where a lending participant’s assets are paired and loaned to a borrowing participant, Liqwid combines the assets of each user into a Liqwid Pool. When a user deposits an asset, it becomes a fungible resource in Liqwid (and via qTokens all Cardano decentralized applications “dApps”). This approach enables substantially more liquidity than matched lending to ensure users can deposit or withdraw their assets at any time, never needing to wait until loan maturity.
Tokens deposited to a Liqwid Pool are expressed by a derivative custom token balance (“qToken’’) which gives the ownership rights of the underlying asset that accrues to the lenders supplied amount representing borrower interest being paid to qTokens each block (time value of money captured each block). qTokens translate into an increasing percentage ownership claim on the underlying Cardano native custom token. In this way, earning interest is as simple as holding a derivative custom qToken. Again, this is not a miracle, it is just the time value of money formula functionally expressed in a smart contract, in this case qTokens representing collateral in each Liqwid Pool.
Initially users will be able to post crypto collateral to borrow crypto from the Liqwid Pool at variable algorithmically calculated borrow APY. The ability to introduce decentralized identifiers (Atala Prism DID) & a dynamic credit scoring algorithm will drive efficiencies across all Liqwid Pools.
In the future with the recent introduction of the first Extended UTXO based Non-Fungible Token “NFT” marketplace on Ergo and an ongoing interoperability play between Cardano focused tech firm Emurgo and Ergo development teams, Cardano based NFT digital asset collateral including credit data and Intellectual Property could be staked to collateralize loans in Liqwid Pools. A universe of conceptual possibilities is opened when you give users the ability to monetize their Liqwid generated data, ideas, or any other illiquid asset into a digital equivalent and with NFT marketplaces price discovery for these items can determine value in a completely trustless process.
All of these developments and more velocity in the physics of macroeconomics will move the DeFi space to soon offer uncollateralized loan products. Liqwid aims to innovate here initially with a stablecoin based uncollateralized loan product enabling borrowers with Atala Prism DID’s that have been verified by LiqwiDAO members to access Liqwid stablecoin Pools (USD on Cardano) at 0% collateral using a combination of protocol incentives (disincentives), a growing credit line for borrowers who repay their loans and the credit delegation + scoring products to help de-risk the implementation of this product. We don’t feel this to be a novel idea & we believe organically these types of products will be developed in the DeFi space as the product teams quickly iterate to compete with the equivalent counterpart offerings in legacy traditional CeFi markets (in this scenario uncollateralized loans connected to user credit, link to personal data/government issued ID).
To be clear: (1) Liqwid will not implement the uncollateralized stablecoin loan product with the initial product release and (2) when this is implemented the lenders in existing stablecoin Liqwid Pools will be able to opt-in to provide their capital for uncollateralized loans (or not) and (3) it will be implemented with math based on realistic default predictions & audited formulas. The higher risk associated with an uncollateralized loan product will be represented in the lender earn rate (APY) for this specific product, and our supporting math accounts for a default rate (~30%) which is in line with the default rates on short term credit loans in legacy CeFi markets. This means the risk premium for this product will account for interest assuming a default rate of 30% for every median Default amount. As a result of the higher *fixed* interest (~20%) borrowers would pay for this, we can calculate what the earn rate will be for a given scenario, so let’s explore the math for product feasibility.
Using this math with realistic default value predictions yields an elegant solution: Assuming the median default amount is $500 or higher & the default rate is 30% or less, the average APY earn rate for lenders would be 12.25% or higher. This is because of a very high reward to risk ratio inherent in our proposed method of a growing credit line limit — which minimizes the actual default exposure (borrowers are paying their default risk up front with a ~20% interest on each credit line). The above math does not account for Liqwid protocol incentives (subsidizing borrower total cost with Liqwid governance token airdrop upon loan repayment, dynamically adjusting qCredit score upon repay or default) or other smart contract & DAO processes such as the credit delegation feature that will serve to de-risk new borrowers outstanding loans on the platform using the qCredit score of bootstrapped LiqwiDAO members. Capital preservation is the most critical component of Liqwid Pools for lenders and we plan to introduce this feature after successful internal & external audit rounds.
2.2 Liqwid Ramps: Liqwid Ramps will provide cash-on ramps (and eventually cash- off) for holders of digital currencies in traditional CeFi fintech apps (USD in Venmo/Cash app) to enable direct web2 to web3 cash on ramps for our users. Protocol ownership and LiqwiDAO governance processes will be used to incentivize devs to build build unique Liqwid Ramps into specific CeFi applications (e.g. the top money market saving account platform in India) and CeFi bridges into Venmo digital wallet apps across Africa (Barter app/Flutterwave and Paystack) and India using their open source API’s to read the database. More technical concepts will be unpacked here over time but the functional process works like this: (1) Liqwid Ramp integration into a user’s Venmo (or any CeFi) digital wallet is used to read a user’s account balance, (2) this debits the digital CeFi wallet account balance and deposits the 1:1 amount into a Liqwid Pool, enabling the user to instantly go from web2 centralized CeFi digital currency earning 0 interest to instantly earning the algorithmically calculated earn rate calculated for a Liqwid Pool based on the current supply & demand levels expressed as the pools Utilization ratio (Pool liquidity volume).
2.3 Liqwid qCredit Scores: We are proposing to use Atala Prism (+ Biometrics + ZK-Proofs) to enable users to trustlessly & transparently verify themselves via the LiqwiDAO verification process while preserving their complete privacy each step. QCredit scores will dynamically price down borrowers cost (~0.25% loan origination fee) will go to 0 (essentially gamifying the process of bootstrapping strong credit scores via lowering cost/subsidizing borrower costs with an airdrop of the governance token).
As all of Liqwid’s code is open source any developer on Cardano can innovate on top of us building dApps across mortgages, insurance, social finance, tokenized asset backed loans and they're all using a combination of Liqwid open data feeds, smart contracts or SDK’s to build sophisticated target focused dApps.
In addition to the fee pricing there is a qCredit delegation feature that will use qCredit scores of LiqwiDAO members to delegate or “vouch” to prospective borrowers in their personal network they trust to repay the loan. This mechanism is a double edged sword for the LiqwiDAO member who is becoming a de facto peer-to-peer credit union in the Liqwid ecosystem. In the happy path a borrower the LiqwiDAO member delegates their credit to manages to repay their loan & interest so both Liqwid users will see their qCredit scores increase and the benefits that accrue to higher qCredit scores (lower priced fees on loan origination + increased ratio of governance tokens airdropped). In the sad path the user defaults, the LiqwiDAO member who delegated credit is going to see their qCredit score slashed some percentage, but the penalty slash on qCredit Score will not be as severe in comparison to the user who defaulted. This is a mandatory disincentive in the system to mitigate Sybil attack vectors linked to users who attempt to build up one of the highest qCredit scores in Liqwid to delegate their credit to several new borrowers they secretly control (or have paid users off for) their Prism DID’s in order to default on the uncollateralized loan and rinse and repeat the process.
Building on concepts from behavioral economics the Liqwid ecosystem will include a transparent well defined set of protocol incentives *in tandem* with equally salient economic disincentives (paying higher loan origination fee and receiving less governance tokens as fee subsidy for riskier borrowers) that will make cost higher for borrowers who default or are liquidated. This has as much to do with the founding ethos of Liqwid as a protocol to drive for economic inclusion where users need financial infrastructure the most as it does with mitigating default risk. Building native protocol incentives into Liqwid that encourage healthy lending to bootstrap strong credit scores while also discouraging unhealthy borrower practices linked to defaulting is a part of our mission to develop Liqwid as a grassroots community-led financial infrastructure for all.
Building integrations into Atala Prism to connect to a user’s social and professional accounts will enable the qCredit scoring algorithm access to a broad set of data points to accurately calculate a credit score reflective of a borrowers on chain activity as well as real world activity validated via integration of legacy web2 system databases with Atala Prism (API’s).
The uncollateralized stablecoin loan product unpacked above is based on the concept that these borrowers are Atala Prism & LiqwiDAO verified (or delegated) borrowers that tie financial and social incentives to the borrower to repay their loan. In theory the implementation for this feature can become iteratively more complex, for example what if in a future version not only could the Liqwid lenders opt-in to the uncollateralized stablecoin Liqwid Pool they could also define their “borrower risk tranche” based on the borrower’s qCredit score so the conservative risk averse investor from our example above could enter these Liqwid Pool but select a structured borrower qCredit Score risk tranche (e.g. only lend uncollateralized to borrowers with the qCredit Score equivalent of a 650–850 FICO credit score [or 800–850 for super risk averse lender] and at this point we can price the tranches by likelihood of users in a given range to default. FICO is simply the name of the credit scoring algorithm used by banks across the US. Liqwid is building an in-house FICO credit scoring algo to replicate similar functional processes enabled with the creation of credit.
2.4 Liqwid qCredit Delegation: Emergent from Liqwid’s community-led operational structure means by merging DAO and smart contract tech with the qCredit Scoring model outlined above is a product that allows LiqwiDAO members to delegate or “vouch” for a borrower (irrespective of borrower qCredit score and for new borrowers who have successfully repaid at a minimum (1) uncollateralized stablecoin loan to a Liqwid Pool before) which causes algorithmically calculated fee reduction as a result. This product still needs de-risking and is tightly coupled with the implementation of the qCredit scoring model. Some of the implementation details for this product are contingent on specific functional use cases, for example:
Should we allow users in the LiqwiDAO with strong credit scores to delegate a percentage of their full credit delegation power so as to support multiple borrowers in their network & hedge against the slash they will incur if their vouched borrower defaults? In this example I could split up my credit delegating voting power (a function of a LiqwiDAO members qCredit Score) into 10% blocks (think “credit delegation portfolios”) and vouch for 10 users in my personal network I trust to repay loans to spread my support & mitigate the default risk of any single of my vouched borrowers. This is option 1 but we could say option 2 where we introduce a vanilla binary form of credit delegation where LiqwiDAO members delegate their full credit delegating power to a user in their personal network (or they do nothing). In many ways you can compare this to the current Cardano staking mechanism where wallets can stake all of their ADA to a single pool. As a result of this binary process users must create multiple wallets to delegate their ADA to more than one Cardano Staking Pool. In response to this limiting “one to one” staking mechanism IOHK is introducing a delegation portfolios product to enable “one to many’’ staking from delegate addresses so users delegating their ADA stake can split it amongst several stake pools similar to my example above of splitting credit delegation power to several users. Users are incentivized to stake their qCredit score as a type of social financial asset to bootstrap the protocol network effect to bring in new users, while also being disincentivized to default as the sad path above highlights. If we went purely off of the data from staking one to one compared to the soon to launch Delegation Portfolios which will introduce tranches of stake pools based on some predefined criteria (Region, Performance, SPO Community pool e.g. SPOCRA founding board stake pool) and effectively serve the exact same purpose as the example of credit delegation in our example above: (1) the ADA delegator is now able to spread their stake in a delegation portfolio composed of 10 stake pools and (2) they have effectively hedged the risk associated with inconsistent block production from a single pool (there are several reasons a user in a large or small pool would want to diversify this cash flow & hedge the risk from a single stake pool we do not need to fully unpack for the purposes of this article, staking is simply being used as an analogy to introduce the feature’s proposed design).
Another full blog posts outlining our plan to research and develop Liqwid’s LiqwiDAO structure, including the interim operational plan leading up to the official LiqwiDAO launch and the proposed incentive structure being proposed to make great use of SPO staking infrastructure to report accurate price feed data into Liqwid Oracle Pools, build L3 Bolt dApps that use Liqwid open API’s and smart contracts to launch concept apps the LiqwiDAO community members can test out and then vote on continuous funding for or against, complete various Liqwid marketing tasks and potentially the front-end hosting of the Liqwid dApp.
The long and the short of the incentive structure for SPO’s functions like this: (1) SPO completes one or several of the tasks outlined above and the ADA staked in the Liqwid ADA pool is auto-delegated to their specific stake pools in proportion to the amount of labor they are providing on a given tasks. All controlled by smart contracts. Liqwid’s mission critical tasks such as precise price feed data for each Liqwid pool from Oracle Pools & front-end hosting on SPO infrastructure (if implemented) are what we consider mission critical. SPO’s incentivized to develop concept & MVP Bolt dApps and complete marketing tasks, while secondary to the mission critical activities, we believe are still important for Liqwid community engagement and will help us build Liqwid’s diverse & resilient ecosystem. This is key for our ecosystem development especially in these early days and our founding team is dedicated to building a self-sustainable LiqwiDAO structure to govern the future strategic operations and protocol update processes.
The blog post mentioned above will also unpack the incentive structure for another key user in the Liqwid ecosystem, open source developers and the incentives built into our DAO & Treasury governance structure to reflect Liqwid’s future operational plans.
The long and the short: (1) introduce developer bounties, a quarterly Liqwid community grants round and LiqwiDAO selected hackathon challenges, (2) LiqwiDAO members submit proposals & vote on ideas they feel deliver value to the protocol and (3) developers compete for the bounty amounts attached to each challenge.
- Token — $LQ
LQ is a Cardano native custom token [4] asset that will be minted at the launch of Cardano’s Multi-Asset Ledger. It will be used to stake in the protocol, and as a governance token with voting rights. We are not being bootstrapped with VC money & our team is fully committed to a fair-token launch and community-led open & transparent project, further highlighting the dual Cardano and Liqwid vision our founding team has had from day 1. Since $LQ will conform to the Cardano native custom token standard built into Cardano’s multi-asset ledger, the $LQ token is tradeable on any exchange and storable on any wallet that supports Cardano native custom tokens — allowing anyone in the world instant access to it. As a result all of the $LQ tokenomics concepts we have designed integrate some of the proven DeFi value capture mechanisms and utility driven token design we truly can’t wait to introduce to the Cardano community! Blog posts next week will unpack this all in depth.
We’ve allocated more than enough for this to be a community run project & we’re in this for the long haul. It won’t matter if the price of $LQ is trading at 0.10 or $10 because it will be serving a unique coordinating and incentivization purpose in our protocol plus value capture mechanisms so that the token supply becomes more scarce in linear proportion to the fees the protocol generates (LQ becomes more valuable as TVL in Liqwid Pools increases).
Onward, together as a community Cardano. Come one come all.
