Last Updated on Jan 25, 2022 by James W
Liqwid is a non-custodial and decentralized liquidity protocol for the Cardano platform. It will allow, like classic liquidity pools, creditors to lend their cryptocurrencies against interest, and borrowers to stock up on cryptocurrencies when they need them (often for trading).
But Liqwid is a protocol that has several specifications, which we will go through together.
The whitepaper is available here, for those who want all the details.
Liqwid defines its scope to native tokens of the Cardano platform. If one can not trade other platforms’ tokens on Liqwid, it’s more than likely that someone will one day play the game of token wrapping (such as wBTC on Ethereum, which represents Bitcoin with a ratio of 1 to 1). It is therefore not unlikely to see well-known tokens appear on the Liqwid platform after a while.
Liquidity providers will exchange their tokens for qTokens. These tokens work much like shares: you will receive them in proportion to what you send in the protocol.
The protocol generates profits over time (via borrowings and liquidations). You can exit the protocol by re-exchanging your qTokens. You will then get back what you put in the protocol, plus a fraction of the interest generated.
As on other DeFI platforms, borrowers will need to inject collateral into the protocol to borrow. If the price of the collateral falls, you can sell some (or all) of it to ensure that the borrower remains solvent at all times.
Accompanying the liquidation is a tax per protocol, to reward users, on the one hand, to remain solvent and to provide sufficient liquidity in the protocol, and to guarantee against the trading of Arbitrage (which seek to take advantage of momentary price divergences between price protocols).
You can exchange collateral for qTokens, which will be exchangeable for other assets to be borrowed. Collaterals are not all created equal: some tokens are more volatile than others. Liqwid solves this problem with a collateral factor for each token, a number between 0 and 1, which will tell you how many qTokens you can receive by placing your token in the protocol. Tokens that have a low market cap (and therefore face a greater risk of illiquidity) will be subject to a lower collateral factor than more liquid tokens.
If DeFI platforms provide a precisely calculated interest rate for each token, Liqwid goes further. Liqwid wants to consider the history of the borrower so that it can lower its cost of borrowing if it performs well (if it repays its loans well and avoids liquidations).
As a bank would favor its good customers, Liqwid will reward good users with lower interest rates. This innovation could create a net competitive advantage for well-built DeFI projects based on Liqwid.
There are 5 types of actors in the protocol:
- Liquidity providers who earn interest
- Borrowers who use this cash
- Oracles, providing information on market prices
- The liquidators, who will make a profit by securing the protocol, by partially repaying the loans that have become unhealthy.
The whitepaper does not specify exactly how these liquidators operate, but maybe the process is like that of AAVE, in which these players stake the AAVE token (at 5% annual interest) in exchange for reimbursement of losses from users (up to 30% of their capital) in the event of a problem.
Each of these users will, over time, receive the $LQ, the platform’s governance token. This will be an additional incentive to take part in the proper functioning of the platform.
If the Liqwid team claims that the protocol will be compatible with staking on Cardano, the whitepaper does not mention it. At this stage, we can only speculate on how this staking will work.
Since the delegation information is available on the blockchain, it is not inconceivable that Liqwid can retrieve it and reallocate our tokens to the Stake Pool of our choice. We will update this article when we have more information.
Liqwid aims to be a self-governed project from day one. The governance token, the $LQ will govern the protocol (called LiqwiDAO).
Below is the organization protocol of token distribution;
Out of 21 million $LQ tokens: Hydroponics
- 25% of the tokens will be distributed to the Liqwid team, over 146 epochs (of 5 days), each releasing around 36,000 tokens (0.68% of the total supply).
- 60% of the tokens will be distributed to users of the protocol (while using it, it seems)
- 5% of the tokens will go to the DAO protocol treasury (the whitepaper does not specify whether these tokens can vote)
- 10% of the tokens will be distributed through the protocol’s yield farming mechanism, called Hydroponics.
The distribution of tokens to the team will begin upon the release of Hydroponics.
Liqwid seems to be a promising platform. If the major innovation of the protocol lies in a consideration of the history of the borrower to reduce the interest rate, this idea combined with the Cardano blockchain (efficient, at least as decentralized as Ethereum, and above all at the expense of much more attractive), could make Liqwid one of the major DeFI platforms in the coming years.
In addition, Liqwid has all the cards in hand to allow the very rapid appearance of a DEX on Cardano. If someone tackles token wrapping on Cardano, to transfer BTC, ETH, and other essential tokens there (ERC20 porting is coming soon), Liqwid could quickly enter the first rated DeFI platforms, even much better.
But let us not forget that this kind of protocol always involves risks. Will the protocol be robust enough to withstand black swan events (stormy days during which cryptocurrencies devalue quickly, and it becomes difficult to sell your assets)? Liqwid has at least the advantage of operating on a noncongested platform, and on which orders should be able to pass quickly. This seems too good to be true, right? Well, we look forward to the unfolding of events.
Do you have unanswered questions? This article Liqwid token: Everything you need to know may hold the answers you need.