LiqwidX

A decentralized borrowing protocol accepting ADA as deposits for over-collateralized loans issued as a stablecoin that is algorithmically pegged to USD.

The LiqwidX protocol acts as a lender, minting LQUSD (a USD pegged stablecoin) upon the deposit of ADA collateral by a user, and burning the LQUSD when it is returned by the user to redeem their ADA collateral. By depositing ADA users open up their own individual vault where they interact with the loan which they are borrowing from the protocol.

No interest is charged on the loan, only a one-time fee for the initial borrowing transaction (the fee size is variable, proportional to the Total Collateral Ratio at the time of minting LQUSD). There is no limit on the term of the loan, users just need to maintain a minimum ratio of collateral to loan, i.e. value of ADA deposited to the value of LQUSD they minted.

Minimum Collateral Ratio and User Functions

A minimum collateral ratio, MCR, of 110% needs to be maintained by users to prevent the collateral in their vault from being liquidated. If the collateral ratio of the individual’s account falls below this MCR threshold their vault is liquidated immediately.

As a backstop a user can only collateralize a loan up to 115% e.g. a user deposits $115USD worth of ADA to get a loan for 100LQUSD. If the value of ADA drops and the USD value of the ADA in this vault falls below $110USD then the vault is automatically liquidated by the protocol.

Note that the user doesn’t have to hit this ratio when they mint their LQUSD, and it is advised they don’t because they’ll be very close to the liquidation threshold. A user can deposit as much ADA as they want and take out as small a loan as they want e.g. a user can deposit $100USD worth of ADA and take out a 50LQUSD loan. If the value of ADA drops this user can be safe in knowing that they’re unlikely to be under-collateralized soon. If they want, this user can borrow more LQUSD against the excess ADA in their vault, up until they hit the 115% threshold.

Users can deposit staked ADA and continue earning the staking rewards from the pool of their choice.

At any time a user can deposit more ADA, adding it to the collateral already backing their loan, increasing their collateral ratio. Alternatively, they can return LQUSD to reduce their loan amount and increase their collateral ratio.

Liquidation and Stability Providers

If the minimum collateral ratio is reached by a vault then the protocol automatically seizes the contents of the vault and the borrower’s debt is forgiven. The contents of the vault is then liquidated in one of two ways:

Stability Providers are those who stake LQUSD to the protocol and their LQUSD is used to purchase ADA acquired by the protocol when accounts are liquidated. The LQUSD staked by Stability Providers is burnt to pay the debt taken on by the protocol through liquidation. Each Stability Provider then receives ADA proportional to their proportion of the total stake. The value of ADA they receive will always be more than the value of LQUSD burnt because the liquidated loan was over collateralized. The rewards earned by these stability providers are only realized when they withdraw the remainder of their stake, along with the ADA they’ve earned. These Stability Providers are also incentivized to stake because Stability Providers also receive the protocols governance token LQX as a reward for supporting the protocol.
If there is not enough LQUSD in the stability pool to fully repay the debt of all the seized vaults the collateral and associated debt that remain after liquidation are distributed to the remaining active vaults. This will reduce the vault's individual collateral ratio but represents an overall net gain in value for them (it will be programed in that this does not overburden, or nearly overburden any vault).

Total Collateral Ratio (TCR)

The TCR minimum value is set to protect the protocol and to ensure that the LQUSD stablecoin remains backed by a significant amount of collateral in times of a large price movements for ADA. The minimum TCR is initially set at 150% and when the value of collateral locked in the protocol goes below 150% of the value of issued LQUSD certain actions are disallowed. Specifically these actions are:

Taking out new loans
Withdrawing their collateral
Extend and existing loan

Returning LQUSD to the protocol for burning and depositing more ADA are how the TCR can be brought back above this 150% threshold and normal operations can resume.

LQX Governance Token and a DAO

The LQX governance tokens is distributed as rewards to Stability Providers who provide LQUSD to the stability pool. This LQX token is used for governance voting in the LiqwidX DAO and can also be staked to receive a share of the protocol’s revenue earned from fees paid on the platform (paid in ADA).

The DAO for the LiqwidX platform has access to a treasury that is funded by a portion of the minting fees charged by the platform. This portion of fees is one of the parameters under the control of the DAO. The parameters controlled by the DAO are going to be written into a separate UTxO from the script that manages the vault. This allows updates to be made by bots rather than by developers themselves. The parameters that can be adjusted through DAO votes include:

Approving oracle price feeds and the timing constraints for calling for oracle updates
LQUSD minting policy
Liquidation limit (initially 110%)
TCR value (initially 150%)
The percentage of fees redirected to the treasury
Turning on the protocol’s Emergency Shutdown Mode

Emergency Shutdown Mode

This is a safety feature built into the protocol for if the price of LQUSD drops below its stable peg of $1USD on exchanges. If this happens then holders of the LQX governance token can activate the Emergency Shutdown Mode. This freezes the exchange rate of ADA and borrowers are allowed to withdraw any of their excess collateral (leaving 110% to cover their loan).

The rate of exchange is then set for LQUSD (in this situation it is expected that the exchange rate of ADA to LQUSD will be less than $1USD) and all holders of LQUSD can come and exchange their LQUSD for the same amount of ADA per LQUSD token. This creates a fair distribution in the result of the protocol failing and prevents there being a rush to redeem tokens, a.k.a. a bank run.

Industry

DeFi

Lending Protocol

Tags

Loan

Borrowing

Algorithmic

Non-custodial

Lending

Stablecoin

Author

builtoncardano

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Links

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Glossary

Oracle

In the ancient world oracles were people through whom the Gods spoke directly to the inhabitants of earth. In the blockchain and crypto world oracles are a service that provides off-chain data to smart contracts running on a blockchain.

On-chain functions, i.e. smart contracts, cannot access real world data on their own. This is problematic when a smart contract is trying to provide the real-time price of financial assets to users, or when it needs to determine the outcome of a sporting event for a gambling protocol, or even when it has been asked to use something measurable in the real world, such as the temperature or quantity of snowfall, in its calculations. Oracles can feed any real world data onto the blockchain for use by smart contracts.

Data is collect it in a variety of ways: APIs, websites, sensors, etc, and can be manual input by humans. This data is collect by nodes and is then passed on to the oracle service that then supplies the smart contract with the data. Having one node supplying data means a central point of failure, and a high potential for manipulation of the data. As a result oracle services usually use a network of nodes to build a consensus of the correct data point and to prevent the data from being manipulated, thereby helping to ensure trust in the data they supply.

Loan

Blockchain brings forth a new decentralized method of lending, allowing individuals to offer each other loans in a peer-to-peer fashion through smart contracts. Cardano loan platforms allow you to access Cardano collateral loans, where you lock up your holdings on the Cardano blockchain to receive a loan of equal or lesser value.

These protocols also include unique, Cardano NFT loans, where you can lock your Cardano NFT up in a smart contract, using it as collateral, in return for a loan in ada. All of this is done in a trustless manner through the use of smart contracts on the Cardano blockchain.

On the multiple Cardano loan platforms listed here you can be either the loaner or the loanee, allowing you to access loans using your existing assets as collateral, or to put your ada to work to earn you money by lending it out to others.

Cardano NFT loans are some of the most popular types of loans as the protocols allowing you to complete Cardano NFT loans, Lending Pond and Fluid Token, allow NFT owners to unlock the liquidity locked up in their assets without losing their beloved NFTs (so long as they return the borrowed assets, plus interest, in the allotted time)

DAO

If a project on Cardano operates with a DAO that you’ll find it tagged and listed on this page. All of these Cardano DAO projects have, in some form or another, incorporated or plan to incorporate a DAO. Not all of them will be full autonomous and this may be for one of many reasons, be it that features are being released gradually, that they will never actually be a full and proper DAO (and this a debate for another time).

There are specific Cardano DAO projects listed here, and these are those that operate as a full DAO, who’s direction is guided by the votes of its members. Others on here are projects and protocols built on Cardano, and these can take various forms, including: DeFi projects, NFT projects, and gaming projects.

Regarding full Cardano DAO projects, these have been created around many different topics, the most popular being Cardano investment DAOs that invest in Cardano NFTs and tokens. However, there are other DAOs focused around things such as the development of open-sourced tooling, the growth of the DAO idea itself, and art.

Borrowing

Lending Protocols

Lending protocols in the DeFi world allow people to loan or lend money in a peer-to-peer manner, i.e. without the banking middleman. These loans are secured by the lender over-collateralizing the loan and the terms of the loan being managed in a smart contract. This gives the unbanked or those who have poor credit the ability to take loans, and it gives those with excess capital the opportunity to provide loans in a secure and trustless manner, and to earn income from them.

Over-collateralization means that the person receiving the loan locks up more than the value of the loan to secure it e.g. if they want to loan 100 they must lock up 150. How much they over-collateralize the loan by, and which tokens they use as collateral, depends on the platform. Some platforms only accept stablecoins, and other accept a variety of crypto assets. Typically, an individual uses one asset for collateral and takes a different asset as their loan.

An important factor in all loans is the interest rate and the length of the loan. These vary greatly by lending protocol, and loans can have fixed interest rates and periods, or infinite periods with interest rates that fluctuate throughout the loan period, fluctuating based upon the utilization rate of the pool of funds the loan was drawn from.

Importantly, the receiver of a loan is expected to maintain a certain ratio of collateral to loan, meaning that if the value of their collateral drops below that of their collateral to loan ratio, they need to add more collateral to keep the required balance. If they don’t keep up the collateral ratio they face liquidation and the loss of their collateral.

To "become the bank" those with idle tokens can deposit them into a lending protocol and earn from the interest derived from the loans their tokens are used to facilitate. Usually this deposit requires a lockup period of a certain length of time. Often, the longer the lockup period the higher the percentage return for the depositor.

Minimum Collateral Ratio and User Functions

Liquidation and Stability Providers

Total Collateral Ratio (TCR)

LQX Governance Token and a DAO

Emergency Shutdown Mode

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