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.