Liquity Incentive Vibe Check

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Hi folks!

I talked with Liquity a bit, partly with my IMC hat on, and more with just a community member hat on.

I wanted to see how the DAO feels about providing incentives for their product

Liquity Intro (including v2)
  • Liquity V1
    • They’re one of my go-to answer for what good defi looks like
    • Fully ossified contracts (aka immutable)
    • Minimal offchain stuff (they do depend on an oracle rate, which they get from chainlink)
    • Governance free
    • Deposit ETH “troves” to borrow LUSD against it
    • Kept on peg by liquidations (fall below allowed TVL; collateral is liquidated at a discount to repay debt) and redemptions (anyone can swap LUSD against the trove with least-healthy TVL)
      • Works great at preventing negative depegs, but have seen significant upward depegs
    • Has a stability pool where LUSD can be deposited to automatically help with repegging - incentivized by both the discounts on liquidations and LQTY incentives)
    • One-time fee up front
  • Liquity V2
    • Will allow LST collaterals (eg, wstETH and rETH)
      • Each of these will have separate stability pools and borrow rate markets.
    • Will be ossified
    • May have a tiny bit of governance for liquidity incentives
    • Tweaks from V1
      • New stable called BOLD (remember, stuff is ossified, so can’t use LUSD)
      • Interest rate is ongoing and set by borrower (updatable whenever). Interest rate control can also be delegated to a 3rd party (eg. DeFi Saver, Summer Fi)
      • Redemptions are from the lowest interest rate trove per market
        • Ie, you’d redeem BOLD against a basket or ETH/wstETH/rETH
      • Recovery Mode from Liquity v1 has been removed - which means borrowers can borrow at the advertised LTV ratio without worrying about an overall protocol ratio.
      • Smaller liquidation penalty of 5% compared to 10% from v1.

So why do we want rETH involved?

  • Useful to be able to borrow against it, ofc
  • The dynamic interest rate things allows for the market to have a strong voice (vs, eg, Maker where the interest rates are set by governance)
  • We try to steer clear of “degen leverage”; while this does allow it, the inclusion of the stability pool helps mitigate damage from this kind of use.
  • We have very little liquidity against USDlike on-chain (and a ton off-chain); would it help to add some on-chain?
  • Good brand relationship for both of us

Paths

Liquity are asking for help bootstrapping the first year, and then hope to be self sustaining. I will purposely give a broad set here, without presenting my own opinion. For context, IMC’s current spend is ~$350k/period (periods are 28 days). It was somewhat higher when the RPL ratio was higher because we’ve been trying to run lean to preserve runway. It fluctuates somewhat with ETH price, as we track most expenses in ETH (and a couple in RPL).

What are some paths we could take?

  • IMC could provide on the order of 8E=$24k/period incentives to rETH/BOLD
    • Context: this would be about a tenth of our total rETH/ETH mainnet spend
    • Context: this would be a bit over half our L2 rETH/ETH spend
    • Context: this would be half our spend on PancakeSwap’s mainnet rETH/ETH concentrated liquidity
    • Context: this would be 3.5x our spend on RPL/ETH
    • Can the IMC do this: This is a lot. I’d want an explicit voted pDAO direction for this.
  • IMC could provide on the order of 2.5E=$7.5k/period incentives to rETH/BOLD
    • Context: this would be similar to the spend on RPL/ETH
    • Context: this would be about half the spend of rETH/ETH on one L2
    • Can the IMC do this: The IMC charter doesn’t cover USDlike at all, though it does talk about “access to rETH across major DeFi protocols” and “build rETH exchange volume”. This is an amount I’d feel comfortable moving on with either strong support in forums and other casual channels or a vote.
  • We could provide funds for stability pool incentives
    • The rough expectation is that incentives here improve the peg and thus ten to reduce interest rates indirectly
    • In a leverage cascade, a healthy stability pool acts as a buffer
      • The IMC is generally not a big fan of leverage (and especially incentivizing it) due to the potential for cascades.
    • Can the IMC do this: I think this would need a vote, either to have someone else do it, or to tell the IMC to do it despite being a bit outside the usual remit.
  • Nothing
    • We determine we won’t provide incentives at this time due to some combo of being USDlike, encouraging leverage, etc

There would be some open questions: Do we provide more budget to IMC for this? Does IMC have control at all, eg, to spend less if they judge that appropriate? Should we explore starting aggressive and ramping down instead of uniform? What level do we actually want (the bullets are rough examples, not the only options)?

For now, I’m looking for high level vibes, and we can figure out details if there’s enough interest to make that sensible.

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Sounds good to me - i.e. I am in favour of doing something (involving spending money via IMC) with Liquity v2 over nothing.

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Love Liquity. I agree that it’s what DeFi is supposed to look like (ossified contracts, no or minimal governance).

I support spending more on incentives for Liquity v2 than less. Perhaps significantly more during the launch period when there’s a bit of hype around it. If it’s useful we could vote to give the IMC more funds or reduce the incentives if we see it’s not going as well as hoped.

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How does Liquity v2 compare to Gravita?

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Hi Peteris - Sam from the Liquity team here. Good question - there’s quite a few differences compared to Gravita and Liquity v1.

The main innovation with Liquity v2 is that it will be centered around user-set interest rates instead of a fixed one time fee. This means that it will be adaptable to any type of market condition (low interest rate vs high interest rate environment), and all of this will be achieved without any governance.

v2 comes with some major changes, with the key ones being:

A new primitive with user-set interest rates
Liquity v2 will bring a new primitive to DeFi with user-set interest rates - contrary to other DeFi protocols (like Maker or Aave) where rates are determined by governance or utilization factors, borrowers on Liquity v2 can set their own interest rates when borrowing, empowering them to dictate their borrowing costs. They can adjust their interest rate at any time, and also delegate the interest rate management to a 3rd party (eg. DeFi Saver). This market driven approach is a first in DeFi.

Ethereum-native stablecoin
Liquity v2 will support ETH as well as LSTs as collateral, and introduces a new stablecoin named BOLD. BOLD will be native to Ethereum and have minimal centralized collateral risks, as it will only be backed by ETH and the LSTs that we integrate as collateral. BOLD inherits the resilience of LUSD (from Liquity v1), while also benefiting from improved peg dynamics and sustainable real yield (more on this below).

Enshrining protocol revenue flows to BOLD
Peg stability and demand for BOLD is ensured through a majority of the interest rates revenues (roughly ~90%) being diverted towards the Stability Pool and protocol incentivized liquidity (PIL).

On the Stability Pool side - Depositors (aka Earners) of BOLD in the SP get a majority of interest rates that borrowers pay (in $BOLD) & liquidation gains in (ETH).

Regarding protocol incentivized liquidity, Liquity v2 diverts on the protocol level a fixed portion of the interest revenue from all borrow markets to specific LPs (eg. BOLD / USDC,) on the likes of Uniswap and Curve.

Novel redemption mechanism and immutability
In addition to introducing dynamic interest rates, Liquity v2 also welcomes a novel adaptive redemption mechanism around BOLD, which helps facilitate market between borrowers and stability seekers without active governance.

Direct redeemability of BOLD is what ensures that BOLD has a hard price floor of $1; in Liquity v2 redemptions will be set in the order of interest rates paid rather than a function of LTV (as in Liquity v1 & Gravita).

These improvements make Liquity v2 fundamentally incentive aligned: the more you are willing to pay as a borrower, the more revenue you contribute to drive demand, stability and liquidity for BOLD as a stablecoin. User-set interest rates enable a capital efficient equilibrium between BOLD borrowers and holders in a fully market-driven manner.

And lastly, Liquity v2 will launch with the core contracts being immutable, and with minimal governance.

We’ve released a few blog posts that highlight these things in greater detail that you can check out here, and our Whitepaper will be coming out next week as well!

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I’m a fan of Liquity’s focus on governance minimization and would support bootstrapping incentives w/ rETH. Values are generally quite aligned and I believe we hold some of RP’s treasury in LUSD today, correct? Makes sense to me.