Here's how Cardano's first DeFi app, Liqwid Finance, will work


In an episode of Cardano Chats, Dewayne Cameron, the inventor of Liqwid Finance, spoke about current progress and what the app will bring to the table. With a planned launch date of June 2021, which coincides with the “Alonzo” hard fork, Liqwid will likely be the first decentralized financial application in Cardano. Cameron explained Liqwid's goal as follows.

Liqwid is an open source liquidity protocol and its use case is based on loans. Liqwid is for anyone who has an ADA and wants to use that ADA as collateral to open a loan in USD. With use cases for developers and stakeholder operators who are in the Cardano ecosystem and don't want to create taxable events and want to leverage their ADA holdings to get some return.

Ultimately, it is for anyone who needs a loan or loan service in a decentralized way. In that sense, Liqwid Finance is similar to Aave, Compound, Yearn Finance, and others on Ethereum. LQ is the governance symbol of the platform and will be used to improve Liqwid Finance, make parameter changes and for any other modifications that require community participation.

Is it possible to get yield farming from LQ with ADA staking?

However, there is a big difference. Like Kolibri at Tezos, Liqwid Finance aims to enable participation and performance farming simultaneously. Therefore, users can get rewarded for delegating and cultivating performance in Liqwid Finance. However, this feature is still in its early stages, Cameron said:

We are still in an initial phase of exploration “it depends”. Theoretically yes, it is possible. It has a lot to do with the way Cardano stakeout works. I mean, it doesn't actually block ADA when you bet on staking pools.

As Cameron said, ADA users are delegating more than betting their ADA in the direction of betting. Liqwid will basically sign a transaction body with the user's engagement address. This allows the stake to be used in the pool. Therefore, Liqwid Finance users can use a system in which ADA funds remain delegated until they are borrowed. Ultimately, the protocol would establish a kind of hybrid system:

So what you can really do is take the unsubscribed ADA tokens. Each of these markets has a utilization rate, which is basically a function that combines the supply amount and the loan amount. So if I have a very low utilization rate, that means that many people have supplied it, but not many have borrowed it.

With a very high utilization rate, I am almost close to 1: 1 in terms of how much I have on the supply side and how much is borrowed, which means that not many people can borrow when utilization is very high. (…) And it wouldn't be great if you had all these unloaned ADA tokens that you can also bet on the participating funds that they have entered. Unless ADA tokens are loaned.

Regarding the feasibility of this idea, Cameron further explained:

It will definitely depend on how Plutus (Cardano's smart contract platform) is going to interact with delegation keys and how contracts on Plutus will be able to handle delegation keys from those wallets. We are still in the exploration phase with IOHK.

The LQ token

According to the FAQ section of their website, the LQ token will have a total supply of 21 million (which will be coined with the Mary hard fork) and can be saved in wallets that support the upgrade "Mary". In addition, it is already known that the LQ tokens will be distributed 60% to the community, 24% to the core team, 10% to Yield Farming, 5% to the DAO Treasury and 1% to the consultants.

For the yield culture characteristic, called Hydroponica, the percentage mentioned above will be released at 2.78% for each Cardano season (5 days). In other words, all users participating in Yield Farming will receive a total of LQ 2,100,000 over a 6-month period. The protocol team clarifies the following:

Yield Farming's initial KEVM participation contract will be the first choice for users to start earning LQ. Cardano's KEVM sidechain is a dependency and the YF product launch is subject to change pending IOHK's timeline for the launch of the KEVM sidechain and the basic infrastructure required for our dApp.

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