Use MIN/ADA in DAO POL as liquidity for Lenfi V2

[CWSchub]

Introduction

The Minswap Labs team has agreed to seed the MIN/ADA pool to help kickstart the Lenfi V2 protocol. But in order to further strengthen liquidity, we believe that it would be healthy for the overall ecosystem to use some of the DAO’s POL as a booster for the Lenfi V2 pool. Why Lenfi V2? Lenfi V1 has been on mainnet for a long time period and has become one of the most widely used Cardano DeFi platforms. Lenfi V2 introduces several improvements and is open sourced and audited.

Reasons for the proposal

An important concept within DeFi is capital efficiency, which is the measure of value a certain amount of liquidity can generate over time. In the case of Minswap’s liquidity pools, one way of measuring this value is comparing a pool’s TVL with its daily trading volume.

The following graph plots the ratio between the average daily volume (in ADA) and its TVL:

As can be seen, the least efficient pool in 2023 was MIN-ADA (which is highly incentivized) due to most of the liquidity not being utilized. Therefore we can conclude that TVL in the MIN/ADA pool is too high. Additionally, it could still function with less TVL and still have sufficient liquidity for trading activity.

In order to alleviate this issue, we believe some liquidity ought to be withdrawn and deployed in other strategies. The removal of Liquidity ought to be done gradually and carefully, through very thought-out Proposals that present valid options for the MIN/ADA capital once it is removed. This is the first step in that direction, and thus can be considered more of an initial trial.

Impact of the proposal

The following are some of the impactful consequences we can expect from this proposal:

• Increased Trading Volumes:
  Boosting borrowing/lending will eventually lead to increased trading volumes. Such an increase in trading volumes should signify a positive impact for Minswap. The target for the DEX in the long run is to have Trading Fees progressively become the larger part of the yield earned by LPs.

• A New Use Case for MIN:
  Lenfi V2 enables leverage trading. This is important for traders who are willing to take greater risk for a potential higher reward. It may also become attractive for holders with lower funds by allowing them to acquire a larger position.

• Assurance to MIN holders:
  By having a Pool backed by Minswap DAO Liquidity, MIN holders will have the assurance that there is enough Liquidity to trade MIN with leverage. This also prevents Liquidity fragmentation by giving all Minswap supporters who want to use leverage a common Pool to trade and provide liquidity.

• Stake Key Delegation:
  Lenfi Pools enable control of the Stake Key delegation. It is important for the Minswap DAO to remain in control of this delegation as this Pool grows in the future. Currently Minswap Labs has control over the stake key, which has been directed towards the MIN Stake Pool. This Pool has 100% Fees, meaning all the ADA staking rewards are being distributed to LPs in the end. This may be changed by the DAO anytime.

• POL Diversification and increased Yield:
  At Minswap, the current yield these MIN/ADA LP Tokens generate is 17.62%. The yield is in the form of MIN, ADA and Trading Fees. While the yield obtained by this MIN/ADA in Lenfi V2 is hard to forecast (having launched just weeks ago), LENFI incentives and yields from lending/borrowing activity will enable the DAO to diversify its source of yield. Additionally, current MIN/ADA farmers will initially enjoy a higher APR, due to rewards being distributed into a smaller share.

Risks of the Proposal

• Lending/borrowing access to MIN enables users to short MIN:
  Firstly, this is already available through other platforms that allow lending and borrowing of MIN.
  Secondly, this can be mitigated within this proposal by looking into the ratio the DAO is willing to provide as collateral/borrowable tokens.

• Higher volatility for MIN Token:
  Active lending/borrowing markets entail a higher volatility for an asset as it is linked to an increase in Trading Volume. There are ways for the DAO to take advantage of increased lending/borrowing, such as increasing the Fees on the MIN/ADA LP on Minswap V2 (but that’s another Proposal).

• Smart Contract exploit:
  Such a risk has been addressed through an audit of Lenfi V2 but it can never be fully prevented.

• Less MIN/ADA Liquidity:
  Out of the options that are being proposed, the maximum liquidity removal would be of 100k ADA and 100k ADA worth of MIN. That is q only 0.44% of the MIN/ADA poolTVL and 1.47% of the Minswap DAO owned liquidity. We do not expect a significant impact from this liquidity being removed.

Use Case Example:

When the Minswap DAO deposits MIN as a DAO, it will earn interest rates on this deposit and any stake pool rewards accrued due to collateral staking (someone has to lock ADA as collateral).

When it deposits ADA as a DAO, it will have the same as above, but additionally the MIN token will get extra utility to be used as a collateral in a liquid pool. Leveraged trading is the easiest use case.

Example:

1. Have 10k ADA.

2. Buy 10k ADA worth of MIN.

3. Deposit 10k ADA worth of MIN as collateral take a loan of ~6k ADA

4. Buy 6k ADA worth of MIN

5. Deposit 6k ADA worth of MIN as collateral take a loan of ~3.7k ADA

Voting Options

It’s important to consider how we ratio this liquidity. The more borrowable ADA in the MIN/ADA Pool we deposit, the easier it would be to leverage long MIN. The more borrowable MIN we deposit, the easier it will be to leverage short MIN.

We propose different ADA and MIN amounts to be removed from MIN/ADA Liquidity from the Fee Switch (containing roughly 521k ADA and 8.6mn MIN).

Therefore the options would be the following:

1. 100k ADA and 100k ADA worth of MIN

2. 100k ADA and 50k ADA worth of MIN, in which case the remaining MIN would be transferred to the DAO wallet.

3. 50k ADA and 50k ADA worth of MIN

4. Do not remove POL to provide in Lenfi V2.


Authors: CWSchub, PurritoGeneral

Should this proposal go on-chain?

• Yes
• No

[Ch_cken]

Nice and well thought out proposal @CWSchub & @PurritoGeneral

I can see that we are taking the MIN in the treasury and using it to earn yield from other blue chips. That way the MIN is not diluting existing stakers or voting power from our own holders. So instead of just sitting there, it is being put to good use to earn yield.

Maybe a future vote can be had to pass this yield on to MIN stakers

We are also supporting ecosystem at the same time

[MiraiVibes]

Making use of the liquidity at our disposal in the broader Cardano DeFi ecosystem strengthens us as a whole. It’s important to build partnerships and fortify the strong position Minswap is in even more.

Lenfi’s pooled staking mechanism allows us to not give up on any native staking rewards in comparison to other lending options. Although I fear that the DAO will give up on yield income in total, I welcome the endeavor to grow outreach and power.

Besides increasing MIN liquidity in DeFi lending products, it is a healthy opportunity to earn real yield without taking away incentives for our own liquidity providers and farmers. Let’s put our liquidity to work.

[calles]

First thanks for the very nice proposal, here are my comments.

I see several issues being adressed here together, but maybe I would rather adress them separately. I am a firm believe of POL for a DEX, so therefore I am not a big fan of taking it out.

I undestand the point of the pool being highly inefficient, cant we just reduce rewards to the pool? wouldnt that reduce “private” owned liquidity achieving higher efficieny? Also we could incentivise pools that are in dire need of more liquidity.

I however like the idea of seeding the ADA/MIN pool of Lenfi, most of all fro its future potential of leveraged farming, but here is my proposal, we could keep the POL, and just give MIN fro mthe treasury, and pair it with the ADA from the batcher fees (which we also have there doing nothing, lets not forget about it).

[CWSchub]

I think there are several ideas that need to be unpacked here:

Firstly, it’s not a significant amount of POL. Therefore the impact on the pool is pretty much negligible.

Secondly, regardless of the location of this POL, it is still POL nonetheless. The intention here is to enable higher trading volumes by enabling leverage. By doing so, liquidity providers would benefit of an increased APR.

Thirdly, the decisions on reducing emissions in the MIN/ADA fall on the working group established in the MINomics V2 article and consequent on-chain vote. Therefore it is not within the scope of this proposal to consider such actions.

Finally, increasing the supply of borrowable liquidity does not necessary imply an increase in volume. Nonetheless it is necessary to open up these options preemptively.

[JWolfish]

I’m a fan of using protocol assets to generate yield for the protocol. It is definitely time that Minswap takes the step to move liquidity into protocols other than Minswap to do so. Cardano defi is starting to evolve, and Minswap needs to, as well. I fully support this vote, and would likely prefer option 1 or 2

[Contra]

All for it in principle. Just curious what kind of yields we can expect from Lenfi. And how will those yields be managed to the benefit of the DAO?

[JuanCamiloCAKE]

the beginning of bad proposals, and bad ideas. VERY DANGEROUS and I do not say it for this proposal, but for the changes they propose in the very short term.
Surf with CAUTELA. “Minswap”

[marco_112358]

After reviewing how Lenfi V2 works I do not think kwe should deploy any POA into Lenfi V2. It is highly susceptible to deposit>borrow> withdraw attacks to minimize fixed borrow rate and push utilization to 100% . This is a no from me

[JuanCamiloCAKE]

Minswap is Minswap,
Lenfi is Lenfi.

[marco_112358]

Adding examples using the current Lenfi interest rate calcs

lenfiv2.xlsx

Please consider voting no. We should not be comfortable deploying tr asury assets with this known risk to have our ADA locked indefinitely

[ahrnsetido]

Hi there,

I wouldn’t say it can be locked indefinitely. But surely for a long time.

I think Lenfi’s automatic interest rate calculation is based on Etherium’s AAVE lending platform, which seems very successful and has been tested.

The main thing that protects the lenders the lending pool is the collateral that the borrower has to lock into the pool, which is usually twice the amount of the loan value.

For a MIN/ADA pool the locked ADA collateral would earn staking rewards for the lenders.

As the loan interest increases with time, its health factor will decrease. If the borrows decides not to pay back the loan it will eventually be liquidated (with the locked collateral) and the lending pool gets the loan + interest.

If a pool has high UR, its supply APR is also high and would attract more lenders to the pool - which would free up some supply for lenders that would like to withdraw.

Lending is form of long term passive income yield generation.
Just like how DEXs need liquidity providers, lending platforms need lenders that supply LPs.
If there is unutilized capital in the POL, that isn’t needed in the foreseeable future, a way to utilize it would be in a lending pool.

It could give minswap and cardano users more liquidity to seek opportunities with and can increase on-chain activity.

P.S.: The Lenfi community is currently revising the interest rate&fees structure as it has been set very low since the V2 launch. This would also affect a potential MIN/ADA pool and increase the fees and interest for the pool.

P.P.S: I’m not part of the lenfi team. Just a regular user of minswap and lenfi.

[cadudragon]

Min is Min and Lenfi is Lenfi, the yields we can expect from Lenfi and how will those yields be managed to the benefit of the DAO are not very clear. So my vote is no.