Onchain Decentralised Lending

[nftstonkers]

Proposal: Decentralized On-Chain Lending Protocol on WAX Blockchain

Abstract

One of the most promising avenues for value creation on any blockchain is On-Chain Lending, a proven product-market fit within the Web3 space. This proposal outlines a non-technical framework for a decentralized lending protocol on the WAX Blockchain, which I believe is an ideal candidate for funding by WAX Labs or other community mechanisms. A technical discussion will follow once we determine the desirability of implementing on-chain lending.

Key Areas for Open Discussion

1. Overall Vision: How do you perceive the direction of this proposal?
2. Need for a Decentralized Lending Protocol: Is there a strong demand for such a protocol on the WAX Chain?
3. DAO Structure and Revenue Distribution: Is the proposed governance structure fair?
4. Stakeholder Involvement and Revenue Split: How should different contributors be incentivized? Are the current splits appropriate? Do we need to consider other actors?
5. Other Considerations: What potential risks, opportunities, or alternative approaches should be considered?

Is On-Chain Lending Viable?

Yes, on-chain lending protocols have consistently proven to be sustainable and profitable. They not only generate significant revenue but also increase the productivity of assets on-chain. According to DeFiLlama, the majority of top protocols by Total Value Locked (TVL) are lending or liquid staking protocols.

For instance, Aave generates approximately $2.1 million in revenue daily, even in bearish market conditions (source).

Why On-chain Lending?

1. Makes Stablecoins Productive: On-chain lending ensures that stablecoins remain within the ecosystem and generate yield, reducing the outflow of value from the blockchain while making assets more productive.
2. Enhances Utility for Native Tokens: Lending protocols allow native tokens to be used as collateral, increasing their utility beyond holding or trading. This promotes more activity within the ecosystem, enabling token holders to earn interest or access liquidity without selling their assets.
3. Boosts Total Value Locked (TVL): By attracting liquidity from lenders and borrowers, on-chain lending significantly increases the total value locked (TVL) on the blockchain, a key metric for gauging the health and attractiveness of a blockchain ecosystem.
4. Acts as a Catalyst for DeFi Growth: Lending protocols are a core component of DeFi, serving as a foundation for a wide range of financial services, including yield farming, decentralised exchanges, and derivatives markets. Their presence encourages further development and innovation in the DeFi space.
   5.Generates Revenue for ParticipantsL On-chain lending creates sustainable revenue streams for both lenders and borrowers through interest and liquidation fees. This provides a viable business model that rewards ecosystem participants while fostering long-term growth.
5. Drives Native Stablecoin Development: Lending protocols often require stable assets, encouraging the creation and adoption of native stablecoins. These stablecoins are essential for facilitating DeFi activities, making them a crucial part of the blockchain’s financial infrastructure.
6. Attracts Bigger DeFi Projects and Stablecoins: With sufficient adoption, on-chain lending can make the WAX Blockchain more attractive to larger stablecoin issuers and DeFi projects, driving further liquidity, users, and partnerships into the ecosystem.

Updates Since Previous Discussions

Following a legal review, I have decided that ownership of smart contracts will be held by a governance contract managed by a decentralized DAO. This ensures that the protocol remains aligned with its core principle: non-profit extraction and also remains legally viable.

Vision

The protocol’s primary focus will be on sustainability and community-driven growth. All revenue will be distributed among stakeholders, and the protocol itself will remain non-profit. Developers and the protocol itself will not retain any revenue. Below is the detailed breakdown of the revenue distribution model.

Initial MVP

• Lending Support: Initially, only WUF and WAX tokens will be supported.
• Oracles: Utilize DelphiOracle and Alcor to determine asset values. Oracle solutions may be reassessed post-launch.
• Audits: Partner with one of the WAX guilds for a thorough code audit. The WAX Team could also be involved.
• Multisig Governance: All contracts will be governed by multisig wallets controlled by elected representatives from the DAO.
• Stablecoin Onboarding: Any stablecoin can be integrated into the protocol by paying a fixed fee + stake WAX, which will go into the insurance contract.
• Open Source: All development will be open-source, fostering community participation and transparency.

Revenue Distribution

Revenue generated by the protocol will be distributed as follows:

1. Collateral Providers (70%): Users who provide collateral to the protocol will receive 70% of the proportional revenue.
2. UI Products/Demand Builders (20%): Platforms like Alcor, WAX Fusion, Taco, and other marketplaces can register as demand builders. They will receive 20% of the revenue generated by customers arriving through their platforms .
3. Oracles (1.5%): If paid oracles are required, 1.5% of revenue will be allocated to them. Otherwise, these funds will flow into the insurance contract.
4. Insurance Contract (1%): 1% of the revenue will go to an insurance contract, which will cover potential losses from exploits, bugs, or market crashes. Any excess funds above a predefined threshold will be redirected to development efforts.
5. Liquidators (1.5%): Liquidation agents will receive 1.5% of the revenue for maintaining decentralized liquidations. Liquidators will stake WAX, and their performance will be tracked. Poor performance could lead to disqualification or stake loss.
6. DAO Treasury (5%): 5% will be reserved for the DAO Treasury, which will fund governance and future development proposals.
7. WAX Buyback and Burn (1%): 1% of the revenue will be used to buy WAX, convert it to LSWAX, and burn it, supporting WAX tokenomics.

This distribution can be adjusted through future governance proposals.

DAO Structure

The protocol will be governed by a DAO using GOVERNANCE Tokens, which will be distributed as follows:

• 30% (Non-Transferable): Issued proportionally to all revenue-earning stakeholders.
• 25% (Transferable): Distributed over three years to users who interact with the protocol.
• 15% (Non-Transferable): Allocated to onboarded collaterals and lendable asset contracts.
• 10% (Non-Transferable): Issued to the WAX Team (designated wallets) for their involvement in the ecosystem.
• 10% (Non-Transferable): Allocated to parties involved in the project’s development.
• 10% (Non-Transferable): Airdropped to contributing guilds, the Office of the Inspector General (OIG), and key governance contributors, based on their feedback and efforts.

Transfer Fees

Governance tokens will have a transfer fee (with exceptions), and the accrued fees will be added to the DAO Treasury.

Conclusion

This decentralized on-chain lending protocol offers a sustainable, community-driven approach that ensures all revenue is distributed fairly among contributors. By leveraging the WAX Blockchain's unique strengths, we believe this protocol can provide value to the ecosystem while avoiding profit extraction by developers or the protocol itself.

I invite everyone to provide feedback on the vision, structure, and revenue distribution models outlined in this proposal.