Summary: Governance Hour #1 – Deep Dive Into Cardano DeFi Liquidity Budget
In the first episode of the “Governance Hour”, Nicolas Cerny (Governance Lead at the Cardano Foundation) speaks with Dr. Nick Schaub, PhD, also known as “Elder Millennial”, representing the team behind the proposal and co-founder of SteelSwap. They discuss the initiative to provide a DeFi liquidity budget from the Cardano treasury.
The Problem: Lack of Liquidity Currently, decentralized exchanges (DEXes) on Cardano suffer from relatively low liquidity, which leads to high price fluctuations (“slippage”) during trading. This is especially problematic for crypto businesses and projects, such as the Amaru team, when they need to convert their ada holdings into stablecoins to cover fiat expenses without facing severe value losses.
The Solution: 50 million ada for stablecoin pairs The proposal plans to use 50 million ada from the treasury to specifically increase liquidity for ada/stablecoin pairs on DEXes and lending protocols.
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Targeted Focus: Originally, the plan was to spread the funds across many protocols. However, to achieve a real impact and avoid diluting the funds too thinly, the liquidity will now be concentrated on just one or two stablecoins and one or two DEXes and lending protocols.
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Gradual Rollout: The liquidity will not be deployed all at once. Instead, it will be rolled out gradually over time to prevent massive arbitrage opportunities.
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OTC Desks: Since the on-chain ecosystem currently lacks enough stablecoins for a direct swap, the project will work with over-the-counter (OTC) desks to convert ada into fiat-backed stablecoins.
Structure, Security & Community Control Instead of a simple multi-sig wallet, a smart contract is being built to ensure a long-term, secure, and auditable solution.
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Treasury DAO: Oversight will be handled by a Treasury DAO, which any DRep can join. This DAO holds a veto right (a “no confidence vote”) and can shut the entire contract down at any time, sending the funds straight back to the treasury.
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Transparency: All liquidity provider tokens will be held directly within this smart contract, making it extremely easy for anyone to audit and track exactly where the funds are.
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Pro-Bono Development: The smart contracts and frontend are being built for free for the community by developers from the UTXO company and Sidon Labs.
Legal Framework (Current Governance Action) The currently active on-chain vote (Withdrawal 1) is not yet for the actual payout of the 50 million ada. Instead, it is funding a smart contract audit and the creation of a legal entity.
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This legal framework is absolutely necessary to enter into legally binding contracts with OTC desks.
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Crucially, it also protects the committee members and involved DReps from potential personal liability or international lawsuits.
Benefits for the Cardano Ecosystem Beyond creating a smoother DeFi market that makes Cardano much more attractive for businesses to operate on, the deployed liquidity will generate interest. The proposal targets a conservative yield of three to five percent, which will flow directly back into the Cardano treasury to help make it more sustainable.
Next Steps Once the current withdrawal action is completed and the legal entity and audit are finalized (expected to take about four to six weeks), the second action for the actual ada funds will be submitted. A Request for Proposals (RFP) outlining strict security and operational criteria for protocols wishing to apply for the liquidity is scheduled to be released shortly.
At the end of the video, both urge that DReps should actively and promptly vote on withdrawal actions so the process can move forward without unnecessary delays.
Q&A Section:
Question 1: What exactly is the problem with liquidity on Cardano, and why is this proposal important? Answer: Currently, the decentralized finance (DeFi) markets on Cardano suffer from relatively low liquidity, meaning there are not enough market participants to ensure smooth trading. This leads to high price fluctuations (“slippage”) during larger trades. When businesses or projects, such as the Amaru team, need to convert their ada holdings from the treasury into stablecoins to cover ongoing business expenses, they face significant financial losses. To solve this problem and make Cardano more attractive for businesses, 50 million ada from the treasury will be used to significantly increase the liquidity for ada/stablecoin pairs.
Question 2: Why is the liquidity concentrated on just a few protocols instead of being spread broadly across the ecosystem? Answer: The original plan actually envisioned spreading the funds broadly across many protocols to avoid picking winners and to create incentives for the growth of smaller decentralized exchanges (DEXes). However, it quickly became clear that dividing the 50 million ada among numerous DEXes and stablecoins would dilute the liquidity per pool to less than one million dollars, which would hardly provide any real benefit to traders. To achieve a noticeable effect for smooth trades, the liquidity is now highly focused on just one or two stablecoins, as well as one or two DEXes and lending protocols. This approach also minimizes the risk of losing all funds in the event of a security issue or hack.
Question 3: How is it ensured that the treasury funds are safe and that the community retains control? Answer: Instead of a simple multi-sig wallet, a custom smart contract is being developed to provide a long-term, secure solution. The oversight function is handled by a Treasury DAO, which any DRep in the community can easily join. This DAO has a veto right: it can issue a “no confidence vote” to stop the entire smart contract if there are concerns, preventing administrators from taking any further actions, and forcing the funds to flow straight back to the treasury. For maximum transparency, all liquidity provider tokens are held directly within this smart contract, allowing anyone to easily audit and track the funds at any time.
Question 4: How will the ada be converted into stablecoins if there is not enough on-chain liquidity to do so? Answer: Since the on-chain ecosystem currently lacks enough fiat-backed stablecoins to process a direct swap of this magnitude, the project will work with over-the-counter (OTC) desks. However, to enter into legally binding contracts with traditional OTC desks, a formal legal entity is required. The currently active on-chain governance vote (Withdrawal 1) serves to fund the creation of this legal entity and a smart contract audit. Crucially, this legal structure also protects the committee members and involved DReps from potential personal liability or international lawsuits.
Question 5: What direct financial benefit does the Cardano treasury gain from providing this liquidity? Answer: In addition to fundamentally improving market conditions for businesses, the Cardano treasury benefits directly from the generated returns. By providing the liquidity, interest is generated. The proposal aims for a conservative and low-risk yield of three to five percent, which will flow directly back into the Cardano treasury. This plays a crucial role in making the treasury more financially sustainable and providing it with an additional source of income.
Tuesday, 24 March
16:00 – 17:00 UTC