There is currently a 50M ada budget proposal to setup a stablecoin DeFi liquidity fund with the Cardano Treasury. https://gov.tools/connected/governance_actions/e5643c33f608642e329228a968770e5b19ef5f48ff1f698712e2ce864a49e3f0#0 Here are my thoughts about this proposal by @ElderM et. al.
The main goal is to increase liquidity on Cardano DeFi, to start a virtuous circle improving Cardano’s attractiveness by reducing stablecoin swap slippage, and increasing other DeFi metrics presented on most analytics platforms.
Based on aggregators, a 100K ada swap to $USDM today (2025/10/04) would result in approximately 3% slippage. This would cost 10x more in slippage than in conventional fees for this type of pair (0.3%), e.g. 81596 USDM, but 83580 USD on Kraken. Such imbalance in fees will most likely dissuade high net individuals/entities to interact with Cardano onchain, also limiting the potential of other protocols relying on this liquidity to grow. Indeed, who would lend $USDM or $USDA with hypothetical 8% annual returns if a single swap annihilate 5 months of returns, and we don’t even talk about costs on the way back. It’s a serious problem, and I’m glad that the community is trying to tackle it.
Now let’s talk about this proposal concretely. The administration of the fund is setup with 2 layers. An executive layer with a 5/9 multisig setup, and an oversight layer based on DRep voting. The security of a given setup is always defined by its weakest point. Here, 5 people can collude to steal 50M ada. It is a very enticing sum. And a non-avoidable risk. We could not design a contract allowing only restricted onchain usage to go from Ada to stablecoins, for the very reason of this proposal existence. For this reason I think a 5/9 multisig is too risky. I would prefer seeing a 9/9 or at the very minimum a 7/9 if they want to keep the ability to rotate compromised keys. It is still very risky IMO, but I’d feel slightly more at ease.
Speaking about the executive committee, I would appreciate seeing a couple lines in the proposal about the experience and role that each member would have. The complementary document introduces each member, however it does not explain in which capacity and how these members will contribute. If steps of the proposal are not going as expected, DReps and the community need to understand who was responsible for these.
Now let’s touch on the executive plan. It is explained that only 2 protocols/category will be used to limit thin spreading of the liquidity. It makes sense but at the same time, picking winners increases an anti-competitive landscape, which might deter new protocols. I would suggest the 2 chosen protocols be re-selected quarterly. This prevents liquidity spreading while being fairer for new protocols and the competitive market in general.
Regarding protocol selection, the proposal mentions criteria of growth and returns. I would argue that the most important criteria should be risks & security of funds, transparency and report capabilities (independently of said protocol). Also ideally, the staked ada should remain under the control of community, and delegated to the abstain DRep at all times. This means I would prioritize protocols where the ada is not staked and usable by the protocol itself, and remain under control of the user.
Finally I want to touch on the secondary goal of returns for the treasury. The proposal suggests that a 4% return is possible. However, there is no supporting data in the proposal. I would even argue that it is an undesirable side quest. The proposal should focus on the main goal and here is why. Considering the goal is to make Cardano more attractive, two of the following situations can happen. (1) This plan works well and the value of Ada increases. (2) The value of Ada drops, for whatever reason. In situation (1) we start from 50M ada in the treasury and replace it by 17M ada + rest in USD. Only 17M ada will take advantage of the price increase, instead of 50M. And even that amount will suffer from price variation loss (impermanent loss in AMM). In situation (2) the value of the 17M ada drops, and this treasury loses value. Granted it will be less than if all of the 50M stayed in ada denomination. In sum, in both situations, we either have opportunity loss, or actual loss on the 50M ada initial value. This should be clearly communicated, and it’s not 15% of the 4% interest that will offset anything. If the project is successful, and helps Ada gain value, it’s the rest of the untouched treasury, and the community, that will profit from the initiative. So IMO, this proposal should focus on the primary goal, and drop that secondary goal.
That’s all from me. I won’t vote on it because I’m not a DRep, but I would appreciate these points being addressed in an upcoming treasury withdrawal if the budget passes.