Problem: Current protocol fees are tiny and way below current market standards, and will never be enough to fund any sort of growth initiatives even if TVL and volume increased by 10x.
Current Market of various protocols on Cardano:
Dex aggregator on Cardano earned protocol fees in February 2024: ~100,000 ada.
Borrowing/Lending platform on Cardano earned protocol fees in February 2024: ~50,000 ada.
Lenfi expected protocol fees on pace for all of March: ~400 ada.
Summary of Problem:
Right now total active loans on Lenfi v2 are 1.5M ada with an average borrow rate of 8%. Let’s predict active loans increases from 1.5m to 3m ada over the rest of the month - that would translate to 20k ada in interest to lenders per month (at 8% average borrow rate), which would equal a total of 400 ada a month in protocol fees (with current top UR fee of 2% of interest). If eventually said active loans increases from 1.5m to 10m ada over the next several months, protocol fees per month would still generate only 1.33k ada per month. This means growth for Lenfi will be extremely hard to achieve with current state of revenue, even with volume increasing substantially.
Solution:
Fees need to be increased significantly in order to have a healthy protocol that plans to grow. I propose an initial four part solution:
- Increase protocol fees on v2, regardless of utilization rate - paid for by the borrower.
- All loans on V2, the protocol fee to the borrower: 20% of interest on all new loans.
- Introduce same protocol fee on v1.
- All loans on V1, the protocol fee to the borrower: 20% of interest - added on the UI level only, on all new loans.
Keep in mind loan interests will not be increased by this proposal as the borrowing APR will remain the same - thus borrowing usage should not change.
Future plan if the proposal is approved:
These increased protocol fees will grow the DAO treasury in a way that can be used much more effectively for the growth of Lenfi and $Lenfi holders. Following 3-5 months under these new protocol fees, a new proposal should be made using these accumulated DAO funds as liquidity to fill various pools on Lenfi V2. This will accomplish three things: 1) increase TVL, 2) make it more cost effective for users to borrow given there will be deeper liquidity pools, and most importantly 3) create a new revenue stream to bolster the treasury even further as the DAO will now be generating lending fees as well.
Once all this is achieved, Lenfi will be in excellent shape. Additional token utility via fee sharing to stakers, CEX listings, any growth initiative will then be on the table.
Update to the Proposal: Removed increase to liquidation fees from the initial proposal after learning more about how they work from Mantas. Since we are raising the protocol fee to 20% of interest, that means the liquidation fees are being raise already, thus it was redundant in the first proposal.