Introducing WaterNeuron
What? WaterNeuron is a liquid staking protocol. It offers a more capital-efficient staking method.
How? In regular staking, your capital is locked in neurons for a definite amount of time through the NNS, and only the yield you earn (maturity) is liquid. In liquid staking, your capital and yield are liquid and represented by a single token, in our case, $nICP.
Why? Liquid staking tokens allow users to get a similar yield to the NNS while enjoying fully unlocked capital. Users can then use this capital in various DEFI protocols to:
- Earn extra yield on DEXes - by putting the token in liquidity pools of various exchanges, you earn a fraction of the fees on the swap.
- Use as collateral - by locking it in a borrow/lending platform or stablecoin, you can borrow stablecoins against your $nICP, essentially borrowing against your “locked neurons.”
TL;DR When you lock $ICP into the NNS, only your yield (voting rewards, expressed as maturity) is liquid, to unlock your capital you need to wait until your dissolve delay for your capital (locked $ICP) is over. Our solution earns a comparable yield to the NNS while staying fully liquid.
What problems are we solving?
Now that you have a better grasp of the mechanism surrounding this liquid staking token let’s circle back as to why we believe a liquid staking protocol is essential.
- Capital Efficiency: DeFi is still having a hard time on the IC, partly because any DeFi app using ICP needs to compete against the juicy 8 to 15% that can be generated by locking ICP in a neuron. To that effect, most users seeking safe yield on their token have only one place to go. This locks up a large amount of capital and makes those tokens disappear from the network. On top of that as the NNS incentives large lock-up period for governance reasons most DEFI and governance users get bundled up together.
To fix this, users can now use $nICP instead of $ICP on DEXs or elsewhere to expose themselves to the yields they would get by locking their ICP + the yield they can get from the DeFi app.
- Governance Decentralization: A significant downside of the IC is the centralization of the voting power. The NNS, as the protocol design intended, is all-powerful. It can vote to upgrade any canister, whether it has been explicitly declared as a controller or not. This problem could disappear if DFINITY didn’t have so much voting power (as most neurons follow DFINITY). WaterNeuron is poised to become an alternative to follow to earn maximum rewards as the known neuron will have a 100% voting rate with educated votes when needed. A counterbalance to DFINITY is crucial to ensure the decentralization of the Internet Computer protocol.
- $ICP Inflation: The inflation rate on the IC tends to be 5% per year. Token holders who have not locked their tokens see their tokens lose value every year. Liquid staking tokens allow you to hedge against inflation without locking up your tokens.
Protocol Design
The liquid staking token can be minted anytime by swapping $ICP for $nICP. The $ICP swapped will be put together in a 6-month neuron controlled by the WaterNeuron canister.
To make yourself whole again, you can either:
- Swap it for $ICP on a DEX at a discounted price
- Redeem it at a protocol level. In this case, we would split your $ICP in your own 6-month neurons that will immediately start dissolving, as pictured below
$nICP thus now represents your $ICP staked in the common 6-month neuron. Now why would you lock it in a 6-months controlled by a cannister when you could do it yourself?
However, it represents more than that, as you have derived from the title, we will do an SNS - all the $ICP received from that SNS will get staked in an 8-year neuron and 90% of the voting rewards will go directly to the 6-months neurons ($nICP holders), as pictured below.
This approach simplifies the staking process, removing the need to select specific trusted neurons to maximize rewards. The protocol votes no by default. The SNS can overwrite the no by proposing to vote yes.
WaterNeuron will launch its SNS DAO with a proposal to start the initial SNS swap. The initial parameters can be found here: docs.waterneuron.fi. We invite you to play with them on the dashboard with the Tokenomics Analyzer.
This SNS is special. 100% of the $ICP deposited will be sent to an 8-year neuron. As explained previously, 90% of this neuron’s rewards will go to the 6-month neuron and will go to the $nICP holder to enhance their yield. The remaining rewards, 10%, will be disbursed to the governance holders who have locked their tokens.
Liquidity
As with any DEFI protocol, early-on liquidity is paramount to success. To that effect, we have two built-in mechanisms to bootstrap the protocol’s flywheel effect.
The first one is enhanced yield for early-on users. If 1 million $ICP gets deposited in SNS, the yield from the 8-year neuron will be substantial. We graphed the APY for $nICP users, from 50’000 to 5’000’000 $ICP locked (0.01% to 1% of the total supply).
The first graph looks at the APY before the protocol hits the $500’000 $ICP total value locked mark. We go from 346,95% yearly return at the 50’000 $ICP TVL mark, 41% at the 500’000 $ICP mark, and from then on, the yield doesn’t go down below 10% until we reach 6’000’000 $ICP tokens (or 1,2% of the total ICP supply) on the protocol:
It then diminishes gradually until we only reach the exact yield of the NNS for a 6-month neuron, 8%, at the 21’800’000 token mark. Afterward, the APY tends to 7.3%; however, this does not take the age bonus of the 8-year neuron into account, which, after four years, will increase the APY by 25%.
Now, let’s get on to the second liquidity bootstrapping mechanism. ⅓ rd of the total amount of $WTN will get airdropped to early user as follows:
This means that until the protocol reaches 40’000 $ICP TVL, every $ICP swapped for $nICP will also receive 64 $WTN, and that is for every token swapped. Between 40’000 and 80’000, it will be 32 $WTN for every token swapped. This airdrop will continue until the 163’840’000th million tokens are swapped—or until the protocol reaches a 2 billion dollar inflow of $ICP (at the current $ICP price of $12.89 per token).
Why would you want the governance token in the first place? Well, 10% of the yield from the 6-month tokens gets disbursed to the governance token holder. As more users leverage liquid tokens, the 6-month neuron and the 10% cut will grow. APY here is calculated given the initial theoretical amount of 1 million $ICP deposited at SNS. The WTN token will have meager inflation.
Wen launch? As soon as canisters can control neurons. The protocol is already built. We have a working version in tesnet. As the implementation changes for the canister-controlled neurons are minimal - a few lines of code need to be removed to accept canister-controlled neurons:
ic/rs/nns/governance/src/governance.rs
Next week, we will do a Twitter Live showcasing the dapp running on a testnet.
As the forum is not ideal for discussions (single-threaded style page) - this post is cross-posted to Taggr where we invite everyone to carry on the discussion and ask any questions they might have.
Your mission, should you choose to accept it:
) and please correct me if I’m wrong: