WaterNeuron Explained

[EnzoPlayer0ne]

WaterNeuron Explained

Over the last few weeks, WaterNeuron has been a recurring topic on the forum, many core questions about protocol mechanisms have arisen. We felt that these new questions needed to be addressed in order to clear up a few common misconceptions.

The IC has a liquidity problem

Among the top programmable chains, we are the only one with such low on-chain DeFi TVL, despite a FDV in the same ballpark:

We believe the low DeFI TVL to be a downstream effect of the following:

1. Non-EVM architecture: if your chain is EVM, projects can come, fork a protocol and re-launch it or you can make a deal with an already existing protocol to redeploy. You can also tap into a wealth of already existing EVM libraries for multi-sig, DAO, DEX, Borrow/Lending, MarketPlace. On ICP everything has to be written from scratch, and as such project cannot just relaunch or leverage already existing libraries.
2. Non-synchronous block: complex multi-step DeFi actions like flash loans or arbitrage are hard as you cannot chain them all in one block.
3. Thin Post-Genisis Ecosystem: Most ecosystem projects funded by the initial beacon funds grants are not on the IC, while none of the DeFi projects listed are still around. Were this not the case we could have hit the ground running with many DeFi opportunities for people to deposit their ICP into, from the launch Messari report

4. Proof-of-Stake: on other chains validators expose their rewards, as the more they stake the more yield they make. Validators on the IC receive a fixed XDR amount and not an amount relative to ICP staked, which makes it near impossible to create a tokenized version of the staking yield.
5. Locked staked tokens: ICP locked in a neuron cannot be transferred or used as a collateral. On every other chain listed staked tokens can be used as collateral on borrow/lending protocols.
6. Locking time: un-staking on the IC takes longer than on any other chain, leaving a lot of capital essentially frozen

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Are ICP users different from other chains?

We often hear IC users are peculiar therefore what worked over there might not work over here. This is wrong. ICP users yield an appetite that matches what we can see on other general programmable L1. More than 40% of our FDV is currently staked, comparable to every other L1.

Why is this high demand for yield not translated into a higher DeFi TVL?

1. NNS was the only protocol with yield (2021-2024). The lack of projects coupled with staking happening at a governance level rather than validators means regular end users locked their tokens on the NNS with no other option available.
2. Capital is immobile. Neurons cannot be used as collateral, cannot be sold on the second market. Once your ICP is locked it essentially drops out of the on-chain economy.

⇒ The IC looks like an European saver economy, where the population keep their savings in bank accounts (NNS) rather than use them in the stock market (DeFi).

(Ethereum is extremely strong in DeFi and Sui so low because their FDV is three times their market cap and the difference is both vesting and staked at the same time)

How do we increase DeFi TVL?

The first step out of this deadlock is liquid staking. Every chain that went from high staking TVL to high DeFi TVL used LST to free locked capital while preserving yield.

Today less than 1% of the staked ICP is liquid versus 10% on Near and Solana, and nearly 30% on Ethereum. By motivating users to stake we have more available liquid capital to deploy on borrow/lending or liquidity pools.

(Once again keep Sui and Aptos out of the equation as a large part of their staked TVL is in fact investor vesting and not organic)

Why should non-DeFi projects care about the on-chain economy?

Even if your dapp has no use of DeFi whatsoever (OpenChat, DecideAI, Dragginz). One day you will need to sell tokens, that day you will need deep liquidity pools, which we currently lack.

nICP Yield

On other chains the liquid staking playbook is simple, you spin up validators, stake a lot of tokens, and tokenize them. Allowing people to stake on your validators against a cut of their profit. On the IC the path goes through governance instead of validators. By staking nICP you gain yield and liquidity, while giving up your VP to WTN stakers.

nICP stakers get the boosted yield until the TVL reaches 21M ICP, at which point the WTN airdrop is unlocked. At 21M ICP TVL liquidity should be deep enough to allow large players to move in and out of position easily and disregard the 10% fee taken by the DAO.

• WaterNeuron has 2.3M ICP staked, which represent 68% of all the ICP in DeFi.

• nICP is the largest community owned token pool on ICPSwap.

• Current pool depth: you can sell 20k nICP with less than 2% slippage.

WTN Voting Power

Today the IC’s governance is heavily concentrated:

• ~25% of all the VP sits with DFINITY
• ~6% is controlled by a single whale

Two entities have enough VP for 1/3rd of the VP, even before following. Relying on institutions or wealthy individuals to steer the network is a decentralisation risk. We have seen the effects of concentration on other chains:

• On Bitcoin, the top two mining pool represents 60% of the Bitcoin hashrate.
• On Ethereum, the top two MEV-Boost represent >80% of the blocks.

Unless we work to distribute the VP at the NNS level, the IC is going in the same direction. WaterNeuron’s goal is to put more seats at the governance table.

What do we do from here?

As WaterNeuron takes a larger place in the world of ICP we believe two essential steps need to be taken:

• Increase the WTN Nakamoto coefficient. Currently standing at 5, DAO members are working to make sure this number goes up in time.
• Give more utility to nICP. Borrow/Lending is the next DeFi frontier on the IC. It enables two use cases:
  1. Looping ICP exposure. Deposit nICP, borrow ICP, stake into nICP, deposit nICP, repeat. Deeper ICP demand and opportunity to leverage ICP.
  2. Borrowing stablecoin. You deposit LST and borrow stabelcoins. Users can then keep exposure to ICP while freeing cash for real word spending.

To get involved in the WaterNeuron community, feel free to join the Telegram group.

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You can find every data source used for this article in the nICP spreadsheet under the tab Pools.

[borovan]

@EnzoPlayer0ne

WaterNeuron’s goal is to put more seats at the governance table.

Three more seats right? Four?

This is a masterclass in cherry picking data!

[Trils]

Newsflash: ICP was not build with DeFi in mind…

[Mico]

Did you decide to avoid the part where you and Dfinity own 33% vp with out counting voter following?

Seems you are a master at cherry picking yourself.

[borovan]

@EnzoPlayer0ne

Why should non-DeFi projects care about the on-chain economy?

Even if your dapp has no use of DeFi whatsoever (OpenChat, DecideAI, Dragginz). One day you will need to sell tokens, that day you will need deep liquidity pools, which we currently lack.

I think you’ve got a very short-sighted view of what DeFi can be here.

[Lorimer]

Thanks for this @EnzoPlayer0ne. I agree that there’s a tension between proof-of-stake (long-term stake) governance, and defi. I also agree that the IC really needs more defi activity and options for users. WaterNeuron is the best defi project I’ve seen on the IC, which is why I’ve been so invested in spending my time reviewing WaterNeuron proposals, and trying to think about all the ways in which things could go wrong (e.g. encouraging non-transferable neurons, and top holder doxing, and various other things).

I also want to make sure that the success of WaterNeuron benefits as many people on the IC as possible, and that ownership over the protocol is as shared as it practically/realistically can be.

In many ways I think that WaterNeuron is becoming a victim of its own success. It’s so well designed and positioned that it’s considered threatening. I certainly found it threatening when I first saw it proposed as an SNS, and I can still understand the concerns.

I think we need more teams to step up and build similarly well-designed and effective defi products. This would surely be the best outcome for the IC (such that no team / subcommunity has a monopoly).

@EnzoPlayer0ne

Increase the WTN Nakamoto coefficient. Currently standing at 5, DAO members are working to make sure this number goes up in time.

How do we make sure this number goes up? I agree, I think this is very important. I’m just not clear on how it will happen.

[DanGTZ]

@EnzoPlayer0ne

Non-EVM architecture: if your chain is EVM, projects can come, fork a protocol and re-launch it or you can make a deal with an already existing protocol to redeploy. You can also tap into a wealth of already existing EVM libraries for multi-sig, DAO, DEX, Borrow/Lending, MarketPlace. On ICP everything has to be written from scratch, and as such project cannot just relaunch or leverage already existing libraries.

That’s why Bitfinity has been created, right? What happened with it? We had a great lending/borrowing protocol on it, called Lendfinity, which did a successful launch and allowing to borrow against nICP. Why is it ignored?

[infu]

Thanks for trying to explain @EnzoPlayer0ne, but I think we need a little bit more information to make governance decisions. Going for IC DeFi is great if that is the goal.

You seem to give Ethereum as a good example, but it doesn’t look too good here
☕ Liquid Staking Tokens (LST) on other chains
A few liquid staking DAOs and CEXes - entities you can count on your fingers have 58% of the governance power using user assets and having no skin in the game.

If we apply that to IC governance where it takes >50% to upgrade the protocol, with time it is going to completely change who is governing it (Unless it turns out to be an instant attack). Perhaps the next step after that will be to move to AWS nodes.

@EnzoPlayer0ne

Today the IC’s governance is heavily concentrated:

• ~25% of all the VP sits with DFINITY
• ~6% is controlled by a single whale

These are people who have worked hard for years, and people who have invested in it and work towards creating something valuable.

Are you proposing that CEXes and liquid staking DAOs govern the IC instead of them, like in Ethereum? If so, when will they come and try to convince us it’s a good idea? What are they offering? What is their roadmap? Or for them, it’s just another token they want to get fees from. Lowering the minimum dissolve delay and expanding governance rewards to a broader group could significantly increase downward pressure on ICP.

Canister neuron limits don’t really limit staking. You can have LST with CK and HTTP outcalls. CEXes can also stake neurons directly. Reducing the minimum dissolve delay is going to make all of these more interesting for CEXes, not just nICP

For a lot of people in the ecosystem - everyone who gets paid $ amounts in ICP monthly (that’s pretty much half of the ecosystem), the ICP price doesn’t matter at all, so they are probably going to not care about the implications initially until it just all burns down.

Last but not least - why would the new governors care how valuable ICP is, if they don’t have any stake in it themselves while governing it?

Looks like this needs to be negotiated with the NNS DAO, not carried out covertly. Perhaps CEXes and DAOs buying and staking X amount of ICP allows them to use the voting power of X amount coming from user assets. Sounds much more fair than giving voting power for free, just to get some kind of fake decentralization that could very well be the end of the IC.

You also probably need to make sure each CEX governs alone to have a higher Nakamoto coefficient and puts their reputation on the line by registering a known neuron.

[EnzoPlayer0ne]

@infu

Going for IC DeFi is great if that is the goal.

Fully agree with you on this point. As outlined above, the IC even if lacking behind other programmable chains in DeFi, has some strong arguments going for it.

@infu

These are people who have worked hard for years, and people who have invested in it and work towards creating something valuable.

Thanks for highlight the fact, as we agree on WaterNeuron is following this virtuous path.

@infu

why would the new governors care how valuable ICP is, if they don’t have any stake in it themselves while governing it?

Indeed, a surprisingly accurate point. The team behind WaterNeuron is the team with the most projects on the IC. You should check our two new projects:

• borrow/lending with yusan.fi
• bridging from any chains to ICP with onesec.org

[volibear]

this is a good point indeed

@infu

Last but not least - why would the new governors care how valuable ICP is, if they don’t have any stake in it themselves while governing it?

Looks like this needs to be negotiated with the NNS DAO, not carried out covertly. Perhaps CEXes and DAOs buying and staking X amount of ICP allows them to use the voting power of X amount coming from user assets. Sounds much more fair than giving voting power for free, just to get some kind of fake decentralization that could very well be the end of the IC.

[antinutrino]

The top 5 WTN holders, made up of whales and core developers, control over 51% of the governance token supply. That’s not decentralization, that’s majority rule by a coordinated minority. It’s a textbook governance soft capture, and it comes at the direct expense of the community.

The illusion is that you still get a vote. The reality? Those top 5 holders vote in lockstep. By the time your vote is cast, the outcome is already decided. Your vote is ceremonial, a placebo designed to simulate participation while real power stays concentrated.

To cement that control, WTN handed out locked, non-voting WTN neurons worth tens of thousands to influencers. You can’t sell them, you can’t vote with them, but they’re just valuable enough to make you think twice before speaking out. That’s not inclusion, it’s soft silencing.

This isn’t a flaw in execution, it’s a flaw by design. WaterNeuron isn’t democratizing staking or governance; it’s centralizing decision-making under the pretence of community control, all while using your staked ICP to tighten their grip on the NNS.

[WebTreeSoftwareSolut]

You can post all the charts you want.

It doesnt change the fact that at the end of the day, you’re just printing money. And handing out scraps to the peasants.

[antinutrino]

[antinutrino]

Nobody, individually or collectively could ever acquire enough WTN to make a difference.
The top 5 will always control the vote.
The game is rigged.

[Mico]

You must not know gold dao is in the top five.