Intro to $AQUA Token and Liquidity Boosting

Anthony

Published in

Blockzero Labs

6 min readAug 18, 2021

Editor note: This article was written by Steve.eth of Blockzero Labs

$AQUA is the token for the AquaFi protocol.

The reason for using $AQUA, or to “AquaFi your liquidity”, is to increase your rewards earned on the fees accrued as a liquidity provider.

To increase your LP fees rewards, you must stake your LP tokens into the AquaFi protocol. The extra fees rewards will be calculated and applied based on total fees your LP position earned between the time it was staked and unstaked.

Example of Staking Your Liquidity and Earning More Fees

How it feels to stake LP tokens on AquaFi

Let’s say you have $100 worth of LP on Uniswap V2: $50 WETH + $50 USDC…

You Stake Your wETH/USDC LP tokens

AquaFi pays +50% premium on fees for WETH/USDC LP tokens.
You stake your $100 WETH/USDC into AquaFi
Some time passes, and your LP position has generated $10 worth of fees. This would be true regardless if you had staked into AquaFi.
For simplicity, let’s also assume the price of WETH is the same price now as it was when you first staked.

You Unstake Your wETH/USDC LP tokens

If you had never staked your LP tokens, you would have $110 worth of WETH/USDC returned from Uniswap.
AquaFi’d liquidity will get you back:
$100 worth of WETH/USDC
$15 worth of $AQUA tokens. Your $10 of fees + 50% = $15.
Because you staked with AquaFi, you now have $115 worth of tokens instead of $110.
The AquaFi protocol keeps your $10 of fees as WETH/USDC LP tokens.
You are now free to do what you want with your $15 worth of $AQUA tokens.

AquaFi Tokenomics

1. Inflation

More $AQUA tokens are minted when anyone unstakes, given to the unstaker.

2. Constantly increasing AquaFi treasury value

The more LP tokens the AquaFi protocol keeps from staker’s fees generated, the more value it accrues and keeps. Those LP tokens will continue to generate fees, further increasing the value, passively over time.

3. Deflation

There are future plans to upgrade the AquaFi protocol to allow the act of burning X% of the circulating supply of $AQUA to unlock X% of total LP tokens in the protocol’s treasury. This would create a minimum value all AQUA tokens are worth. It will eventually become profitable to burn AQUA tokens once the AquaFi protocol acquires enough LP tokens compared to the current token value.

Example:

If there were $100mil worth of LP tokens in the Treasury, and there were 100 million $AQUA tokens in existence, if I burned 1million $AQUA tokens, I should get $1million LP tokens from the Treasury. This means the floor value of each AQUA token would be $1 each.
If the current value of $AQUA in the AQUA/USDC pool is $0.75 per AQUA token, then it would be profitable to buy up as many tokens as possible under $1, and then burn them to be able to withdraw the treasury’s LP tokens. This would cause the floor value to be $1 per token. This means the more LP tokens the AquaFi treasury owns, the higher the value each AQUA token will become.

What can I do with $AQUA tokens?

1. Pool Them

Pool them, duh.

The AQUA pools, such as AQUA/WETH that will pay +100% premium on fees, will likely always have the highest premium rate. You can pool AQUA with another token such as WETH to earn more fees on your AQUA LP position.

2. Buy/Sell

There will be liquidity pools such as AQUA/WETH and AQUA/USDC that you can buy from and sell to.

3. Governance

$AQUA holders will have voting power to decide which pools will pay which percentages, and which new pools to add in the future among other decisions.

This means if you have any ideas for potential upgrades to the AquaFi protocol, you will be able to create a proposal and if approved, upgrade the protocol to reflect your suggested changes.

4. Future Growth

As the protocol keeps more and more LP tokens for itself, and because of the previously mentioned burning mechanisms proposed in future upgrades, the value could increase. Because fees generate a larger liquidity position which generates more fees, which should exponentially increase the LP value the AquaFi protocol holds: the more liquidity staked, the quicker the price floor will exceed current values, forcing the price to increase.

List of Available Liquidity Pools on Launch

Every pool will have its own premium and is controlled by $AQUA governance. Additional pools will be added in the future.

The pools available and their premium when AQUA launches has not yet been completely settled on but will be decided before mainnet. The vote and discussion for what these will be can be found at:

VOTE: https://vote.blockzerolabs.io/#/blockzerolabs.eth/proposal/QmPG9j2CmDwi7sPiQ3KYSVf3BwKHXSu4HPMDKHuSWREZXK

POOLS: https://docs.google.com/document/d/19FvB-zB8a15p3pGxRjl3m8HQ7NkSs2usmjG_mKurOfM/edit#

Why use AquaFi (fee boost) over other protocols (variable APY)?

Certainty

You can be certain of what the fee percentage boost will be, no matter when you unstake in the future. This is calculated based on the $AQUA price at the moment you unstake.

Example: Historically, the USDC/ETH UniswapV2 has earned about 14% in fees per year to LPs. The AquaFi premium for USDC/ETH is 50%, which means you should expect to earn 14%(+50%) = 21% APY using $AQUA, or +7% APY overall, for this specific pool.

No Risk of Volatile APYs

The APY in other protocols is based on that moment’s variables that will be changing constantly. Their APY and rewards could be better than AquaFi today and could be worse tomorrow.

Their APY rewards are usually:

Relative to their native token price. If their native token price goes down, so does your APY.
Example: If some $CRAP token is worth $25 today and their protocol is advertising 25% APY for USDC/ETH, and you staked your LP tokens for 1 year… If in 1 year the $CRAP token ended up being worth $1, then the total APY % you actually earned that entire year of staking would only be 1% APY: the price went down 25x, so your actual APY% value reduced to 1/25th.
Based on total current liquidity divided by a predetermined amount of their tokens they reward per block. This means if more people add liquidity, the overall APY goes down for all other liquidity providers also staking.
Example: If some $CRAP protocol is offering 25% APY on USDC/ETH and has $1mil liquidity after you stake your liquidity and if tomorrow there is a total of $5mil staked, their APY tomorrow will reduce to 5% APY: the liquidity pool increased 5x so your APY was reduced to 1/5th.

No Risk of Volatile Markets

As mentioned before, volatile prices of native tokens will usually cause the APY% earned in other protocols to fluctuate at the same rate. Keeping that in mind, and when considering what the prices of the native tokens have been for some of the top yield farms over the last 6 months, nothing has been “certain” of their APY rates for long term LPs who don’t regularly withdraw and sell their yield, February to July 2021:

Uniswap: $20, $25, $42, $17, $25, $18
Sushi: $12, $23, $11, $21, $7, $8
PancakeSwap: $18, $17, $25, $42, $15, $14

The price of $AQUA only matters when unstaking, at which point you get paid $AQUA based on the exact ETH value of the boosted LP fees earned, no matter if $AQUA is worth $0.01 or $100, you would get enough $AQUA tokens to be worth the value owed to you.

Set It and Forget It

You don’t need to withdraw and sell your tokens regularly to ensure the APY value advertised is what you actually get.

Final Notes

We will be relying on community feedback and voting to utilize governance to adjust pool premiums to ensure the AquaFi protocol pays competitive rates so each pool doesn’t pay too little or too much, with the goal of acquiring as much liquidity as possible into the AquaFi protocol.

The success of the AquaFi protocol will be directly related to how many LP tokens it can acquire and in what timeframe. If you want to help the AquaFi protocol succeed, you can help to find ways to, or directly contribute to, increasing the total liquidity staked in the AquaFi protocol.

For more information, you can refer to the AquaFi documentation at https://docs.aquafi.io/