Bonq Liquidity Solutions

December, 2022

1. Summary

BonqDAO is a non-profit decentralized autonomous organization (DAO), building technology solutions for self-sovereign finance. Self-sovereign, in the context of finance, means that users don’t have to borrow capital from external 3rd parties, but can access the liquidity of their own assets instead. It means they don’t depend on any 3rd parties when it comes to capital availability, interest rates, custody, approvals, etc.

The Bonq liquidity platform is the first solution launched by BonqDAO. It allows web3 protocols and projects to de-risk their treasuries and create deep, protocol-owned liquidity for their native tokens at zero interest. It also allows users to access sustainable, low-risk yield strategies. Initially, Bonq solutions will support whitelisted ERC20 tokens, however in the future Bonq protocol will support tokenized real-world assets, including invoices, real estate, and shares of private companies.

Bonq leverages an on-chain, non-custodial, and decentralized lending protocol with its own over-collateralized, Euro-pegged native currency, BonqEUR (BEUR). BEUR loans need to maintain a minimum collateral ratio individually set for each whitelisted token by the risk model and are secured by the Stability Pool. In case the Stability Pool does not suffice, the trove’s assets and liabilities will be picked up by the community of trove owners.

BonqDAO will build, launch, and operate the lending protocol, the liquidity solutions, and the data-driven risk model that underpins the entire ecosystem. The BonqDAO will issue its own utility token BNQ, to align the incentives of the ecosystem, automate the value flow and facilitate the governance process.

2. Introduction

The crypto economy has undergone tremendous growth reaching ~$3 trillion in market capitalization last year. However, much of that activity was highly speculative and targeted at existing crypto holders who profited from high leverage and various incentive mechanisms. The current DeFi protocols are not optimized for mainstream usage and fail to provide the critical retail financial tools offered by traditional banks. There are still not enough DeFi products that help the mom-and-pop shop owner in Santiago get a small business loan or the small-scale farmer in Kenya get insurance to protect their harvest. The lack of real-world traction and the inability of solving day-to-day problems manifested as a bear market in 2022, when the crypto capitalization went down to ~$800 billion.

In order to fulfill their vision for economic prosperity and financial inclusion, future DeFi platforms such as Bonq have to prioritize three goals: (1) provide long-term, sustainable and low cost liquidity solutions to Web3 tokens (2) offer self-sovereign borrowing solutions to unlock the debt market and access cheap capital ; and (3) solve real-world problems by catering to everyday use cases.

With the introduction of its liquidity solutions, Bonq is paving the way for a financial service model that is open, permission-less, non-custodial, and transparent. All tokenized sources of value including real estate, IP, equity stakes, and cryptocurrencies will become liquid and exchangeable digitally with low cost and friction over decentralized networks.

According to Boston Consulting Group “Tokenization of global illiquid assets is estimated to be a $16 Trillion business opportunity by 2030”. All these on-chain real-world assets will need liquidity. By providing this liquidity, Bonq is focused on solving a real word problem. Bonq's self-sovereign solutions and products are easy to use and are much cheaper than any traditional finance solution, as they don’t need any external capital or intermediaries.

3. Self-Sovereign Finance

Traditionally, businesses and individuals had to rely on 3rd parties to access the liquidity of their assets. 3rd parties like banks give car loans and mortgages to individuals or provide trade finance for businesses. The asset owner has to apply for a bank loan, which can be granted or denied, and then pay recurring interest until the loan is paid back in full. This means that the asset owner is dependent on the lender, and the ability to access the liquidity of their assets is determined by the availability of the capital and its price (the recurring interest).

The recent decentralized finance (DeFi) projects and protocols developed a new way of providing loans based on blockchain protocols and tokens. However, the overwhelming majority of the DeFi projects and protocols still operate under the traditional finance paradigm of relying on a 3rd party lender providing capital and charging recurring interest.

Self-sovereign finance (SSF) is an approach that advocates the use of technologies like blockchain to conduct financial transactions without the need for relying on any 3rd party, including traditional banks or individual DeFi lenders. Bonq protocols are a manifestation of SSF.

Bonq users don’t transact with any 3rd party. They transact with their own trove, a smart contract that only they can control. They can access the liquidity of their assets just by locking them up in their own trove, without any involvement of any 3rd party.

This SSF approach is the single most important aspect of Bonq and has the following implications:

● Bonq is censorship-resistant. No one is needed to approve a loan, so no one can deny a loan.

● Loans created with Bonq troves are not limited by the availability of external capital.

● There is no recurring interest that needs to be paid. Users are accessing their own capital, they can “borrow from themselves”, so there’s no one who needs to charge recurring interest.

● The supply of the Bonq stablecoin is not limited by the ability and willingness of the borrowers to pay the recurring interest

4. BonqDAO Ecosystem

At Launch, BonqDAO ecosystem consists of 3 layers that would allow Web3 protocols to access the debt market and create deep, on-demand protocol-owned liquidity for their native tokens at zero recurring cost and minimum risk.

Risk Management Platform

Over-Collateralized Lending Protocol with its own Euro-pegged native currency BEUR

Self-Sovereign Liquidity Solutions Layer

5. Risk Management Platform

Since BonqDAO’s mission is to make self-sovereign liquidity available and cost efficient for a broad range of on-chain assets, the protocol uses a data driven risk model built to weather different market conditions and mitigate the risks for the users.

There are three different aspects of risk categories which are critical in assessing whether a token would be allowed as a collateral on the Bonq protocol:
Fundamental Risk - evaluates the overall quality of the protocol and uncovers potential design risks. It looks at the value offering, usefulness, strengths/ weaknesses, and competitive advantage.

Technical Risk - indicates how closely projects follow best practice in terms of process quality and cybersecurity. Evaluates the smart contracts, checks to see if they match the software repository used to develop the code, looks at the documentation and stress tests and verifies the audit reports.

Market Risk - quantifies the exogenous risks that occur when crypto markets are volatile and cause the collateral assets to fluctuate a lot. Tokens that have lower than average historical volatility and higher trading liquidity on exchanges should have lower risk of triggering cascading liquidations when markets go through correction cycles.

Each individual risk category has a score that ranges from 0 to 100 and is calculated as a total sum of each evaluated sub-group. The risk category assessments are carried out by the BonqDAO contributors using community templates and feedback and voted by the BonqDAO members. Each risk category must score a minimum of 50 to be considered by the BonqDAO.

While Fundamental and Technical Risk Scores are only used for whitelisting new tokens, the Market Risk Score has an additional function in deciding the Minimum Collateral Ratio and Borrowing Capacity for each token.

Bonq uses a bounded decay exponential function to define the change in MCR in relation to a change in the underlying Market Risk. Practically, the curve anchors the top scores to the minimum MCR allowed and the lowest scores (50-60) to maximum MCR while allowing a more severe decline of the score as certain ratios move to higher risk values.

When the Market Risk Score changes, the newly opened troves will reflect the new MCR while the existing troves will not see their MCR updated until new debt is minted. However, any trove with an MCR at or below the latest MCR for the collateral, will provide redemption the minimum redemption fee. Having a trove with the minimum redemption fee, increases the risk of the collateral asset in the trove being redeemed by the arbitrageurs.

Note: A more detailed Risk Model methodology paper will be released in 2023.

6. BonqDAO Over-Collateralized Lending Protocol

The backbone of the Bonq platform is its non-custodial, over-collagenized stablecoin pegged 1:1 to Euro (BEUR). In contrast with other stablecoins, BEUR is backed by a basket of on-chain digital assets that distributes the collateral risk and allows broader accessibility to DeFi protocols and real-world financial products.

6.1. Lending Overview

Bonq allows users to access the liquidity of their assets without selling them. Users may deposit their crypto-assets, (for example $ETH) as collateral to a smart contract called Trove to mint and withdraw BEUR stablecoin. The Trove needs to maintain a minimum Trove Collateral Ratio (TCR). The minimum TCR is determined by the risk model for each asset. If the trove has insufficient collateral, it’s instantly liquidated.

This mechanism is similar to having a home equity line of credit where bank customers can borrow against the equity value of their property. The main difference for Bonq is the fact that the protocol does not charge any recurring interest on the borrowed BEUR. It is because the users borrow from themselves, there’s no 3rd party involved that has to provide liquidity and earn interest.

A Trove consists of two balances. One for the crypto asset collateral, and the other one for the debt denominated in the protocol’s stablecoin BEUR. There is no minimum debt and there is no deadline to repay the debt as long as the minimum collateralization ratio is maintained.

6.2. Bonq Stability Pool

The Stability Pool is the BEUR liquidity of the protocol that acts as the first line of defense to maintain system solvency by paying off the debt of the liquidated troves. The Stability Pool is funded by BEUR holders who deposit their stablecoins into the Stability Pool to make gains from liquidations, BEUR arbitrage and earn BonqDAO rewards in BNQ tokens.

6.3. Debt Liquidations

Existing asset-based lending platforms execute liquidations in two ways. Either undercollateralized positions are auctioned or a fixed-price sell-off takes place with a discount. Auctions take time, and delay in liquidations means that issued debt stays under-collateralized until the auctions are concluded. The discounted fire sales cannot achieve the best prices for the sold collateral, due to constrained demand.

On the Bonq platform, the under-collateralized Troves are liquidated automatically. If any Trove falls below the minimum TCR, the protocol instantly liquidates the position. The process is algorithmic, requiring no buyer or bidder to achieve these sales. Liquidated borrowers keep their BEUR, and all their collateral is distributed to the Stability Pool or, in the case of insufficient Stability Pool liquidity, distributed to the other troves with the same collateral.

Stability Pool Liquidation When Troves are liquidated, BEUR tokens are burned from the Stability Pool in an equal amount to the liquidated debt to ensure that the total BEUR supply remains backed. As a result of this burning process, Stability Providers lose some of their BEUR but are compensated with the liquidated collaterals at a significant discount. Both burning of BEUR and redistribution of liquidated collateral take place on a pro-rata basis per the Stability Provider.

Since the liquidations happen instantly once a Trove Collateral Ratio (TCR) falls under the minimum TCR level, the Stability Providers are likely to gain a higher BEUR value of the collateral. Meanwhile, this also means that the liquidation penalty is a strong incentive for trove holders to maintain safe TCR levels of their troves.

Community Liquidation
In the event that the Stability Pool runs out of funds, both the collateral and the debt of the liquidated trove are automatically distributed over the remaining troves with the same collateral to prevent cascading liquidations.

Additionally, Community Liquidation is used for every trove with CR <100%, even if the SP has not been depleted.

6.4. BEUR price stability mechanism

The conventional way of price stability introduced by Maker is much like a central bank regarding variable interest rates. Due to having no supply side on the protocol level, Bonq however can support 0% interest rates. MakerDAO could do the same, but they need the revenue accrual from interest rate to control DAI price, which is the main difference in the price stability mechanisms of the two protocols.

Instead of charging interest on the loan, there is a one-off issuance fee charged in BEUR. These fees vary algorithmically between 0.5% to 5%. In addition to the issuance fees, there is a redemption fee for every BEUR redeemed for collateral to maintain the balance of the peg.

When BEUR is trading below the peg (1BEUR=0.9EUR), debt repayment makes sense for the borrowers as they would be better off closing their debt positions at a discount. The arbitrageurs, when BEUR is trading under pegged, can buy BEUR on the market, redeem the collateral, then sell it and capture risk-free profit. As the users buy and redeem more BEUR, the redemption fee increases to make redemptions less attractive when the price reaches the peg.

The fee algorithm is a key variable in maintaining the peg. As more redemption is in demand, the base rate for the borrowing fees is increased to discourage additional borrowing and support the peg to overcome downward price pressure. This way, the borrowing fee increases together with the redemption volume, to prevent flooding the market with newly minted BEUR.

With time, when the borrowing and redemption activity stops, the borrowing fee and the redemption fee decay back to minimal levels.

7. Self-Sovereign Liquidity Solutions

BonqDAO will leverage its Risk Management Platform and Over-Collateralized Lending Protocol to build self-sovereign liquidity applications that would create huge market adoption opportunities within the DeFi and real world’s financial markets.

At launch, the liquidity solutions layer would consist of 3 products:
● Protocol Own Liquidity
● Yield Strategies
● Treasury Management

7.1. Protocol Own Liquidity

Liquidity has become a major challenge of every crypto project, demanding extensive time and resources that could be better spent on development and growth. The liquidity mining model provides short-term incentives for liquidity providers and creates a perpetual expense on protocols' balance sheets. As a result, projects will need better systems to ensure sustainable liquidity while aligning long-term incentives for investors.

Using the Bonq’s lending protocol, Web3 protocols and projects will be able to mint BEUR by depositing their native whitelisted token and have their tokens matched by newly minted BEUR stablecoins inside DEX pools. This design is attractive for projects that want to generate on-demand liquidity with no upfront cost to acquire the other end of the liquidity pair. Since the projects themselves are operating as liquidity providers, they are entitled to trading fees. Additionally, the solution minimizes the potential impermanent loss, because projects keep all their native tokens as collateral in their trove.

The single-side, protocol-owned liquidity solution presents a tremendous opportunity for DeFi in general by overcoming its structural liquidity provisioning problem (2-side liquidity requirement) and matches TradFi solutions, where single-side liquidity is a standard. If achieved, Bonq will be able to lend liquidity to any project (based on whitelisting criteria) and alleviate protocols’ need to source liquidity and pay for the other side of the liquidity pool.

7.2. Yield Strategies

BonqDAO platform is one of the few, if not the only product in the DeFi ecosystem that allows Web 3 protocols and their communities to whitelist their native tokens and earn significant yield without giving control of their assets. Protocols and users can tap liquidity by locking their tokens inside Bonq, borrow BEUR at 0% interest rate and earn yield or cashbacks that automatically pay the debt.

Low risk Yield farming has never been more accessible.

There are three ways the BonqDAO Yield strategies solutions generate returns for its users:

Stability Pool Yield & Liquidation rewards - staking BEUR into the Stability Pool provides a significant yield and receives pro-rata share of all liquidations

Cashbacks that automatically pays back debt - all fees accrued by the Bonq platform are returned to the staking BNQ token holders as BEUR cashbacks and redirected to pay back the debt

Leverage from AMM liquidity providers - Bonq rewards participants for providing liquidity to the protocol in the form of BNQ rewards. In addition, users can borrow more BEUR against Liquidity Pool tokens and earn additional yield and BNQ rewards

7.3. Treasury Management

The purpose of any Web 3 protocol is to manage and govern its protocol in perpetuity. Similar to how traditional companies operate and capitalize themselves, Web 3 treasuries need access to liquidity to ensure ongoing operations, investment in future growth and diversification.

Debt is a largely unutilized part of protocols capital structures leaving most of the treasuries with heavy exposure to their native tokens and high leverage to market turbulences. Accruing stablecoins or reserve crypto assets such as ETH or BTC via borrowing helps de-risking without putting any downwards pressure on token prices. However, most of the protocols seeking to borrow funds are locked out of the debt market as major lending protocols such as Aave, Compound and Maker accept only a few tokens as collateral.

BonqDAO Treasury Management liquidity solution allows treasuries to deposit native tokens, borrow BEUR stablecoin at 0% interest rate and either keep it or exchange it for reserve assets or other stablecoins to reduce the overall risk. As an example, by diversifying almost 30% of a protocol native token (with an average annual volatility of 130%) into BEUR or reserve crypto assets, the overall treasury risk decreases by more than 80% without any selling.

8. BNQ Utility Token

BonqDAO will issue its native utility token BNQ that will be used for community rewards and incentives, to accelerate adoption, tech development, stability pool staking, and providing liquidity to BEUR trading pairs.

Specifically, BNQ tokens are awarded to the Stability Providers and Liquidity Providers of the BEUR liquidity pool. BNQ token holders can stake them to receive discounts on the past and future fees charged by the protocol. This means that staking users can enjoy using the protocol for free, but they can “cash out” the rewards, they can use the rewards as passive income or dividends. There is no lock-up on the staked BNQ tokens.

Companies and crypto projects who want to use BonqDAO self-sovereign solutions or add their token to the approved collateral whitelist have to buy and stake BNQ tokens. They don’t need to pay any recurring fees, and if they decide to stop using the platform, they can sell their BNQ tokens. However, by holding the tokens they join the ecosystem and have no incentive to stop using it (no recurring fees). They are incentivized to maximize the use of the platform and onboard as many users as possible since this will increase the value of their BNQ stake.

Finally, BNQ holders will be able to participate in the governance process of the DAO. They will be able to influence the roadmap of the project, vetting new members and vetting new tokens accepted as collateral.

To summarize, the utility of the BNQ token includes:

● Free or discounted usage of the platform and value-added services

● For crypto projects, the ability to whitelist a token as collateral

● The ability to participate in governance

The supply of BNQ tokens will be distributed between:

● Investments and grants for impact projects (5%)

● Community rewards and incentives (50%)

● Early investors (10%)

● Late investors / operating budget (23%)

● Founders (12%)

Tokens for founders and contributors are subject to a 3-year vesting period.

9. Bonq Technology

Bonq protocol will be launched first on the Polygon Blockchain due to the very low gas fees, energy efficiency, and fast transaction processing of the blockchain. The low gas fee environment is important for the protocol’s efficiency and the stability of BEUR. Later on, deploying the protocol on other fast and inexpensive blockchains will broaden the accessibility and usability of Bonq.

The BEUR peg relies on an active community putting its capital to work in order to defend it. In order to speed up the adoption, we will provide the community with the tools it needs to do this part.

The components of the Bonq system are:

● The smart contracts, which allow users to create troves, mint BEUR, provide liquidity to the stability pool, and benefit from discounts by staking BNQ tokens.

● A DApp which allows users to interact with the smart contracts.

● An arbitrage bot that enables users to take advantage of the price impacts on the DEX liquidity pools by the swaps from freshly minted BEUR to other crypto assets.

● A trove optimization bot will give users the peace of mind of knowing that their trove will not be under-collateralized by allowing a “set and forget” approach to trove collateral level management.

● A cluster of The Graph Protocol servers is needed to track the transactions in the smart contracts and make the data accessible in a database.

9.1. DApp

As a decentralized protocol, Bonq is accessed by using Decentralized Apps in the browser. There will be 3 DApps, to begin with:
Bonq User Interface - allows a human user to interact with their trove and the staking pools

The Arbitrage Bot enables users to take advantage of the price swings that converting BEUR to anything else will create

Trove Manager Bot helps users to keep their troves out of liquidation and still take advantage of the yield opportunities provided by BEUR

9.2. Infrastructure

Even though Bonq is a decentralized protocol, it requires some infrastructure for efficiency and user-friendliness.
● A Web Server is used to store the DApp bundles and serve the applications to the users

● We use The Graph Protocol to index the events generated by the smart contracts and store these in a relational database. This allows for efficient querying of the protocol components and improves the user experience in the DApps

● An RPC node is required in order to guarantee smooth interaction with the blockchain. Hosting our own RPC node is also required to stay in control of security.

9.3. Smart Contracts

The smart-contract system allows the user to manage their loans and collateral. It also makes sure that the equilibrium of value is maintained by creating mechanisms for liquidating insolvent accounts.

Another important aspect is to create a system that is upgradable without causing disruption. When a new feature is deployed, the existing contracts should be able to continue normal operation, until their owners are ready to upgrade.

10. Conclusion

The Bonq liquidity platform is an example of a DeFi solution that has a real chance of being mass-adopted. It solves a real-world problem, is safe and easy to use and is much less expensive than any comparable traditional finance solution. Additionally, the timing for the launch might be just right.

The platform owes its efficiency to the recent technology innovations like fast, secure Proof of Stake blockchains (Polygon) and concentrated liquidity pools on decentralized exchanges (Uniswap v3). Given the amount of innovation that is happening in the area of tokenizing real-world assets and the size of the potential market, Bonq might become “the killer app” of DeFi, if not of the permissionless blockchains in general.

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