Summary

• EDIT: The incentives and pools for the DEX were changed to reflect the community feedback as well as current market conditions
• Bootstrap liquidity for DEX and lending market through incentives to ensure a successful launch with sufficient liquidity to attract power users
• Source enough DOT supply into lending market to enable the usage of the iBTC staking product
• EDIT: Due to various blockers, the iBTC staking product will not be live for launch.
  -EDIT: Register qDOT and qUSDT as vault collateral to improve efficiency and source liquidity into lending market This is postponed and first tested on Kintsugi for safety reasons.
• Focus on main DEX pools (iBTC/DOT, iBTC/USDT, INTR/DOT) and lending markets (iBTC, USDT, DOT)
• A total of 8.46m INTR (~$130,000) would be requested from the treasury to incentivize DEX pools and lending markets for three month. This amounts to around 3.5% of the current treasury
• Target TVLs are $1.6m for the DEX and $1.4m for the lending market

Goal

The goal of this discussion post is to get community feedback on the plan outlined below, how to successfully launch the DeFi hub on Interlay and to attract sufficient capital to enable efficient usage of the DEX, lending market, bridge as well as the highly anticipated iBTC staking product.

In order to achieve this, two main requirements need to be put in place. First, to attract enough liquidity, it is proposed to incentivise the lending markets and liquidity pools. Secondly, to ensure sufficient supply of DOT into the lending market, which is a requirement for the iBTC staking product to work, it is proposed to register qDOT as vault collateral.

qDOT is the token that a supplier receives for depositing DOT into the lending market. qDOT can be redeemed for DOT any time, given the market has free liquidity. Doing so, vault operators don’t have to choose between depositing into the lending market or locking DOT as vault collateral but can utilize both, thereby providing borrowing liquidity for DOT as well as minting capacity for iBTC.

Vault collateral

EDIT: This is postponed and first tested on Kintsugi for safety reasons and not part of the current proposal.
As stated above, registering qDOT as vault collateral is considered one of the main pillars for a successful launch of the iBTC staking product. Apart from qDOT, it is also proposed to register qUSDT as vault collateral. Albeit not being so popular as collateral, utilizing qUSDT as vault collateral would still pose an improvement in terms of capital efficiency and should have similar effects as qDOT in terms of supply in the USDT lending market.

Based on the analysis the following parameters are proposed:

Asset	Liquidation Threshold	Premium Redeem Threshold	Safe Mint Threshold
qDOT	125%	140%	155%
qUSDT	135%	145%	155%

Since qTokens are just a claim of the underlying token deposited into the lending market, the underlying tokens served as a proxy in the analysis and hence both share the same thresholds.

DEX

One of the main goals of the launch in order to be considered successful is to attract sufficient liquidity into the pools to ensure efficient trading, even of larger positions. This is an important requirement to attract ‘power user’ that account for the majority of the volume on a DEX and are therefore a critical user group to achieve a level of trading volume that generate sustainable trading fees for liquidity provider.

Based on the experience from the Kintsugi launch, it is proposed to launch with three essential pools, with a focus on the iBTC/USDT pool, which attracted the most volume and TVL on Kintsugi (kBTC/USDT), despite lower APY compared to the kBTC/KSM pool. The proposed incentives would run for 3 month to allow enough time for trading activity to gain traction while simultaneously avoid draining too many funds from the treasury.

Pool Overview

Pair	Target TVL in USD	APR at target TVL	DOT deployed at target TVL	iBTC deployed at target TVL	INTR	INTR in USDT
iBTC/USDT	1,000,000	22.3%	—	19	3,800,000	$55,735
iBTC/DOT	400,000	29.3%	43,290	8	2,000,000	$29,334
INTR/USDT	200,000	58.7%	21,645	—	2,000,000	$29,334
Total	1,600,000		64,935	27	7,800,000	$120,271

Since most of the yield for LPs will come from incentives in the beginning, it is suggested to launch the DEX with 0% fees to attract as much volume as possible.

Lending

Similar to the DEX, it is suggested to focus on the most important markets to bootstrap enough liquidity for borrowing and lending activities, with a special focus on the DOT market due it’s importance for the iBTC staking product.

Market Overview

Interest Rates Parameter

The interest rate parameters were calibrated to provide a competitive supply and borrow APY at the optimal utilization ratio compared to other lending protocols on Polkadot. The jump rate for DOT was calibrated in a way to still provide excess return for the iBTC staking product at optimal utilization. Note that the optimal utilization for DOT is suggest to be at 80% to create more liquidity to withdraw qDOT to DOT if vaults that use qDOT as collateral get liquidated.

Market	Base Rate	Jump Rate	Full Rate	Optimal Utilization
iBTC	0.0%	5.0%	50.0%	90.0%
DOT	5.0%	20.0%	50.0%	80.0%
USDT	0.0%	10.0%	50.0%	90.0%

Security Parameters

Based on the analysis the following parameters are proposed:

Market	Max LTV	Liquidation LTV	Reserve Factor	Close Factor	Liquidate Incentive	Liquidate Incentive Reserved Factor	Supply Cap (# tokens)
iBTC	0.63	0.67	10.0%	50.0%	110.0%	0.0%	30
DOT	0.67	0.77	10.0%	50.0%	110.0%	0.0%	1,000,000
USDT	0.67	0.74	10.0%	50.0%	110.0%	0.0%	600,000

Details about the parameters can be found in the (github repo)[https://github.com/interlay/interbtc/blob/f0a0144a0cd7e512bf9b2c55e57b12e4b3b5e9c4/crates/loans/src/types.rs#L89].

Incentive Estimates

First and foremost it’s worth noticing that no incentives for the supply of iBTC are suggested. This is because the iBTC staking product relies on users supplying iBTC and locking it as collateral in order to receive staking rewards. Hence. the target TVL for iBTC is equal to the target TVL of DOT * DOT assumed utilization / iBTC max LTV.

The incentives for the other markets are suggested to run for three months and are merely a means to bootstrap the initial liquidity. After attracting sufficient liquidity, it is assumed that users will borrow funds to use them in DeFi application, even if it’s just to do yield arbitrage between Interlay and other lending protocols.

Market	Target TVL (USD)	Supplied Tokens	Incentive APY	Supply APY	Total APY	Rewards (INTR)	Rewards (USD)	Assumed Utilization
iBTC	595,000	23	0.00%	1.11%	1.11%	0	0	20%
DOT	500,000	108,225	5.28%	19.06%	24.34%	450,000	$6,600	75%
USDT	300,000	300,000	4.11%	8.89%	13.00%	210,000	$3,080	80%
Total	1,395,000					660,000	$9,680

Note: All calculations assume an INTR price of $0.01466722. The actual APR and TVL might change due to price changes of INTR and the other tokens used in these calculations.