DeFiForAll: Polygon Protocols Ally to Win QiDAO Wars

Zero-interest loans are one example of real-world applications of decentralized finance (DeFi) that has no parallel in the world of traditional banks. QiDAO is a Polygon-native lending protocol that lets users borrow against their crypto holdings for a small one-time repayment fee. There is now a battle for its control with millions of dollars at stake.

Imagine you are an ice cream shop owner who happens to own some cryptocurrency. When your cash register breaks, instead of selling your tokens to pay for a new one, you can deposit some into QiDAO as collateral for an interest-free loan. When repaying the debt, there is a charge equal to 0.5% of the borrowings. This way you are back to serving cones without missing out on future gains of your tokens. 

QiDao has two tokens. MAI, in which the loans are given and repaid, is Polygon’s first native stablecoin backed by collateral from borrowers and soft-pegged to USD. Qi is the governance token which is used to vote on decisions including collateral types, revenue distribution, system upgrades, community treasury, and changes to repayment fee.

Users can also stake Qi in return for escrow Qi token, or eQi. Staking is a way to boost your voting power and get a greater share of the protocol’s revenues, which include repayment and deposit fees. Locking up tokens for a longer period (up to 4 years) gives you more eQi and more leverage in return.

Until recently, the protocol incentivized users on Polygon to borrow MAI against their assets by paying about 187,000 Qi (or $145,000) per week in rewards. Late last year, the community decided to allow vaults on other chains to receive the rewards with the exact distributions determined by a vote. That set off a tug-of-war over the destination for the incentives, resulting in some funds leaving Polygon for other chains.

Qi Wars Heat Up

Tetu, a DeFi application built on Polygon for automated yield farming strategies, is a key player in the battle. Last December, Tetu created the AMB strategy which optimized yield-farming across AAVE, QiDao, and Balancer protocols. Users could deposit MATIC, WBTC, WETH, or AAVE, and Tetu would provide liquidity to AAVE in return for amTokens. These were in turn locked in QiDao vaults for camTokens, which can be used as collateral to borrow MAI. Finally, MAI is deposited in the Balancer stability pool.

When Qi rewards started leaving 3 out of the 4 AMB vaults, Tetu responded by creating a liquid form of eQi called tetuQi. Not only did eQi holders benefit by staking the illiquid eQi for the liquid tetuQi, they could also earn the usual weekly rewards and boosts. 

This strategy enabled vault rewards to return to the AMB vaults and showed the first steps for returning QiDao dominance to Polygon. Since then, several other protocols like Sphere Finance, OtterClam, Universe Finance, and Vesq have joined forces to increase the Qi rewards of Polygon vaults.

Similar to the AMB strategy, Tetu creates specific vaults for the asset that each protocol wishes to accumulate. For example, if OtterClam wishes to accumulate dQuick, Tetu would create a dQuick vault on their protocol for single-sided staking. Using the Alliance’s combined eQi voting power, Qi rewards would be directed towards these specific vaults.

The Qi Wars are entering a new stage as other DeFi protocols have realized the potential benefits of offering a liquid form of eQi. Gotchi Vault followed Tetu’s lead in creating vQi to divert more rewards to the vGHST vault on Polygon. StakeDao is also planning to enter the fray with sdQi.

You can read a more detailed post on this topic here, explore the broader Polygon ecosystem, and keep up with the latest news on the blog!

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