Key Functionality Of The EQ Token
If Equilibrium were a movie, then the EQ token is something like our main character.
EQ is the core asset at the heart of our interoperable money market, widely used throughout the system and the applications that run on top of it. The initial supply is 120 million EQ tokens, fully compatible across every smart-contract enabled blockchain bridged with Polkadot. EQ circulation will slightly increase every year due to annual inflation of 2.5%.
EQ token use cases broadly fall into four categories: paying fees, accessing system governance, liquidity farming, and bailouts/system liquidity. The first three applications are pretty common for most native DeFi tokens, but EQ’s applications for bailouts and system liquidity are rather unique to ours. We’ll get into all of this below.
Bailouts and system liquidity
EQ tokens facilitate our novel liquidation mechanism, called a bailout. Bailouts are far more reliable than the usual DeFi auction. Users earn a yield by securing loans in the system and locking crypto assets in Equilibrium’s bailout pools ahead of time. (Our EQ token is one of the accepted assets.) Providing this liquidity in advance assures that there is always sufficient collateral in the system for liquidating borrower debt.
Furthermore, you may use the EQ token as a collateral for borrowing stablecoins and other assets. This means that EQ token will act as margin against leveraged exposure to other assets, whether it’s spot crypto or synthetic derivatives (perpetual) markets. We may eventually come up with a set of incentives to make EQ tokens more appealing to use than other assets.
We expect these use cases will become the main drivers of EQ token appreciation, as well as its primary use cases.
Equilibrium is driven by a set of system parameters that can be modified via a decentralized on-chain voting process. EQ token holders are able to vote for some components of this governance.
We make use of Substrate’s democracy and council pallets to operate in a manner similar to Kusama and Polkadot. These modules seek to let the majority of tokens on the network determine the outcomes of key network decisions, like changing the minimum collateral threshold. These decisions are made after stake-weighted voting on a proposed referenda, and an autonomous enactment system ensures that the users’ decisions are binding.
Equilibrium strives to attract liquidity to its substrate, and has put aside 12 million EQ tokens (10% of the initial supply) to encourage crypto users to bring assets into our ecosystem. Since the availability of assets largely depends on the availability of bridging solutions, Equilibrium will start tapping into the liquidity farming pool to reward users with the introduction of an ETH bridge.
The liquidity farming pool will distribute EQ tokens to borrowers and bailsmen alike, based on their relative liquidity size. We will reward bailsmen first, and once we have a big enough liquidity cushion, we will reward borrowers tying rewards to actual borrower demand or utilization.
We will also leave some of the supply for our DEX plans, which include market maker incentives, periodical prizes to most active traders, and a referral program.
- Transaction fees
Substrate users pay transaction fees to validators in EQ tokens, gaining access to native services like DEX trading or subscription-based oracle feeds. Transaction fees on our Substrate chain are calculated based on three parameters: a per-byte fee (also known as the “length fee”), a weight fee, and an optional tip. Tips are an optional transaction fee that users can add to give a transaction enhanced priority.
Together these three fees constitute the transaction fee, which is deducted from the sender’s account before the transaction executes. 80% of the fee goes to the block producer, and the remaining 20% goes to the treasury. The treasury in turn acts as a source of last reserve in case of abrupt, unforeseen liquidity drains. Its account is operated by the on-chain code, and Equilibrium doesn’t have access to the funds that accumulate there.
- dApp fees
Equilibrium’s DeFi parachain provides valuable out-of-the-box services to its end users, like timely oracle-backed price data, a decentralized exchange built on top of our risk engine, as well as margining and balance modules.
Our DEX charges trading fees in EQ tokens to sustain operations. Once live, we expect those fees to be in the range of 0.03% — 0.06%, then fall based on trading volume. The DEX is currently in development, so true numbers will only be available after extensive stress testing. These fees will go directly to DEX operators, market makers, and validators who originate orders into the order book.
- Interest fees
Borrowers pay interest fees in EQ tokens. Interest is algorithmically determined via the risk and pricing modules, which look at the amount of debt or liabilities that a portfolio bears. Portfolios full of volatile crypto assets are subject to higher interest than those containing stablecoins or other price-stable assets.
Interest goes up when bailsmen liquidity declines against collateral liquidity, or when the entire system collateral becomes riskier. The opposite is also true: borrower rates decline when liquidity from bailsmen picks up, and/or when the entire system collateral becomes less risky.
We’ve already covered the percentages you can expect to pay as a borrower under different market and liquidity conditions in our article about Equilibrium’s stablecoin.
Now you have a strong working knowledge of what our EQ token is all about. We hope you agree we’ve created something quite useful and special. We’re eager to get it into the crypto community’s hands and move the DeFi community forward together.
Our next post is going to explain the merits of bailouts over auctions for debt liquidation. Read the previous article “How Equilibrium’s Stablecoin Works”, and don’t miss the details on our bailout mechanism coming soon in the next article.
The outline of our series:
- The Fundamentals Of Equilibrium
- Advantages of Equilibrium
- How Equilibrium’s Stablecoin Works
- Key Functionality of The EQ Token
- Bailouts: The New Normal For Managing Debt In DeFi
- Equilibrium’s Risk Model
- Equilibrium’s DEX
- Liquidity Farming