The introduction of bribe markets into the Protocol Incentivized Liquidity (PIL) framework presents a significant opportunity for LQTY stakers. By allowing third parties to offer incentives to voters, the system aligns economic interests, optimizes resource allocation, and fosters ecosystem growth. Liquity V2’s bribe markets are designed to create substantial value for active participants while ensuring the protocol’s long-term sustainability.

PIL Framework: Core Mechanics

Liquity V2 allocates 25% of its revenue to PIL, which is directed by LQTY stakers through weekly gauge voting.

This mechanism ensures that protocol revenue is directed toward ecosystem growth initiatives, such as deepening liquidity pools and enhancing BOLD's utility. Assuming a BOLD supply of 250M and an average borrow rate of 5%, this would generate $12.5M in annual protocol revenue, with $3.125M, or approximately $60K per weekly epoch, allocated by LQTY stakers.

How Bribe Markets Work

Bribe markets enable third parties to compete for PIL rewards by offering incentives to LQTY voters. Third parties include DEXes, lending markets, stablecoin issuers, or even bigger LPs. These incentives create a dynamic marketplace where economic forces guide governance decisions.

Bribes Explained:

• Bribes are payments made by third parties to influence how LQTY stakers vote on PIL allocations.
• In return, these parties receive a continuous stream of BOLD rewards.
• Payments are distributed weekly based on voter participation.

Bribes offer permissionless access, allowing any protocol to offer them without prior approval or whitelisting. This structure ensures bribes are accessible to a wide range of participants, while market forces determine the most efficient allocation of PIL rewards.Another benefit is that rewards can be distributed anywhere within DeFi, not limited to the confines of a specific DEX or lending platform, as is usually the case. Note that Liquity has provided open source Bribe adapters that can be extended and modified by developers.

Benefits for LQTY Stakers

Enhanced Yield Potential

Bribe markets offer significant earning potential for active LQTY stakers. With a $250M BOLD supply and a 5% borrow rate, the annual PIL pool of $3.125M could attract equivalent or even higher payouts for stakers.

The key to success for PIL and V2 as a whole, is strategic voting on initiatives which grow the ecosystem as a whole. As the BOLD supply grows to 500M, 1B and beyond, so does the PIL firepower, and consequently, the rewards for voters.

To ensure long-term success, LQTY stakers should consider their voting strategy now and into the future, electing to support initiatives that drive the highest value to V2. This means favoring initiatives that facilitate greater borrowing volume, resulting in the greatest amount of PIL allocated towards higher volume LP pairs and initiatives, rather than opting for short-term solutions.

Long-term minded holders who staked early accumulate disproportionately large voting power, and with it, an equivalently large share of the rewards in a growing ecosystem.

Your rewards are directly correlated to a growing BOLD supply. 

Since PIL is not limited to a specific platform, its benefits can be accessed by anyone building in the industry. Bribing will be especially lucrative initially, as voters will support any reasonable initiative offering them. Over time, with increased adoption, the marketplace will mature, and votes could begin to fetch higher prices.

Economics Driven Liquidity Optimization

PIL can be also used to create a feedback loop where the liquidity pool with the most volume receives the highest rewards. This mechanic is similar to the Solidly bribe-dynamic (Velodrome, Aerodrome…), where voters receive trading fees and LPs get token rewards. However, Liquity V2 takes it a step further by paying rewards in a stablecoin, rather than issuing an inflationary token. Such a system could be set up for example on Uniswap V4 via hooks.

By creating this dynamic:

• LPs receive a reliable flow of stablecoin rewards
• LQTY voters receive swap fees from high-volume pools

As a result:

• LQTY voters are incentivized to vote for the pool with the most volume
• This rewards LPs active in the most efficient pools
• BOLD liquidity is reinforced and stabilized

This feedback loop is a win-win for all parties, and is perfectly sustainable and scalable.

The Advantage for Early Stakers

LQTY stakers accrue time-weighted voting power, meaning that the longer their tokens remain staked, the greater their influence in determining PIL allocations. This mechanism rewards early participants by amplifying their governance power over time, allowing them to have a disproportionate say in directing rewards to high-impact initiatives.

As bribe markets develop, early stakers will benefit from being among the first to capture incentives offered by third-party protocols. These bribes are expected to scale significantly as competition for PIL allocations increases. The absence of inflationary token emissions ensures that bribe rewards are tied directly to real economic activity, making them more sustainable and valuable over time.

Conclusion

Bribe markets transform Liquity V2’s PIL into a value-generating activity for LQTY stakers by aligning economic incentives with protocol growth objectives.

This system creates a sustainable flywheel: Bribes → Active Voting → Efficient PIL Allocation → Revenue Growth → Higher Bribe Values…

For LQTY holders, this represents an opportunity not only to earn higher yields but also to play an integral role in driving innovation and adoption within one of DeFi’s most integral building blocks.

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