Redemption Liquidity (QEV)

Redemption liquidity is critical for yieldcoins to function as reliable collateral within DeFi markets. While robust secondary markets make liquidity accessible, rigid redemption processes can cause depegs and bank runs which can impair an otherwise sound yield system.

DayFi manages redemption liquidity with using Queue Extractable Value, a mechanism to enable users to price their own value of time. This enables the protocol to allocate redemptions to users with the highest time preference, while rewarding patient users with an increasing share of NAV.

Queue Extractable Value (QEV)

Introduction to QEV

The protocol addresses the liquidity problem for redemptions through Queue Extractable Value (QEV), a market-driven mechanism for pricing and sequencing redemptions pioneered by USD.ai. The purpose of QEV is to enable depositors to access liquidity more efficiently while mitigating risks of illiquid assets and extended lockup periods.

QEV was first developed by USD.ai for their compute-backed synthetic dollar protocol, but is generalizable to other yield products with long duration underlying. It is well suited as a core mechanism for most InfraFi projects to price liquidity. USD.ai's QEV documentation can be found here. We have borrowed certain sections and phrasing for consistency.

Motivation

Rigid redemption mechanisms, such as simple First-In-First-Out (FIFO) policies, can lead to liquidity mismatches for DeFi protocols. While the underlying assets may remain stable and healthy, an immediate preference for liquidity from a large portion of the deposit base can force a run on the bank, causing dislocations in secondary market pricing. To solve this problem, liquidity preferences need to be priced according to a self-selecting and transparent curve that allows individual depositors to decide their own price of time, without impacting the remaining depositors.

QEV is the mechanism used to dynamically price liquidity and manage redemption queues in DayFi. QEV embeds an auction-based prioritization mechanism directly into the redemption system, integrating seamlessly into the protocol's cash flow stream. A transparent and demand-driven market determines queue positioning, preventing opaque or unfair liquidity bottlenecks.

Passive stakers also benefit, as queue priority is priced into an open auction model rather than being dictated by rigid withdrawal rules. This makes liquidity access more flexible and market-efficient, while still maintaining predictable “amortization” epoch schedules.

By defining Queue Extractable Value as an expected problem to solve for, QEV aligns liquidity optimization with the native constraints of long-maturity/amortizing assets, ensuring structured, scalable and frictionless capital deployment & withdrawal.

Implementation

QEV relies on a structured liquidity scheduling system for yield-bearing assets with predefined repayment cycles, operating in a synchronous manner similar to how blockchains process transactions at each block. Daylight QEV windows are processed every 30 days, summing all of the GRID distributions to the staking pool during that window. Those distributions are primarily sourced from:

1. $M T-Bill yield: all $M T-Bill yield is deposited in the yield vault, including for unstaked GRID; and

2. Protocol revenues: generated from the underlying physical infrastructure network.

As a result, each monthly window presents a limited supply of liquidity for redemption. As demand for exits fluctuates, a natural competition for queue positioning emerges through the QEV auction system.

Energy revenues are lumpy and seasonal by nature. For example, tax credits on new deployments can return 30%+ of a project's cost very shortly after commissioning. Meanwhile, power grids are typically maximally strained in warmer months, so VPP revenues are higher in the summer. This opens up a new economic element to QEV, where monthly window liquidity can range from 3-10%+ of the underlying.

QEV's market structure works as follows:

• Queue positions become market-based mechanism, allowing users to bid for faster redemptions.

• A secondary market for liquidity sequencing ensures fair, transparent capital allocation.

• Demand-based pricing for redemptions optimizes efficiency in amortizing asset withdrawals.

• If no one bids, the queue enters into a FIFO distribution should anyone enter redeem. If no one redeems, all proceeds are rolled over to new PPAs or stay in T-bills (”basic redemption / reinvests”).

QEV Auction System

The auction system works as follows:

1. Stakers enter a redemption queue, receiving amortized liquidity over time.

2. Users bid for priority access to unlock liquidity faster.

   • Bids scale queue movement proportionally, avoiding all-or-nothing distribution situations.

   • Passive stakers receive rewards through bribe redistribution.

   • All bids are done privately via zero-knowledge proofs to avoid MEV for QEV scenarios (last block bids)

3. Winning bidders move up in the queue, while non-bidders remain in amortized scheduling.

Uniquely, QEV's optimized auction layer:

• Ensures fair, efficient queue bidding execution via private matching.

  • Given the privacy, bidders can bid at anytime for the full 30 days leading up to the next auction. The only data visibility will be the # of bidding participants relative to the # of total depositors.

• Proportional Queue Movement: Adjusts positions dynamically rather than granting full priority to the highest bidder.

• Protocol yield source: The protocol earns from these “queue bribes” or auction bids, while reducing forced early exits and volatility. The more depositors value liquidity, the more NAV is redistributed to passive depositors.

QEV Smoothing

QEV allocations are smoothed according to relative bid strength to prevent whale dominance of the redemption pipeline. This is solved through Allocated Liquidity: the portion of available liquidity (Δ₁) distributed to depositors based on their bid strength relative to total bids.

$$\text{Allocated Liquidity} = \left( \frac{\text{Absolute Bid}}{\sum \text{Absolute Bids}} \right) \times \Delta_1$$

[NOTE] This formula may be subject to governance updates as depositor and borrower behaviors evolve. All formulas involve trade-offs between:

• Managing small vs. large depositor interests.

• Ensuring borrowers’ liquidity needs align with depositor expectations.

The smart contracts are modular and allow onchain formula swapping via droplets, ensuring governance can optimize liquidity dynamics over time.

QEV Summary

Queue Extractable Value (QEV) represents a necessary evolution in DeFi liquidity design. It treats redemption liquidity as an auction-based resource rather than a fixed discount function, ensuring that exits are dynamically priced according to real-time liquidity availability. Instead of relying on reactive interventions, QEV enables liquidity providers to be compensated based on queue depth, automatically adjusting incentives in response to redemption demand. This prevents reflexive depegging, ensures fair pricing, and eliminates the need for unsustainable liquidity incentives. Unlike utilization-based models, which work for short-term money markets but fail for fixed-duration assets, QEV directly prices liquidity at the protocol level, making redemptions predictable, fair, and resistant to shock events.

If low-liquidity crypto assets were to scale into DeFi capital markets & form factors, they must move beyond static liquidity assumptions and adopt market-driven mechanisms that dynamically price exit liquidity under all conditions.