In KIP-6, the Kyber team proposed a KNC upgrade and migration to make the token more flexible and the Kyber community gave their strong stamp of approval with a large majority of 99.89% voting in favour of the proposal.
While the team makes preparations for the actual KNC migration, we would like to kick-start discussions on how to utilise KNC to drive adoption for the Kyber Dynamic Market Maker (DMM) protocol and other future initiatives.
Creating a Kyber Ecosystem Growth Fund
There were interesting suggestions by community members including representatives from HyperChain Capital and ParaFi Capital regarding the use of the KNC token as a catalyst for growth.
Building upon those ideas, we are proposing that a suitable amount of KNC be generated and managed by the KyberDAO as part of a Kyber Ecosystem Growth Fund for 2021 to drive innovation, bootstrap liquidity, and reward early adopters of new protocols such as the Kyber DMM.
For the purpose of this discussion, we would like to first gather feedback on the possibility of generating 42M KNC to start the fund (roughly 20% of the total KNC supply) to be used for a certain time period e.g. the rest of 2021. Any remaining KNC in the fund at the end of the time period should be burnt.
From this 42M KNC pool, KyberDAO can further allocate, through subsequent proposals, a portion of KNC to be used for liquidity provider incentives for the Kyber DMM. Remaining KNC can be used for other critical growth activities suggested by the community to help augment the main liquidity incentive programs.
The suggested parameters and numbers in this post are subject to change and need to be discussed as a community before they are finalised for an official KIP submission and vote by the KyberDAO. All initiatives will be subject to approval from the KyberDAO. Example flow below:
Motivations
- Bootstrap liquidity: Additional liquidity incentives are necessary to attract more liquidity providers to the Kyber DMM.
- Showcase Kyber DMM’s benefits to liquidity providers: If they are incentivized to use the amplified pools, liquidity providers will naturally learn about and enjoy the benefits of high capital efficiency and dynamic fees.
- Bring more DeFi participants and value into the Kyber ecosystem: More liquidity providers using amplified pools would mean more of them receiving KNC rewards and becoming part of the Kyber ecosystem and community, with the ability to stake KNC and vote on the KyberDAO. By receiving KNC, liquidity providers not only gain a useful asset, but also a stake in DeFi’s liquidity infrastructure.
Discussion: Liquidity Incentive Program Parameters
There are certain important parameters that the Kyber community needs to consider when generating KNC tokens and running a liquidity incentive program.
We would like the community to discuss and give feedback on the suggested parameters below. These initial parameters are meant to help facilitate discussion and are subject to change. Feedback provided will help finalise the details for the eventual KIPs.
Suggested KNC Allocation for Liquidity Incentives
| Current KNC Total Supply (17th April) | 210,252,943 |
|---|---|
| Ecosystem Fund: minting +% of Total KNC Supply | 20% |
| Ecosystem Fund KNC Pool | 42M |
The majority of the additional KNCs will be used for liquidity mining program as following.
| Liquidity Mining Rewards Pool: % of Ecosystem Fund | 90% |
| Liquidity Mining Rewards Pool (KNC) | 37.8M |
Eligible Liquidity Pools
Amplified pools (AMP>1) on Kyber DMM provide higher capital efficiency compared to typical liquidity platforms. The Kyber team is proposing that only amplified pools be eligible for incentives. Each pool gets an equal number of KNC. The more liquidity you provide, and for a longer period, the greater share of the KNC reward pool you receive.
We are proposing 5 pools that we feel are the best suited for the initial liquidity incentive program, based on the current trading behaviour and trends in the DeFi space. Ideally, with the added bonus of liquidity incentives, Kyber DMM can be the most capital efficient and attractive venue in DeFi to add liquidity for the selected token pairs.
The 5 suggested pools and AMP factors:
| Pair | AMP* | Reason for incentivizing the pool |
|---|---|---|
| USDT-USDC | 100 | Stablecoins pegged to the US Dollar such as USDT and USDC, are among the most traded and held tokens on Ethereum. Strongly correlated/stable pairs also provide the best showcase of the high capital efficiency possible on Kyber DMM. |
| USDT-ETH | 1.5 | Stablecoins pegged to the US Dollar such as USDT and USDC, are among the most traded and held tokens on Ethereum. Paired together with ETH, this would be a popular pool to hold USDT while maintaining exposure to ETH. |
| USDT-WBTC | 1.5 | Wrapped Bitcoin (WBTC) is the most widely-used ERC-20 version of Bitcoin and a popular choice for liquidity providers. |
| WBTC-ETH | 2 | Wrapped Bitcoin (WBTC) is the most widely-used ERC-20 version of Bitcoin and a popular choice for liquidity providers. Paired together with ETH, this would be a popular pool to maintain exposure to both BTC and ETH. |
| KNC-ETH | 1.9 | To enhance KNC liquidity and encourage KNC holders to lock up their tokens for a prolonged period, we propose that liquidity incentives be awarded to an amplified KNC-ETH pool. This also acts as a natural counter against inflationary pressure. |
*AMP = Amplification factor. Amplified pools have higher capital efficiency. Higher AMP, higher capital efficiency within a tighter price range.
We welcome the community to suggest other suitable token pairs and AMP factors. Token pairs suggested should be popular pools that can attract substantial liquidity.
KNC Reward Emission
KNC liquidity mining reward distribution will be based on a linear distribution by default. The same reward is released every block. The longer you provide liquidity on the DMM, the more KNC rewards received.
However, we would also like to discuss whether we should allocate a slightly larger KNC reward pool for the first few weeks/months of the liquidity incentive program to reward early adopters. This way, the earliest adopters and liquidity providers on the DMM will receive a higher proportion of the KNC rewards.
How to Add Liquidity and Receive Liquidity Incentives
Upon successfully adding liquidity by depositing the required tokens into the eligible campaign pools, you will receive DMM LP pool tokens representing your pool share. You will then need to stake your DMM LP tokens in designated smart contracts to receive liquidity incentives.
KNC liquidity incentives can be awarded to every liquidity provider that adds liquidity to eligible campaign pools, with the reward amount based on their share of the pool over time.
KNC Governance Safeguards
The implementation of a solid set of governance safeguards to prevent potential abuse and malicious behaviour around token generation and usage is an important aspect of any liquidity incentive program. Outlined below are certain mechanisms to ensure network stability and healthy KNC token circulation. The Kyber community should discuss them and suggest changes if required.
- KyberDAO Must Approve any New KNC Token Generation and Fund Allocation
Any minting or allocation of funds needs to be a new proposal approved by the DAO. No single centralized party should be able to control the minting process. For example, minting new KNC for an ecosystem fund and what portion of it gets allocated to liquidity incentives requires a new proposal and vote by the DAO.
- Timelock for Claiming Individual Rewards
As a safeguard to ensure network stability and healthy token circulation, there will be a timelock (e.g. 30 days) for all new KNC rewards distributed and claimed. Although the user can claim available KNC rewards anytime, they are automatically locked in the KyberDAO until 30 days AFTER the user initiates a claim. After 30 days, claimed rewards are automatically distributed to the Ethereum address.
KNC rewards can be categorized as:
- Available Rewards
- Claimed Rewards
- Locked Rewards (claimed rewards that have yet to be distributed. Auto-distributed on a rolling 30-day basis) with a countdown timer.
Example: Assuming a liquidity provider is awarded 1,000 KNC in rewards after 7 days and immediately executes a claim on this reward. The 1,000 KNC will be locked in the KyberDAO for 30 days before being automatically distributed to the user’s address. KNC received can be used for KyberDAO staking and voting or added to KNC liquidity pools on Kyber DMM for additional rewards.
- KyberDAO to Manage Unused KNC Rewards
It is imperative that new KNC token rewards are only distributed and released from the ecosystem growth fund into the circulating supply if there is a corresponding action taken to benefit and add value to the Kyber ecosystem. For example, KNC can be used as a reward for adding liquidity into an incentivized pool or as a grant to fund new projects that bring value to Kyber.
Any unspent KNC from the ecosystem fund should be locked up with the KyberDAO and not be circulating. If spare KNC tokens are not utilized by the end of the stipulated deadline e.g. within 2021, we should consider burning them as well.
Summary
We believe that the proposed Kyber Ecosystem Growth Fund and liquidity incentive program will greatly boost liquidity and adoption of Kyber Network, starting with the Kyber DMM protocol. As always, all important decisions pertaining to new token generation/burning, new protocols, and growth initiatives, will be decided as one Kyber community in a transparent manner.
We encourage and welcome the community to discuss how to use the KNC token as a catalyst for growth.