KNC Migration Recommendations and Safeguards - HyperChain

Disclosure: Hyperchain owns KNC tokens. All content in this proposal represents the opinions of Hyperchain and should not be construed as financial advice. The information contained herein is solely for educational purposes.

Hey everyone,

My name is Stelian Balta. I am running Hyperchain Capital. I have been investing in the space for a long time. Hyperchain is a long-term holder of many projects, including Ethereum, Kyber, Cosmos, Polkadot, Dfinity, Tezos, Fantom, with an AUM of more than $300M.

We are major long-term holders of KNC (5 Million KNC) and have been involved in the Kyber Network project since its formation in 2017. We have been participating in their KyberDao governance since the first epoch, witnessing the project’s growth since Loi shared with me his idea and vision to where Kyber is now. I also have observed the hard work, integrity, and transparency displayed by the Kyber team over the years.

That said, it is clear that Kyber’s market share (in terms of liquidity provision) has dropped substantially, reflecting the need for massive changes to enable it to adapt much faster and capture future trends. As such, we are very supportive of the Kyber 3.0 plan as we believe it solves key constraints that are severely inhibiting its growth while opening up new growth vectors.

At a high level (and with caveats), we are also supportive of the KNC token migration proposal to make the token more flexible and amplify its governance powers. We believe that this a necessary tool to drive adoption and fulfil Kyber’s full potential, especially for its new dynamic automated market maker protocol and new protocols.

In 2020, the AAVE community had very similar concerns regarding inflation during the migration from LEND to the new AAVE token. Despite the concerns, AAVE has proven that a carefully executed token migration strategy, along with a comprehensive governance framework that puts growth and value accrual as a key objective, can work extremely well. That said, every project is different, and Kyber needs to find its own set of governance rules.

We would like to stress that inflation on its own without guard rails is not ideal. We strongly recommend the implementation of important safeguards as part of the migration process, and we would be hesitant in voting in support of migration unless there are clear plans outlined to ensure responsible management of the token supply for the benefit of KNC holders like ourselves.

These are the governance safeguards and tools we recommend for Kyber.

Recommended KNC Governance Safeguards

  1. Every minting 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 liquidity mining on the dynamic market maker requires a new proposal and vote by the DAO.

  2. There needs to be a sufficient timelock period between a proposal passing to the KNC token undergoing any upgrade or minting. Our recommendation is 1 week for the average proposal.

  3. There should be a supply cap that allows for sufficient flexibility but never infinite or abusive minting. Any raising of the supply cap should have a far larger quorum and timelock period. For example, our recommendation is that any raising of the cap requires at least a 3-week timelock period and a voting quorum of 40%.

  4. For new tokens that are released into the market to fund new projects or reward stakeholders, it should be accountable in terms of achieving the stated objectives. This means that additional tokens should be locked up with the DAO until objectives are met or an appropriate vesting schedule is in place. We recommend a vesting schedule of about 1 year, with rewards claimable every 2 weeks, similar to what Synthetix did in the past for their staking rewards.

  5. There still needs to be greater incentives and convenience to encourage KNC holders to lock up their tokens for a prolonged period and vote in the DAO. We highly recommend that more incentives are given to KNC voters and an easy method be provided to allow KNC stakers to automatically convert their ETH rewards to KNC and stake these tokens after every epoch. This ensures a constant increase in KNC locked that are not circulating, serving as a natural counter against inflationary pressure.

Overall, if the token migration has a strong set of safeguards and provisions, we will be in full support of the proposal. We would like the Kyber team and community to seriously look into and discuss our recommended set of safeguards.

Kyber has an uphill task ahead given their current constraints, and we believe that a dynamic and flexible KNC token will be able to help fund new growth and innovation. Moreover, the wider distribution of KNC through ecosystem initiatives such as retroactive rewards and liquidity mining for deserving stakeholders, will bring more people into the Kyber and KNC ecosystem over time.

Together with the solid fundamentals of the Kyber team and technology, this will help Kyber become a top liquidity provider in DeFi again.

10 Likes

I am a Partner at Pantera Capital and am supportive of the upgrade and agree with these proposed safeguards.

6 Likes

@HyperChain Great set of recommendations! The main things for me are the following:

  • The DAO must be the ones approving any mint, with ownership of minted funds clearly stated for
  • An initial supply cap, with a very high quorum and vote differential for raising cap
  • Formalizing the initial governance parameters BEFORE any mint.

Otherwise, great recommendations!

5 Likes

Totally makes sense. I think what we should arrive with soon is a set of rules and policies for any activity related to token supply (mint/ burn).

The vesting and other policies mentioned in point 4 could be done off-chain and could be different from a project to a project.

Overall what you proposed is really aligned with our thinkings. Really appreciate the efforts.

4 Likes

Why such a low voting quorum? Why not a super majority of 75%-80%? The best governance safeguard is the one that a super majority needs to agree to raise the supply cap to avoid abusive minting.

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Hello, nobody will comment on the 40% quorum proposal? Don’t you guys think is too low?

Pools and kyber owns 53.7% of the vote, I find it very convenient proposing such a low quorum for minting. Real community voting is around 46%.

Let’s do things right, a super majority quorum of 80% is objective. With such a low quorum of 40%, then the community will never have the last word on minting. It just takes Kyber Team and half of the pools to reach the 40% quorum.

3 Likes

This is strange, 40% is too low? Quorum means that the number of KNC that needs to be present in the “meeting” needs to be 40% of the supply? But in order to APPROVE raising the cap, it needs to be a super majority no?

I wholeheartedly agree with the proposals from Hyperchain. I only vote on significant proposals now, because the cost to vote on burn and reward ratios is too high for the return. I am actually considering just holding my KNC, possibly even unstaking because I am not seeing how this current system rewards me. I am a smaller user, private, I don’t have millions of KNC.

Particular interest to me is proposal #5, which I was actually going to toss out for discussion when I saw this one. For a smaller member of the DAO, being able to directly convert my ETH to KNC within the DAO interface is a HUGE incentive to continue to participate AND STAKE.

I am even considering dumping all my KNC - even though I just migrated it all and am not certain I can actually convert it or trade it to something else, or even sell it yet. I have not restaked my migrated KNC either, because I’m not sure it’s worth the ETH to tie it up … because the migration was all onchain I had to unstake, then migrate, and now stake… I couldn’t even use the ETH I’ve earned to pay for that process, so its becoming a no win game for me. As I said, I don’t have millions of KNC or dozens of ETH sitting in my wallet, so every decision is about weighing the value of participation in the governance against the actual $$$ of the transaction.

Anway, I am waiting to see what happens …

I suppose it depends on what the DAO is really supposed to be… truly an organization governed by ALL the members, or an organization governed by the absolute most powerful members.

I support a supermajority, even if it’s at 70%, becuase that would require at least some of the smaller stakeholders to also agree to the minting. 40% is just a farce to give the appearance of community governance, because the community couldn’t really affect the outcome anyway, if the team and the pools agree.

Guys, we need a protection, so minorities are not abused with excessive monetary emission. And the smallest and most absolute minority is the individual KNC hodler. The best protection for the individual KNC hodler is a super majority threshold.

@loiluu any comments on this?

1 Like