KNC Token Migration & Upgrade Discussion

As mention in our previous Kyber 3.0 announcement, the team plans to bring up a proposal to upgrade the KNC (Kyber Network Crystal) token to the community & the DAO. The intention of this post is to discuss the upcoming KIP (Kyber Improvement Proposal) for this topic.

Motivations

The main motivation behind the KNC migration is to greatly strengthen the token’s role as a governance and incentive mechanism that allows the KyberDAO to drive growth and value creation for Kyber Network.

The existing KNC token contract design has so far been sufficient for the current iteration of Kyber, allowing the KyberDAO to accrue network fees to reward professional market makers and KNC voters, as well as reduce KNC supply via token burns.

However, the current KNC token contract has several design factors that make it unsuitable to meet the fast-changing needs of Kyber’s next phase of growth:

  • Token is non-upgradable, which means any major improvements and functionality changes require the inconvenience of a full smart contract migration
  • KyberDAO has no control over token behaviour
  • Token supply is fixed, and there is no ability for the KyberDAO to support new initiatives or user growth when when the opportunity arises

Kyber 3.0 will transition Kyber into a hub of various liquidity protocols that cater to different DeFi use cases, along with a strong emphasis on growth and innovation. As such, a much more flexible KNC token contract design and a dynamic supply with a clear incentive system is required to quickly adapt to DeFi trends.

Proposed KNC Contract Design

We are proposing a migration to a new KNC contract that will allow the KyberDAO to fund the development of new protocols and adoption initiatives, as well as raise the overall value of the network.

1. Token Upgradability

We propose that the new token contract be deployed as a proxy that allows any kind of upgrading capabilities, including adding new functions to the token and changing the token name if required. This will allow KyberDAO to upgrade core functionalities in the contract without undergoing major migrations.

That said, technical mechanisms need to be introduced to ensure that any token contract alteration will always require very high participation and consensus by KNC holders. These new governance mechanisms will allow us to configure the criterion. Examples include longer timelocks before the effects take place, minimum voting quorum, and a vote differential (% difference between ‘For’ and ‘Against’ voting results). These are not finalized and need to be discussed.

For instance, AAVE, which has a similar token upgrading capability, has a long timelock period of 2 weeks, and requires at least 20% of the AAVE supply voting yes with a vote differential of 15%.

2. Dynamic Token Supply

We propose that KNC be upgraded into a token with a DAO-controlled dynamic supply to better support different types of DeFi innovation. This means that the KyberDAO will have the important ability to generate new KNC tokens to fund new protocol development, bootstrap adoption on protocols (e.g. liquidity mining on the DMM), and achieve network effects in order to accelerate growth and innovation.

It is imperative that any new tokens generated will ultimately result in a much greater increase in the value of Kyber Network, as well as rewards to liquidity providers and KNC voters. The intention is for the KyberDAO to be responsible for governing and facilitating this entire process in a transparent and community-driven manner.

3. Mechanisms For Greater Governance Power and Flexibility

To support the powerful mechanisms of token upgradability and dynamic supply, as well as the multi-protocol nature of Kyber 3.0, we also aim to implement critical on-chain governance features such as delegated voting and proposition powers, rapid protocol upgrades via short timelock executors, and governance upgrades via long timelock executors.

This ensures that the protocol can rapidly adjust to changing market conditions with efficient upgrades to core parts of the protocol. It will also be possible to create governance strategies that allocate voting power based on different tokens. For example, a governance strategy based on a collaboration between Kyber and another DeFi project might have 2 tokens (theirs and KNC) making up the total voting power.

AAVE x Kyber Collaboration on Governance Framework

DeFi project AAVE has developed a comprehensive and secure framework for their successful token migration last year, which includes token upgrading functionality and other sophisticated governance mechanisms.

If the KNC migration proposal passes, Kyber intends to adapt and utilize key components of AAVE’s technical governance framework for our own KNC migration needs. AAVE’s framework will help provide a robust starting point, greatly reducing the complexity and uncertainties in our migration.

We will be collaborating closely with the AAVE team on our KNC migration, and we also look forward to working together on future Kyber/AAVE governance collaborations and ecosystem initiatives.

Next Steps

What happens after this discussion?

After 2-3 weeks of forum discussion, the Kyber team, based on research and community feedback, will submit a KIP that best addresses the various concerns and presents a well-rounded token migration process. This KIP will include all the necessary technical details and governance parameters for implementation.

What happens if the proposal gets passed?

  1. The Kyber team will begin the token migration process, including the development of the new token contracts and a KyberDAO upgrade.

  2. Once the migration has been completed, all KNC holders will have to perform a token swap to the new KNC token, which will retain the ERC20 standard on Ethereum. There will be various ways for existing KNC holders to claim their new KNC tokens e.g. a migration portal.

  3. Kyber’s governance and fee system will be updated to better fit the economics of the new Kyber 3.0 architecture:

  • Governance scope and decision-making is currently limited to one single protocol. It will be expanded to the entire hub of liquidity protocols.
  • Fees currently come from only one single protocol. The KyberDAO can decide whether to take fees from all or selected liquidity protocols.
  • The current fixed fee system based on the Burn, Reward, Rebate (BRR) framework might not be suitable for the new liquidity protocols in the network e.g. the DMM protocol. The KyberDAO will be able to determine a new fee system.

Key Community Discussion Topics

1. What are the proposed network-level safeguards for KNC?

As part of this proposal, we will be suggesting specific KNC technical configurations and parameters (to be coded into the smart contract) to regulate token behaviour and supply. This token growth management process is crucial for network stability and has to be transparent and led by the community from the start.

Here are some examples of protection mechanisms that the community can discuss:

  • Token Timelock: If a proposal to generate new KNC is passed, there must be a short period of time before any new KNC tokens are generated on the blockchain.

  • On-chain Voting and Quorum: Any KNC generation/burning has to first undergo a KyberDAO vote on-chain which is a fully transparent process. For bigger proposed amounts of KNC generated/burnt, a certain % of total KNC token votes and a % vote differential need to be reached in order for the proposal to pass.

  • Dynamic KNC Supply (Generate/Burn): The KyberDAO should have the flexibility to not just generate new tokens, but to also decide to burn and destroy tokens if necessary.

  • Supply Cap: Should there be a supply cap every year (e.g. max +20-30%) hardcoded in the token contract?

2. What are the KyberDAO guidelines regarding the management of KNC?

On top of the aforementioned technical safeguards, we need to discuss the guidelines for the KyberDAO to effectively facilitate the token growth management process.

Here are some examples of KyberDAO guidelines that the community can discuss:

  • KNC token ‘Mandate’: KyberDAO-defined guidelines that govern token supply and behaviour, such as KNC generation/burning. For example, an important objective for any generation of new KNC is that it should ideally result in a much greater increase in the value of the overall network in the long run.

  • Token Vesting: Even after new KNC tokens are generated, any disbursement of KNC rewards for growth funding or liquidity mining purposes should follow a DAO-defined vesting schedule. For example, full liquidity mining rewards for LPs on the DMM can be made to vest over 6 months, with 1/6 of the rewards claimable every month.

  • Milestone-based Token Generation: Disbursement of KNC for protocol development and growth purposes should be based on milestones. New KNC will not be released to the stakeholder until certain milestones are hit e.g. new protocol MVP is released, audit is completed.

Summary

The proposed migration will greatly strengthen the KNC token’s critical role as a conduit for Kyber governance, innovation, and value creation. All important decisions pertaining to KNC smart contract upgrades, 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 this matter seriously as the new KNC token will play a very important role to the success of Kyber.

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Hi Loi,

What will be the effect of the staking rewards? Will it increase or decrease from this token migration?

Now that you mention that supply limit would be removed, wouldn’t that introduce inflation and reduce the value of KNC?

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The reward works roughly the same. The reward will be from the network fees (which will be contributed by multiple protocols), and will be distributed to voters based on their votes & stakes.

One important aspect of this proposal is to fund and support new protocols, new growth initiatives via new token mints. I think it is better to judge the token inflation based on their purposes. Not all inflations are bad. If the 5-10% supply increase could drive up the value of the network by 100%, i think it would be a great tradeoff.

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Hello!

What happens with the no migrated tokens? I can imagine a lot of holders maybe not aware of news.

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Inflation is a very bad idea for tokens holders, please don’t implement an infinite way to fund development thru inflation. DO a second round ICO if there is no more money for development and print tokens that way.

The new people that get these tokens through inflation, will either DUMP on US through the market OR stake those new KNC in KyberDAO that will result in diminishing the ETH rewards for REAL ICO token HODLERS.

BE sincere, say, we don’t have more money from ICO, and do a second round, WITHOUT TEAM TOKENS DISTRIBUTION THIS TIME (no more tokens to vitalik), but DO NOT implement an Infinite way to FUND development through inflation PLEASE.

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The migration is similar to how AAVE did the LEND → AAVE token migration. Anyone will be able to migrate at their own time.

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I hold a big bag of tnc. Some of the tokens were from 2017, but I bought the rest of them largely because team constantly advertised knc as “the only deflationary” defi token. It’s just not fair. And I think many others are in the same situation. We could have invested in uni or sushi and done a ten tImes. Inflation is just too big a price to pay for everyone who believed in team and project.

Team could do another round of ICO and raise some real money. I believe there will be enough interest from community and from outside.

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At a high level, I really like the majority of what is being proposed, particularly in relation to the ability to constantly iterate the smart contract, this will be vital in this fast changing industry.

Mild concerns over token caps, but not enough to be completely against the upgrade. As long as the token inflation resonates with Ethereum’s minimal viable issuance policy then I’m all for it.

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As the pivot to digital currencies increases and the technology rapidly advances. It is going to be imperative for Kyber to stay nimble in order to remain competitive, and especially to remain ahead of the game. I’m excited to see these moves being discussed and pretty much on board with everything being proposed.

I’m sorry if I missed this, but in regard to token migration, are we looking at a similar situation to the LEND → AAVE migration where there was an overall decrease in issued tokens?

I think it was something like 100 LEND to 1 AAVE.

I’m not against this in any way. Obviously it worked really well in the AAVE case. I do think the community needs to be ready for that if that’s the case.

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There will be sufficient time for holders to migrate their tokens.

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Why would we upgrade the token to an inflation model when we have spent to past Epoch burning tokens. A deflationary token model works best and IMO I am completely against introducing inflation into the tokenomics. If the team needs funds I would suggest submitting req to DAO to earn some of ths ETH from the Staking pool as this will incentivize thw dev team to create things that generate increased ETH rewards and provide the proposed project with the ETH which is way more liquid than KNC. IMO this token inflation is a well disguised money grab many crypto projects use…focus on implementing layer 2 solution for governance and swaps/lp and there will be plenty ETH to provide rewards to token holders as well as fund any meaningful upgrades to protocal…as it stands i will be voting NO to inflating the token supply

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Hey all! Great overview post @loiluu! Long response incoming:

While I’m in support of the migration/upgrade, I figured I’d lay out some of the reasons why as well as address (some) of the concerns I saw from some other community members so far.

As @cristian asked about tokens not being migrated and what will happen them: it seems the migration will be able to stay open so we can migrate right away or any of us who forget or don’t realize right away could come back in 3, 5, or however many months to migrate once we realize. So there I don’t see any worry there.

Another concern is about the ability to create (and remove) token supply, and probably the biggest concern that I see. I think one thought is that inflation for KNC could be bad from an investor’s perspective, however, the difference with the KyberDAO being in control is that the inflation isn’t just being minted to the Kyber team to be spent on whatever they want which I would be against of course. This is proposed minting by the DAO for matters that will benefit the Kyber ecosystem as a whole which we all are apart of.

This is also similar to Aave’s migration which has been a success, in that the token supply was increased specifically to further support the protocol and incentivize participation - plus with Kyber working closely with Aave for the migration I think it’s in good hands all around personally.

As for the support it will provide the protocol, it’s not measurable of course, but there are many examples where using additional funding to increase network adoption can lead to far more benefit to the network/protocol as a whole with little (or in these cases zero) downside by the increased supply (Aave again being a good example).

All of us voting in KyberDAO are holders of KNC as well, so to vote on something that would greatly inflate KNC with little or negative benefit would also be silly and not a good decision regardless. The end-goal has always been to be fully DAO governed and this is an important step. We need to be able to trust KyberDAO (which is all of us and many more) to govern the protocol wisely, including any token inflation.

Another point to add overall I think is that because KNC has been around for over 3 years now, and because crypto is easily lost and goes missing for various reasons, the amount of KNC to migrate over will likely be less than what already is circulating.

And as you (@tezoswakenbake) mentioned about how those getting these tokens will ‘dump on us’ or stake in KNC leading to lower ETH rewards for ICO holders, if the DAO were to use minted tokens for liquidity rewards, those tokens are bringing liquidity to the protocol as a whole which will benefit Kyber hugely in the long run, and in a sense those being incentivized with additional tokens for providing liquidity (as suggested in the example) now have a financial interest in Kyber’s success (as an LP). Plus, I don’t think we can just assume everyone will want to dump their KNC - we need to think about the future for the platform as a whole.

As for the second point about leading to lower ETH rewards for ICO holders: the true goal for a decentralized network is not to prevent people from participating in a DAO so you get more rewards. It’s vital for the network as a whole to get as many people from all different walks of life to participate in the DAO, this is what keeps it decentralized. ICO investors should not receive any special reward or more than any other KNC holder for any reason. Anyone staking is participating in Kyber’s success.

If inflation was minted by the team or any centralized individual without transparency, and the funds weren’t guaranteed to benefit the protocol, I would be 100% against this of course. But that’s not that case.

+ Support from me!

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Regarding inflation vs deflation, these are completely valid concerns but if we look at real life examples of projects within DeFi and what has happened when they have transitioned from a deflationary to an inflationary model, we see that if done correctly this greatly increases the value of the token. Look at examples from Aave and Synthetix. Aave is worth $6Bn after moving from a deflationary to an inflationary model and we will be adapting their governance framework.

This means that large amounts of KNC won’t be minted ‘just to dump on holders’. After a rigorous governance process a limited amount of KNC will be distributed to initiatives that can make the case that the value they can provide to the Kyber ecosystem is more than the value of the KNC being minted to them.

Regarding your comment about not having money from the ICO, this couldn’t be further from the truth and I hope discussions in this forum can be based on factual, sincere, and objective reasoning.

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I understand the need to fund future development to add value; but introducing dilution goes against what investors are looking for - token scarcity. One good option would be to vote on how much of the fees get allocated (awarded) for project development. That’s like reinvesting earnings back into the DAO. I am OK with using all the fees generated towards good projects at this early stage because it could lead to much bigger dividends or token burns later on.

For example, an itemized project budget could be up for vote; then token holders can decide on the continued reinvestment of fees towards the project based on progress. I like how Kyber is able to reward voters with funds generated from fees, but it is too early for that. That’s like a startup offering shareholders dividends as soon as they make a tiny profit - bad for growth in the beginning but good later on.

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"but introducing dilution goes against what investors are looking for - token scarcity. " - I assumed this early on before Aave’s migration as well but there is a very good argument against burning tokens.

Not all of these points apply, but this is a good post IMO for why there are definitely other models than burning that can be more beneficial to investors and the ecosystem:

Burning doesn’t create new value, it only redistributes current value among those already holding. Instead the funds being burnt could be put towards overall network adoption which could lead to more success in the long run.

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I agree, what we can do right now is to vote on BRRs to reduce burning to 0 :slight_smile:

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Let get this straight ahead, inflation wouldn’t dilute our earnings if distributed evenly to ALL token holders, but this is not the case, certain individuals will get those tokens and will effectively dilute earning in the form of price or in the form of ETH dividends, we can’t escape from the reality of the fact that there will be dilution after this controversial update .

I’m TOTALLY OKEY to use ETH fees to fund development instead OR to buy KNC to pay LP’s to “integrate them” into the ecosystem.

Plus, I don’t think we can just assume everyone will want to dump their KNC

No, we can safely assume that if they are not dumping they will be staking ETH rewards, few will be doing nothing.

Burning does not create value

ETH is literally used to buy KNC in the market and burn it to make it scarce, is basically a transfer of value from ETH to KNC. Is the same kind of value that it would give if ETH was used to buy KNC in the market and instead of burning, distributed staked based to all token holders, just not as much as gas efficient ,or if it was static model it would be also FINE, burning is just literally taking KNC out of circulation. Economically speaking, paying in ETH instead of burning is more desirable, because ETH is liquid and KNC remains ILIQUID after burning it. This economic benefit of ETH being liquid is HARD to ignore.

In fact, i’m against burning it for the fact that i explained above, that it is just much better to pay 100% liquid ETH to KNC holders to increase the underlying asset value. If KNC was a static model, it would still be scarce, there would only be a limited amount of KNC in the world and they all be paying full liquid ETH rewards.

ETH is THE ONLY THING that will ACTUALLY CREATE value to KNC token holders long term. An asset that pays dividends in a higher liquidity asset, like CASH, it would directly create value to the underlying asset, this is an interconnected effect.

As for the liquidity providers being paid with KNC from inflation to “integrate them” into the ecosystem because is “beneficial”, just use the ETH of the fees instead, to buy KNC to pay them 50% in ETH and 50% in KNC, boom they are integrated into the ecosystem!

The inflation based system will be abused, developer in order to earn money will be injecting proposals and proposals all the time, people will always vote yes to everything. Token holders will take the hit of the dilution.

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Hi all, my first post here :slight_smile:

Sorry to say but I don’t like the idea to introduce inflation at all !!! I am small investor and I am sorry to say that so far I have BIG negative ROI when it comes to KNC…

KNC price, compared to BTC, has dropped over 60% since I bought KNC… I don’t care about price in USD…

I wasted over 0.25 ETH so far on fees… Wasted ETH to get my KNC staked in DAO, wasted ETH to vote in 7 or 8 epochs so far, in the end I wasted more ETH to delagate (after seeing it is not possisble to make any returns with these fcking voting fees) :frowning: I spent more ETH on fees then I received from Voting rewards !!! This is just BAD !!! And is not soemthing that can attract new investors/stakers - that is why price is going down for months… There’s no point in investing into Kyber when all You can get as small investor are LOSES…

And now, seeing that KNC might introduce inflation is like a spitting in my face… I am sorry but if this is accepted I’m affraid MANY will leave this project forever… I will be the first one and I know several others who will do the same (I am 100% sure because I know the way they think and what they expect from this procjet)… Inflation is NOT one of the things we expect, or have expected when we invested our Bitcoins in this…

Don’t make me regret decision to be part of this project… I am already sad that I did not invest BTC into UNI and other successful DeFi projects instead of into Kyber… Once again - plase don’t force me, and others, to leave this project forever :frowning:

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Hello,

basically all AMM today use the same model to incentivise usage => they issue an inflationary “governance” token and reward LP’s with that token. While this approach obviously works it does not incentivize people to actually USE the protocoll / liquidity pool (= to trade token A against token B).

I made up my mind and thought how can KNC incentivize not only the LP’s but also the normal user who trades AND keep inflation of KNC at bay at the same time?

This is my idea:

1.) X % of all rewards are issued to KNC “holders”
2.) X % of all rewards are burned
3.) A yearly inflation of X % is defined via DAO votes. This yearly inflation of KNC is issued to both “liquidity providers” AND “traders”. The exact split (e.g. 70% to LP’s and 30% to traders) is to be determined by a DAO vote.

Both “liquidity providers” and “traders” can claim their rewards in form of KNC as defined in point 3.) every two weeks - basically the same routine as normal KNC holders. They go to the DAO portal and “claim” their KNC.

This would be a setup which would incentivise all stakeholders (KNC holders, LP’s and traders) and which would allow the DAO to change and adapt the parameters very easily to keep the economy balanced (in respect to inflation). Under ideal circumstances the increased usage of the protocol (due to incentivised trading) will offset the inflation completely.

What do you think about this?

One more thing - I really appreciate the possibility to share my opinion here in this forum - thx to the KNC team @loiluu!

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The whole thing about LPs being included into the ecosystem is a BIG mental jerk. They want liquid ETH, not an illiquid asset. Same as us, KNC hodlers. Let’s be objective. OR let them decide if they want 100% or 50/50 , don’t force them, and certainly not from inflation.

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