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