It’s a known problem in DeFI, different protocols stealing liquidity from each other by offering insane rewards on liquidity providing. Yet liquidity does not stick and the desired results disappoint, forcing DeFi projects in a race to the bottom. There are two questions to be asked when it comes to liquidity incentives: ‘ who do you want to benefit from the rewards? ’ and considering the market conditions ‘what are the optimal incentive variables (e.g. duration and amount)?
Before attempting to answer the two questions I would like to take a step back. Currently parachains are new and every other project is perceived to be complementary to one another, yet when it comes to fund a parachain lease slot it is very evident there is fierce competition going on. It would actually be worse if there were no competition, because having competition means you are probably doing business in a promising market/industry/ecosystem. Besides parachain slots there is another (hidden) competition going on, a war no one speaks of….
It is a war on becoming the standard for (x) within the Dotsama ecosystem. This means lines are being drawn on what differentiates one parachain from another, and boundaries are being crossed with attempts to steal potential functionalities from each other. Besides outbidding each other with even higher liquidity rewards in DeFi, a clear trend in the Dotsama DeFi space is becoming visible. It’s all about making your staked/locked tokens liquid again, which makes sense since the ecosystem has a tendency to make locking up your tokens the defacto currency, draining (you guessed it) liquidity.
While researching and arguing (just a little) on the forum over the essence of Karura is not a DeFi hub, that’s the result of it’s essence. Karura is nothing more than a pile of money, locked away in some form or another. The unique part is the fact that this locked away value (TVL) is used as an insurance funds for the mighty kUSD.
This design reminds me of something actually, but I’ll save the irony for another time. Only add the ability to stake KSM, hassle free (slash protection included via the treasury) and you get a very solid value proposition. Of course the addition of a AMM swap service and the ability to get liquid derivatives of locked away value, are welcome. But they do not make Karura unique.
It is my believe that if you reward long term and stable kUSD minters, the kUSD will become the default stable coin of Kusama and Karura’s DeFi suite will follow. Aaand I’ll paste this somewhat relevant and famous quote here with the purpose of convincing y’all:
“I care not what puppet is placed upon the throne of England to rule the Empire on which the sun never sets. The man who controls the British money supply controls the British Empire, and I control the British money supply.”
Concluding, you want incentives to benefit long term Karura community members who make sure Karura succeeds in becoming the dominant stable coin on Kusama. While, you make sure actual slippage in new liquidity pools is good enough (I am sure someone knows maths and modelling in the community). If you think there is some merit to my ideas, perhaps we could brainstorm something innovative together.
For now this is what I came up with:
- Reduce the Stability Fee in three steps for select community members (Bronze, Silver, Gold) with as variables: time and quantity KAR token locked in Vault for kUSD minting. I remember that there is a limit on (KAR) collateral amounts to force diversification, thus limiting the total amount of discount getting rich people (trigger: that sounds like socialism). Then for the fun you could elect a (x) amount of Gold members with the longest ‘no liquidation’ streak giving them Rothschild status (plus NFT with hall of fame inclusion) consisting of some reward/governance special role/put in charge of a special fund for ecosystem development whatever. As cherry on top, thee Karura DAO could get special DAO’s within the DAO just to get some discount making it all very meta and making me doubt if Xzibit was ever cool.
- For the liquidity providing rewards, instead of punishing people if they leave the pool early, reward them if they decide to lockup their liquidity for a predetermined amount and time. Trust me, being rewarded for commitment feels better than being punished for failing on your commitment. Additional benefit, you will not have two completely different reward ‘APR’s at the same pool, which makes newer liquidity providers feel shitty, since they are missing those sweet ‘Loyalty’ gains. Well that’s what it does to me at least.
(Full disclosure: I own zero Acala and Karura tokens at the time of publishing, but interested in building a position in the near future and being part of the community so try not to moon very soon)