This is a breakdown of the possible directions the tokenomics of Kwenta could head in.
The Kwenta community is currently targeting Q1 of 2022 for the launch of its native protocol token, KWENTA. The token will launch alongside the release of Synthetic Perpetual Futures and a redesigned product. There is a small window of time remaining to make any changes prior to the roll out of the new token. Some recent discussions in the Synthetix Discord's governance channel have sparked ideation around potential Kwenta tokenomics improvements amongst Kwenta Elite Council members and Core Contributors. Below, the possible directions we could take Kwenta tokenomics in are listed.
The Kwenta community will gauge sentiment on which of the directions outlined below would be preferred and amend the existing tokenomics KIP accordingly.
In the current KIP for Kwenta tokenomics, 313373 KWENTA tokens will be minted at launch with an inflation schedule starting at 60% which depletes linearly for four years, stagnating at 1% indefinitely. The 1% terminal inflation can be influenced by reducing the reward for minting tokens, offering the protocol a degree of control over future inflation. Stakers of the token will gain the ability to vote in elections as well as direct-token-voting where applicable.
Inflationary rewards are locked for a one year period, incentivizing protocol members to make strong long-term decisions. Locked Kwenta can, however, be staked to increase the yield being captured by a wallet.
Fees can be added to the protocol at any time via a KIP from the community.
The token allocation breakdown is as follow:
30% - Synthetix Stakers
5% - Kwenta Traders
5% - Investment
25% - Community Growth Fund
15% - Core Contributors (2.5% of which goes back to Synthetix Core Contributors)
20% - Kwenta Treasury
20% of inflationary rewards (and if applicable, fees) will be diverted to the treasury with the remaining 80% being diverted to stakers. Diverting rewards, in addition to use of the treasury and growth fund, will serve as a mechanism for the protocol to sustainably compensate DAO roles, offer trading incentives, fund marketing budgets, and manage token supply. The protocol does have a buy-back-and-burn/buy-back-and-redistribute mechanism at its disposal should the community decide to use it; this mechanism will not be active at launch.
Release date: Mid 2022 Q1
Alternative 1: No-lock, Depleting Fee Vesting
A year-long lock on tokens can disincentivize individuals from joining the protocol due to the large upfront commitment. In a climate where alternative opportunities offer quicker turnaround, this can harm protocol adoption. However, a lower vesting period encourages shorter-term decision making, shaping the behaviour of DAO participants to focus on short term price gains over longterm product value. By replacing a year-long lock up with a depleting fee on vesting tokens, it may be possible to strike a balance between the needs of short and longterm holders.
Stakers or DAO roles paid with vesting Kwenta would receive KWENTA with a 80% fee attached the to reward. If a staker immediately vests the tokens, the unvested tokens would be burned, distributing the value of the unvested tokens evenly across all token holders, meaning the protocol benefits from individuals vesting their tokens early for a quick payout. For individuals that can afford to wait out the full vesting period, the fee would deplete on a curve where the bulk of the fee is removed towards the end of the vesting period. For example, waiting 1 month could remove 2% of the fee, waiting 6 months could remove 25% of the fee, waiting 11 months could remove 80% of the fee, and waiting a full year could remove 100% of the fee.
This benefits DAO roles such as developers contributing to the devDAO who may need to vest their compensation quickly since these rewards may be used as income. Conversely, longterm holders extract more value from individuals vesting early than those who wait the full vesting period. This establishes an equilibrium of incentive alignment between the two types of token holders.
It is worth noting that as fees are established by the protocol, it will make more sense to pay DAO roles in an alternative currency, such as sUSD, to reduce downward pressure on the token.
Release date impact: Late 2022 Q1 - Early 2022 Q2
Alternative 2: Variable Inflation
In the current inflation model, the protocol is in a race against the clock where at the end of four years token holders are relying on 1% inflation as a way to extract value from the product and compensate DAO roles. This means that finding value for the token and/or adding fees prior to the end of the inflation schedule is crucial to the protocols success. The treasury accumulating supply via the 20% diversion does alleviate this issue to some degree with some healthy treasury management but it is not a permanent solution. With variable inflation, this issue could be removed by imposing a more flexible goal-line.
By setting the inflationary reward for stakers with a target APY (as either a function of the token or in USD), the supply would constantly be in flux to meet this target APY. As fees are introduced to the rewards mechanism in Kwenta, the amount of KWENTA being printed to meet the target APY would shrink. In the event that fees cover 100% of the target APY, the supply of Kwenta would remain fixed (and potentially become deflationary if the 20% of fees diverted to the treasury were used for buyback-and-burn). This incentivizes stakers to remain committed in order to capture the high inflation while continually searching for a path to profitability to reinforce the value of the token. The protocol would gain an infinite runway while continually applying pressure to token holders to establish profit.
Although this model can seem attractive, there are new risk vectors introduced to the tokenomics. Having a fixed APY would be dependent on an oracle system which could be attacked (but not necessarily disrupted if the oracle was reliable). Additionally, there may be unforeseen consequences to continually printing KWENTA without a limit on supply. Substantial testing would be required.
Release date impact: 2022 Q2 - 2022 Q3
Alternative 3: Token Use Cases
At launch, KWENTA will act as a governance token with the potential to capture fees in the future. However, it is conceivable that the Kwenta token can be used for more. Partial collateralization could be used to enhance product offerings such as leverage or to create new products. Using the Kwenta token as an insurance layer could add reassurance to traders while enabling stakers to extract additional value. Stakers and/or NFT holders could gain an advantage with reduced fees. Bonding could enable stakers to capture additional value via quantified risk. Etc.
With the exception of staker/NFT holders getting reduced fees (this can be introduced as fees are enabled by the community), these use cases require extensive research and experimentation which would delay the launch of the token. Core Contributors believe it therefore does not make sense to delay the launch of Kwenta for further experimentation with use cases, it instead makes sense to launch Kwenta and experiment with use cases as the product evolves. Should a valuable new use case be established, there is always the option for the community to launch a KWENTA V2 with a token conversation model where only holders of the new token can capture inflationary rewards and fees, incentivizing a quick transition to the new token.
Although this would delay the launch of the token, we wanted to enable the community to signal whether it would be ideal to first establish an alternative use case for the token before launching.
Release date impact: Q4 2022 - Q1 2023
To establish community sentiment toward the alternatives listed above, we will be holding polls for each of the options in Discord.
Once we have gathered feedback on the alternatives, the Elite Council will amend the tokenomics KIP as necessary. If you have any other suggestions you would like the Kwenta community to consider, we encourage you to do so now by opening discussion in the governance channel of the Kwenta Discord as we will soon be moving on to the delivery stage.
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