Asking community for help on establishing a long term incentivised liquidity pool for KTON/RING

[SasoLithops]

Based on:

This poll: https://github.com/orgs/darwinia-network/discussions/1577#discussion-7095035
This reply: https://github.com/orgs/darwinia-network/discussions/1577#discussioncomment-11149843
This KTON DAO treasury account: https://explorer.darwinia.network/address/0x08837De0Ae21C270383D9F2de4DB03c7b1314632?tab=internal_txns
This ongoing debate: https://github.com/orgs/darwinia-network/discussions/1627
And this initial discussion: https://github.com/orgs/darwinia-network/discussions/1566#discussion-7052819

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IMPORTANT: At this time KTON stakers get 19000 RING while KTON DAO treasury gets 4650 RING every 6 hours.

ALSO: We are working on building an Index token which will highly benefit KTON stakers and governance and Github participants(Alpha). Any opinion on how we could implement it in staking rewards or its fees to KTON stakers, LP providers is welcome(check link above about ongoing debate). Most important KTON will be part of index token.

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1. The first thread is on ratio of rewards to treasury and LP providers

When determining how to allocate the 4,650 RING rewards that go to the KTON treasury every 6 hours, and also reward KTON/RING liquidity providers, it’s important to consider the strategic goals of the KTON DAO, as well as the need to incentivize liquidity and maintain a healthy treasury. The allocation should aim to balance both treasury growth and liquidity provisioning to ensure long-term sustainability of the KTON ecosystem.

1. Overview of the Allocation Problem

You have 4,650 RING that needs to be split between:

• KTON DAO Treasury (to support the DAO's future growth, operations, and governance)
• KTON/RING Liquidity Providers (LPs) (to ensure sufficient liquidity for trading between KTON and RING)

Both of these are essential to the ecosystem, but their roles are different:

• Treasury: This is crucial for the DAO’s operations, including funding for development, governance, and future initiatives.
• KTON/RING LPs: Liquidity providers ensure that there’s a healthy market for the KTON/RING trading pair, allowing users to trade the tokens without experiencing slippage or high fees.

2. Suggested Allocation of 4,650 RING Rewards

A. Reward Allocation to KTON Treasury:

The KTON treasury is crucial for funding the DAO’s long-term objectives (e.g., governance, project development, treasury reserves for strategic initiatives, etc.). A reasonable portion of the rewards should go here to ensure the DAO remains financially sustainable.

• Suggested Allocation to KTON Treasury: 50% - 60% of the 4,650 RING rewards should go to the KTON DAO Treasury. This will help build the treasury and ensure that the DAO can continue to fund development, governance, and other critical functions.
  • 50% of 4,650 RING = 2,325 RING to KTON Treasury
  • 60% of 4,650 RING = 2,790 RING to KTON Treasury

This ensures that the treasury receives a substantial portion of the rewards, maintaining a solid financial foundation for the DAO.

B. Reward Allocation to KTON/RING Liquidity Providers (LPs):

In order to maintain a liquid and efficient KTON/RING trading pair, it’s important to incentivize liquidity providers. However, the rewards to LPs should be balanced so that enough liquidity is available without overly depleting the treasury.

• Suggested Allocation to KTON/RING LPs: 40% - 50% of the 4,650 RING rewards should go to KTON/RING liquidity providers. This incentivizes liquidity provision without diminishing the treasury’s ability to fund key initiatives.
  • 40% of 4,650 RING = 1,860 RING to KTON/RING LPs
  • 50% of 4,650 RING = 2,325 RING to KTON/RING LPs

This allocation encourages liquidity provision without overburdening the treasury, and ensures that LPs are sufficiently incentivized to participate in the KTON/RING pool.

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3. Proposed Reward Distribution Summary:

Allocation	Percentage	RING Amount
KTON DAO Treasury	50% - 60%	2,325 RING - 2,790 RING
KTON/RING Liquidity Providers	40% - 50%	1,860 RING - 2,325 RING

4. Considerations for Both Allocation and Liquidity Providers:

A. KTON DAO Treasury Role:

• The treasury funds important DAO operations such as development, marketing, and ecosystem growth.
• A solid treasury also provides a buffer for unforeseen expenses and strategic investments (e.g., acquisitions, partnerships).
• By ensuring the treasury gets a substantial portion of the rewards, you are supporting the long-term viability of the KTON ecosystem.

B. KTON/RING Liquidity Providers Role:

• LPs are critical for ensuring that the KTON/RING pool is liquid, which in turn helps users trade between KTON and RING without high slippage or fees.
• The more liquidity in the pool, the more attractive the KTON ecosystem becomes to traders, increasing demand for both KTON and RING.
• LPs face impermanent loss risks, so the reward for providing liquidity should be attractive enough to compensate for that risk.
• It may also be worth considering whether to split the LP rewards between RING and KTON as dual incentives, with RING DAO providing RING rewards and KTON DAO providing KTON rewards. This would provide LPs with two tokens instead of one, enhancing the attractiveness of providing liquidity.

C. Balancing Liquidity and Treasury Health:

• The treasury must remain healthy to ensure that it can support the ecosystem, including staking rewards, future DAO governance, and strategic investments.
• Liquidity providers, on the other hand, are crucial for ensuring market efficiency for both tokens. If liquidity is insufficient, the trading experience could suffer, which could negatively affect the ecosystem’s health.
• A balanced approach is important to avoid putting too much strain on either the treasury or liquidity provisioning.

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5. When to Adjust the Ratios:

The exact ratio between treasury rewards and LP rewards can be adjusted over time based on certain conditions:

• If there is a drop in KTON liquidity or an increase in demand for KTON/RING trading, you may choose to increase the LP rewards to incentivize more liquidity provision.
• If the KTON DAO treasury needs more funds for a particular initiative (such as a large development project), you can increase the treasury’s share of the rewards temporarily.

Likewise, if the LP rewards are overly diluting the treasury or creating significant supply inflation, you may adjust the reward allocation to give a greater share to the treasury.

6. Additional Strategies for Reward Allocation:

You can also consider implementing dynamic reward systems based on certain KPIs (Key Performance Indicators), such as:

• Liquidity depth: If the KTON/RING pool has insufficient liquidity, the reward allocation could be skewed toward LPs until liquidity levels improve.
• Treasury balance: If the treasury is sufficiently funded and the DAO is focused on liquidity growth, more rewards could be allocated to LPs.
• Market conditions: If the market is under stress, the DAO might allocate more rewards to LPs to maintain liquidity in the ecosystem.

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Final Recommendation:

Based on the current reward distribution, the ideal split for the 4,650 RING rewards should be:

• 50% - 60% to the KTON DAO Treasury (2,325 RING - 2,790 RING).
• 40% - 50% to KTON/RING Liquidity Providers (1,860 RING - 2,325 RING).

This allocation ensures that both the treasury and liquidity providers are well-supported, and that the ecosystem can continue to grow sustainably. Adjustments to the reward structure can be made over time based on evolving market conditions, DAO needs, and liquidity demands.

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2. The second thread is should we incentivise or provide liquidity

Deciding whether to provide liquidity yourself or incentivize others to provide liquidity is a key decision for any decentralized project, and it depends on a variety of factors. Let’s break it down:

1. Providing Liquidity Yourself

Advantages:

1. Full Control:

   • By providing liquidity yourself, you have complete control over the amount of liquidity in the pool. You can manage the risk and decide how much capital to allocate to liquidity provision.
   • You can adjust your position based on your assessment of the market or your project’s needs.

2. Fee Earnings:

   • As a liquidity provider (LP), you earn transaction fees based on the volume of trades in the liquidity pool. If you have a substantial portion of the liquidity, this can be a good source of passive income.

3. Stabilizing the Pool:

   • If the market is small or there are few liquidity providers, your contribution can help stabilize the market and reduce slippage for traders. This can help improve the price efficiency and trading experience, which may attract more users to your ecosystem.

Disadvantages:

1. Capital Commitment:

   • Providing liquidity yourself can tie up a significant amount of your capital. If you’re providing liquidity in a KTON/RING pair, for example, you’ll need to provide both tokens, and this could be risky if either token’s price fluctuates significantly.
   • This could be a capital-intensive activity unless you’re able to deploy a relatively small amount of capital.

2. Impermanent Loss:

   • When you provide liquidity in a decentralized exchange (DEX) like Uniswap or PancakeSwap, you’re exposed to impermanent loss. This occurs when the price of one token in the pair moves significantly relative to the other, leading to a potential loss in value of your liquidity share. However, transaction fees can help offset this risk if there’s enough trading volume.

3. Opportunity Cost:

   • By committing capital to liquidity provision, you may miss out on other investment opportunities. If the rewards from liquidity provision (fees) are not sufficient, it might not be the best use of your capital.

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2. Incentivizing Liquidity Providers

Advantages:

1. Reduced Capital Commitment:

   • Incentivizing liquidity providers (LPs) allows you to leverage external capital without tying up your own. This reduces the amount of your project’s capital that is directly exposed to the market.
   • You can attract large liquidity providers (LPs) who have more capital and can provide more liquidity than you alone, resulting in a deeper pool.

2. Faster Liquidity Growth:

   • Incentives (e.g., liquidity mining rewards) can attract a large number of LPs quickly, providing rapid growth in liquidity. This can lead to better price stability, lower slippage, and a more efficient market, especially in early stages when liquidity is crucial for the success of the market.

3. Better Risk Management:

   • If liquidity is provided by others, you can minimize your exposure to impermanent loss and the risks associated with market volatility. You can also more easily adjust the incentives (rewards) to match market conditions or balance supply and demand.

4. Community Building and Engagement:

   • Offering rewards to LPs not only provides liquidity but also helps build a community of participants who are incentivized to stay engaged with your project. This increases the decentralization of your ecosystem and can build long-term support.
   • Community members who provide liquidity are more likely to stake tokens, participate in governance, and help promote the ecosystem.

Disadvantages:

1. Cost of Incentives:

   • The main downside of incentivizing LPs is that it comes at a cost to the project. Rewards need to be provided to LPs, typically in the form of the native token or another valuable asset. This could lead to inflation if not managed carefully.
   • If the incentives are too high, it can result in unsustainable token emissions and dilution of value for existing token holders.

2. Vulnerability to Farming:

   • If the rewards are too attractive or short-term focused, liquidity providers might engage in “liquidity farming”—providing liquidity only to capture rewards, and then exiting as soon as the rewards dry up. This can lead to liquidity volatility and poor price stability after the farming period ends.

3. Dependency on External Liquidity Providers:

   • Relying on external liquidity providers means you have less control over the liquidity supply. If external LPs decide to withdraw liquidity (e.g., due to changes in rewards or market conditions), it could cause slippage or price instability in the pool.
   • There's also the risk that LPs might not fully align with the project’s long-term vision, as their incentives are often driven by short-term rewards.

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3. When to Provide Liquidity Yourself vs. Incentivizing Others?

When to Provide Liquidity Yourself:

• Small Market or New Project: If you’re launching a new token and liquidity is thin, providing liquidity yourself can help bootstrap the market and attract users. Without liquidity, the token won’t have much utility, so having enough liquidity early on is crucial.
• Limited Resources for Incentives: If the project doesn’t have sufficient capital to fund liquidity incentives long-term or doesn’t want to rely on external liquidity providers, providing liquidity yourself can be a viable option.
• Active Participation: If you're heavily invested in the project and want to ensure price stability or are looking to manage risk, providing liquidity yourself allows you to directly control the liquidity in the market.

When to Incentivize Liquidity Providers:

• Scaling the Market Quickly: If you need to quickly increase liquidity and get a deeper pool, incentivizing external liquidity providers is often the best choice. Offering liquidity mining rewards (in the form of RING, KTON, or other assets) can attract more LPs faster than doing it on your own.
• Sustaining Long-Term Liquidity: Incentivizing liquidity providers helps you ensure there’s consistent and long-term liquidity in the pool, which is especially important as your market grows.
• Leveraging Community: If your project is trying to build a decentralized community or engage users in governance and decision-making, rewarding LPs with incentives can foster a sense of ownership and participation in the ecosystem.
• Cost Management: If your treasury is not large enough to commit significant capital for liquidity provision, incentivizing others with rewards is a more cost-effective strategy.

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Conclusion:

• Provide liquidity yourself if:

  • You want full control over the liquidity.
  • You're in the early stages and need to bootstrap the market.
  • You have sufficient capital and want to directly support price stability.

• Incentivize liquidity providers if:

  • You need to scale liquidity quickly and sustainably.
  • You want to reduce your personal capital commitment and rely on the community.
  • You're aiming to decentralize liquidity and build long-term engagement within your ecosystem.

In most cases, a combination of both strategies is ideal. You could start by providing liquidity yourself (especially in the early stages) to bootstrap the market and then transition to incentivizing external LPs to scale liquidity over time. By managing both approaches carefully, you can optimize liquidity for both stability and growth.

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3.The third is should both RING DAO and KTON DAO provide liquidity incentives, community already voted mostly yes on poll(link in the begining above)

The idea of having both the RING DAO and KTON DAO reward KTON/RING liquidity providers is an interesting one and could have several benefits, but it also requires careful consideration of how it would align with both DAOs' goals, reward structures, and long-term sustainability.

Pros of Both DAOs Rewarding KTON/RING Liquidity Providers

1. Double Incentives (Attract More Liquidity):

   • If both DAOs (RING DAO and KTON DAO) reward liquidity providers in the KTON/RING pair, it would create double rewards for those providing liquidity to this pair. This could attract more liquidity to the pool and increase the overall depth and stability of the KTON/RING market.
   • RING DAO could offer rewards in RING, while KTON DAO could reward liquidity providers with KTON. The dual reward structure would make the liquidity provision more attractive because providers would earn both tokens (RING and KTON), diversifying their holdings and providing incentives to maintain liquidity in the pool.

2. Strengthening the Ecosystem:

   • Offering incentives from both DAOs would align both tokens (RING and KTON) in terms of liquidity and use within the ecosystem, driving more activity around the KTON/RING pair. This helps grow the KTON and RING markets by ensuring both tokens have sufficient liquidity for trading and future use cases within the ecosystem.
   • Increased liquidity would reduce slippage in trades between RING and KTON, making the ecosystem more efficient, which is beneficial for both DAOs and the broader community.

3. Cross-Incentivization:

   • By involving both DAOs, you create a form of cross-incentivization where the success of one DAO helps the other. For example, KTON DAO rewards liquidity providers in KTON, potentially increasing the demand for KTON (driving up its price). Meanwhile, RING DAO can reward liquidity providers in RING, which increases the demand for RING.
   • This cross-rewarding could create a virtuous cycle where liquidity provision in the KTON/RING pair becomes a highly attractive strategy for users, leading to more trading, better price discovery, and deeper liquidity.

4. Attracting More Capital:

   • Providing rewards from both DAOs could attract larger liquidity providers, including institutional players, who prefer dual incentives because they get exposure to both assets and can hedge some risk between the two.
   • This would also improve the overall capital efficiency of the liquidity pool, as large liquidity providers are often looking for ways to generate passive income in DeFi, and dual rewards make it more enticing.

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Challenges and Considerations

1. Reward Inflation:

   • One concern is the potential inflationary pressure on both the RING and KTON tokens. Offering rewards from both DAOs could lead to excessive token issuance, which might undermine the value of these tokens over time if not carefully managed.
   • To avoid this, both DAOs would need to ensure that the reward distribution is sustainable and does not lead to excessive supply expansion. This can be addressed by implementing caps on the reward distribution or adjusting rewards over time to ensure they remain in line with the actual liquidity being provided.

2. Alignment of DAO Objectives:

   • While both DAOs might benefit from increased liquidity in the KTON/RING pool, it’s essential that the reward structure is aligned with the goals of each DAO. For instance:
     • KTON DAO might want to increase demand for KTON and strengthen its token’s value.
     • RING DAO might be more focused on expanding the use of RING in decentralized finance and driving network growth.
   • If the rewards aren't balanced or if they serve conflicting goals, it could create misaligned incentives that might lead to issues like too much liquidity in the KTON/RING pool and not enough demand for either token elsewhere in the ecosystem.

3. Complexity of Managing Dual Incentives:

   • The administration and tracking of dual rewards can become complex. The DAOs will need to have a clear mechanism in place to distribute rewards accurately and track liquidity provider contributions. For example, how would rewards be split between KTON and RING, and what metric would be used to measure liquidity provision (e.g., weighted by the amount of liquidity provided, or by trading volume)?
   • This also creates potential for governance complexity, where decisions about reward allocation or adjustments to reward programs may need to be coordinated between both DAOs.

4. Risk of Imbalance in Liquidity Pool:

   • If one token (e.g., KTON) has significantly higher rewards than the other, it could lead to an imbalance in the liquidity pool, with more of one token being supplied than the other. For instance, if KTON DAO offers much higher rewards in KTON than RING DAO offers in RING, liquidity providers might disproportionately provide KTON rather than RING, leading to an overexposure to KTON in the KTON/RING pool.
   • This imbalance could cause unstable pricing between the two tokens and reduce the pool’s ability to function effectively.

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Proposed Reward Allocation Strategy

1. Reward Caps:

   • Each DAO could offer rewards proportional to their supply and market cap, to avoid excessively inflating the supply of either RING or KTON. For example, each DAO could reward liquidity providers based on a fixed percentage of total liquidity in the pool, ensuring that the rewards are balanced and sustainable.

2. Weighting Based on Token Contribution:

   • The rewards could be weighted by the amount of liquidity each token contributes to the pool. For example, if liquidity providers are supplying more RING than KTON, the RING DAO might issue a larger reward to balance the pool.
   • This can be structured in a way that avoids over-concentration of rewards in one token, while still encouraging liquidity providers to provide an appropriate mix of RING and KTON.

3. Adjustable Reward Mechanisms:

   • To ensure sustainability, both DAOs could introduce an adjustable reward mechanism, where rewards are not static but are adjusted based on the total liquidity in the pool or the token price. If RING or KTON prices fall, rewards could be dynamically adjusted to incentivize more liquidity provision. Similarly, if liquidity in the pool becomes too high, rewards could be reduced to maintain balance.

4. Time-Locked or Vesting Period:

   • To prevent liquidity providers from exiting the pool too quickly, rewards could have a vesting period or be time-locked. This ensures that liquidity providers are incentivized to remain in the pool for longer periods, helping stabilize liquidity over time.

5. Governance Involvement:

   • Both DAOs could involve their communities in governance decisions around the reward structure. This would help ensure that the reward program is constantly evolving to meet the needs of liquidity providers while staying in line with the long-term vision of each DAO.

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Conclusion: Should Both RING DAO and KTON DAO Reward KTON/RING Liquidity Providers?

Yes, rewarding KTON/RING liquidity providers from both DAOs (RING DAO and KTON DAO) can be a strategically sound approach if done carefully. Here’s why:

1. Increased Liquidity: Dual rewards (RING and KTON) would likely increase liquidity in the KTON/RING pair, leading to better price stability, lower slippage, and more robust trading activity within the ecosystem.
2. Stronger Ecosystem: By rewarding liquidity providers, both DAOs can strengthen their ecosystems, supporting their tokens' value, utility, and market presence.
3. Cross-incentivization: This approach can create synergy between both DAOs, aligning their goals and increasing the overall liquidity in the combined market.

Caution:

• Both DAOs need to carefully monitor the reward distribution to avoid inflationary risks or imbalances in liquidity, which could undermine the value of either token.
• Governance should be used to regularly adjust rewards and ensure the system remains sustainable over time.

If implemented thoughtfully, the rewards from both DAOs can serve to attract more liquidity while rewarding participants in a way that benefits both RING and KTON holders, as well as the broader DeFi ecosystem.

[sonoferin2000]

I think it’s worth asking if it’s in the DAO’s long-term interest to keep paying out 40-50% of rewards just to "rent" liquidity. Incentives are great, but they shouldn’t have to be a permanent thing. They should be used to achieve a goal, not just handed out endlessly.

Do we have any data on how these incentives are actually helping? Other pools don’t get incentives and they’re still functional, but the KTON pool is incentivized and still pretty shallow. For example, buying just 10 KTON causes a 2.26% price impact. If we’re paying out incentives, we should see results. Right now, it doesn’t feel sustainable to keep paying like this without clear benefits.

Here’s another idea: Instead of constantly incentivizing liquidity providers, why don’t we use that 40-50% of rewards to buy KTON ourselves, bridge it to Darwinia, and add it to the liquidity pool? The DAO could provide the KTON, and RINGDAO could supply the RING. We could split the LP tokens equally and keep the funds within the ecosystem. Over time, we’d build up a strong liquidity position that we don’t have to rent, and we’d free up resources for other projects.

If we ever need extra liquidity, we can still use incentives as a tool, but they don’t need to be a permanent fixture. It can’t be Christmas every day. Paying out rewards like this indefinitely isn’t viable, and I think we’d get way more value from building something sustainable instead.