Karma Bond — a protocol owned liquidity-as-a-service
Introduction
Karma Bond is a protocol owned liquidity-as-a-service, providing treasuries and bonds optimized to individual protocol needs, coming to the ICON blockchain.
Why is Karma Bond needed?
For decentralized finance (DeFi) protocols to operate effectively, it is essential to have large amounts of liquidity in token pairs, commonly known as liquidity pools, to allow users to carry out token swaps with low slippage.
To bootstrap liquidity, protocols incentivise liquidity providers (LPs) to deposit liquidity in token pairs, usually the protocol governance token paired with a stable coin. As a reward for providing liquidity, LPs are rewarded with the protocol’s governance token, usually at an attractive annual percentage yield (APY). This is commonly known as liquidity mining or yield farming.
Protocols essentially pay out high incentives to rent liquidity from LPs. As DeFi matures, it is becoming increasingly clear that incentives are not a viable long-term strategy for protocols. The goal should always be to bootstrap and accrue long-term defensible value, rather than perpetually pay high interest on rented liquidity.
Additionally there are other negative side effects of liquidity mining such as impermanent loss for the liquidity provider and a constant sell pressure of the governance token due to high pay-outs to LPs who subsequently sell the governance token to offset their impermanent loss.
Starting with liquidity incentives at launch is a short-lived bootstrapping mechanism to attract new users and capital via LP incentives. These incentives build up large liquidity pools quickly, but they are not a long term strategy.
Bonds are.
Bonds are a mechanism by which the protocol itself can trade its native governance token in exchange for liquidity. Instead of renting liquidity from LPs, it purchases the liquidity outright and owns it.
Additionally, some of the liquidity contains productive assets such as tokens that capture trading fees within liquidity pools for example. Instead of giving away those productive tokens to LPs, they are bought by the protocol which in turn can generate income for the protocol’s treasury.
What is bonding and POL?
What is bonding?
Bonding is a mechanism where a user can sell liquidity pool tokens to a protocol in exchange for its native token through what we call a bond.
To incentivize users to sell liquidity pool tokens to the protocol, rather than the open market, bonds are offered at a market discount. Bonds have a vesting period of 5 days to prevent users from selling all the discounted tokens for a quick profit.
What is POL?
Protocol owned liquidity (POL) is an essential part of DeFi as it guarantees users that there will be sufficient liquidity in token pools.
POL transforms liquidity from a liability to a revenue source. Token swaps using liquidity pools can generate fees depending on the protocol, which can then be distributed to the holders of the governance token. A protocol that uses Karma Bond will become a liquidity provider itself as well as a governance token holder. They will also receive a share of the generated fees.
What are the benefits of Karma Bond?
Benefits of Karma Bond for protocols
- Protocols would own their liquidity, rather than relying on LPs. This creates permanent liquidity and secures the protocol and creates confidence for its users and token holders.
- With more liquidity, the different liquidity pools can support much larger trades and guarantee price stability and protect themselves from large liquidity exits. This in turn creates a healthy price action for the native token (less volatility), attracting long-term holders.
- Since protocols own their liquidity, they also capture most of the liquidity fees. This means protocols will transform liquidity from a liability to a revenue source.
- Protocols through Karma Bond would gain exposure as their bonds will be featured on the Karma Bond marketplace.
Benefits of Karma Bond for users
- Opportunities to buy discounted protocol governance tokens. Through bonds, users can supply LP tokens (e.g. Token X/stablecoin) to the protocol of their choice in exchange for its native token (e.g. Token X) at a market discount.
- No exposure to impermanent loss. Long-term holders aren’t incentivized to provide liquidity because of impermanent loss. This impermanent loss is shifted to the protocol, allowing better alignment between the token holder and the protocol.
- Confidence in the liquidity pools. The token holders can be assured that the liquidity will reside within the protocol and not at the hands of LPs. This ensures that there will always be enough liquidity for users to trade their tokens.
Karma Bond mechanics
- A user bonds LP tokens (e.g. Token X/stable coin).
- LP tokens go to the Karma Bond contract and are distributed to the corresponding protocol treasury contract.
- The Karma Bond contract receives the protocol token at a discount from the protocol treasury.
- The discounted protocol tokens are issued to the user based on the vesting period (e.g. 5 days).
- The Karma Bond service charges a 3.3% fee on the protocol token pay-out.
- The fee is sent to the Karma treasury.
- The 3.3% fee charged by Karma Bond is quoted against a price oracle to determine the fee’s USD value. For every 1 USD worth of fees, 1 bKARMA is minted. 90% of the bKARMA minted goes to the user.
- 10% of the bKARMA minted goes to the early contributors.
Example: Julie’s LP tokens generate 30 USD worth of fees for Karma Bond. Julie is rewarded with 27 bKARMA in addition to the discounted protocol token. The Karma early contributors receive 3 bKARMA.
The Karma Bond token — bKARMA
To ensure a fair launch, there will be no initial token offering or token sale of any kind. Karma Bond will be fully decentralized and community owned.
Early users of the Karma Bond protocol will receive bKARMA tokens when bonding their LP tokens, in addition to the discounted protocol token.
bKARMA is a token that represents the whitelisting of early users and will grant bKARMA token holders the right to purchase the KARMA token at a floor price of 1 USD (details under KARMA section below).
A whitelisted user will be able to redeem KARMA tokens at the following ratio:
1 bKARMA + 1 USD = 1 KARMA
The Karma Finance token — KARMA
The KARMA token will be the decentralized reserve currency of Karma Finance and backed by the Karma treasury. Every KARMA in existence will be backed by at least 1 USD. This 1:1 ratio may be increased in the future based on the success of Karma Finance and the growth of its treasury. However, KARMA’s price will be determined by the market. The market may value KARMA at more than the backing price due to its utility.
The KARMA token will be designed in such a way that it will gain the utility of each of the protocol tokens in the Karma treasury when staked on Karma Finance. It will be a reserve currency as well as a multi-utility token.
Example: Let’s say Karma Bond partners with Omm and Balanced. Through the bonding fee, Karma’s treasury captures a share of the OMM and BALN tokens. KARMA token holders can stake KARMA on the Karma Finance platform and receive passive income from BALN staking rewards and voting power from OMM staking. Karma Finance will be designed so that KARMA stakers will be able to claim their BALN staking rewards as well as vote for their favourite Public Representative of choice directly on the Karma Finance user interface. This is just an example for 2 protocol partnerships.
The utility of KARMA will grow with every new protocol that is onboarded through Karma Bond.
More details will be released around Karma Finance and the KARMA token in due course. The plan will be for the Karma Bond service and Karma Finance to become a multi-chain protocol with the help of ICON’s BTP technology. The focus is to successfully launch the Karma Bond service first and then launch Karma Finance.
Now, let’s talk!
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