KIP-98: Increase liquidity incentives for 12 weeks

Simple Summary

This proposal aims to increase liquidity incentives for a period of 12 weeks. The goal is to improve overall liquidity and address the current imbalance between staking and liquidity-providing (LP) returns.

Abstract

As per KIP-64, the existing liquidity incentives (bribes) are set at 0.5% of the epoch's inflation schedule, which roughly equates to about 30 KWENTA per week. This KIP proposes a phased adjustment to liquidity incentives over a 12-week period, ranging from 1% to 3% of the planned inflation. The approach is as follows:

Start with an adjustment to 1%. In the subsequent epoch, increase the rate by an additional 1% under two conditions:

• If staking APR exceeds LP APR.
• If slippage on a swap worth $10,000 or more exceeds 2%.

Reduce the rate by 1% in the following epoch if:

• LP APR surpasses staking APR by more than 20%.
• Slippage on a swap worth $10,000 or more is below 1%.

Motivation

In recent months, liquidity for KWENTA in the WETH/KWENTA pool on Velodrome—constituting nearly 90% of all KWENTA liquidity— has declined from $3.6 million in March to $700,000 in September. Concurrently, the Annual Percentage Rate (APR) for liquidity provision has dropped from over 100% to 34%. In contrast, the staking APR in staking v1 was around 50%. This disparity encourages KWENTA holders to opt for staking over liquidity provision, mainly due to higher yields and lower risks like impermanent loss. The staking APR in staking v2 experienced an upsurge to 100+% due to the automatic weekly distribution of early vest fees through the staking rewards contract. This trend, if unaddressed, is likely to further diminish the appeal of liquidity provision.

With an anticipated liquidity of over 80,000 KWENTA in the upcoming 3 months, an inevitable increase in market volatility is expected. Enhancing liquidity incentives and ensuring the APR for LPs surpasses the staking APR can encourage more KWENTA holders to funnel liquidity, leading to decreased slippage. This KIP aims to create a balanced ecosystem where both staking and liquidity provision are viable financial strategies for KWENTA holders. This change is especially crucial given the expected influx of liquid KWENTA and the resultant potential for market volatility.

Specification

For more information, visit the: Kwenta State Log