Karma – DAO enabling other protocols to have their own protocol owned liquidity

Contribution Proposals
1

Karma Dao

Protocols struggle to keep their liquidity in the protocol as more than half of the users lock in their funds and withdraw them immediately when there is a better yield opportunity. Renting liquidity is a good bootstrap mechanism but it is not a viable long-term strategy because it puts protocol at the mercy of mercenary LPs. As DeFi matures it is becoming increasingly clear that the goal should be to accrue long-term defensible value. Karma DAO goal is to help enable protocols to establish their own protocol owned liquidity while still providing benefits for the network participants - users.

Concept

  1. Protocols who wish to accrue long-term liquidity can provide their native tokens in exchange for the liquidity which will be locked in protocol custom treasury.
  2. Users provide liquidity to the protocols for which they receive Liquidity providing (LP) tokens.
  3. These LP tokens can be bonded through Karma and are locked in protocol owned custom treasury. In exchange for providing LP tokens, users receive discounted native protocol tokens after a vesting period.
  4. Since LP tokens can not be unbonded from treasury the liquidity will permanently reside within the protocol and there will always be enough liquidity for users to trade their tokens.
  5. This also opens a new revenue stream from LP fees that protocols can utilise for growth and expansion.

Example: OMM wants to have more defensible OMM/sICX liquidity on their AMM exchange and supplies 1000 OMM tokens to KarmaDAO for bringing in liquidity. A user locks to a selected AMM (e.g. BalancedDAO) OMM/sICX in value of 10$ (5$ in both OMM and sICX) and receives LP tokens which represent this locked value. They bond these LP tokens through Karma and receive 12$ worth of OMM through a short vesting period.

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Benefits for ICON Community

  • Stronger protocols with more consistent liquidity (Protocol owned liquidity).
  • Higher liquidity in protocols which will enable: less slipage, more stable APYs and higher liquidity access.
  • Believers in protocols can receive their tokens at a discounted price.

Benefits for DeFi Protocols

  • Protocols now own their liquidity, rather than relying on mercenary LPs.
  • Bonds incentivize users to help the protocol succeed through discounted native tokens.
  • Protocols accrue additional value through liquidity fee revenue stream as they also become the liquidity providers themselves.

Protocols also gain access to experienced engineering and marketing teams ensuring success from idea to deployment and maintenance.

Success Stories

Olympus has seen a huge success with their concept of Protocol Owned Liquidity (POL) and established itself as the starter of DeFi 2.0. Since it’s conception at the end of March 2021 it has amassed a treasury worth over 800 millions dollars and spurred the creation of many forks on different blockchains some of which are very successful on their own (e.g. Wonderland). OlympusDAO initially wanted to create a token which would maintain purchasing power inside of cryptocurrency space regardless of the movement of the market in $ terms. Since the protocol itself now owns the assets in the treasury and isn’t dependent on liquidity providers which may withdraw funds at any time that there is a better opportunity it had the possibility to establish a token with a floating market price which would achieve exactly that. OlympusDAO made the next step of helping other protocols gather their own POL (mostly in the form of LP tokens on AMMs) with their new integration OlympusPRO.

OlympusPRO has partnered with more than 20 different protocols to help them get liquidity and have gathered more than 13 million $ worth of bonded assets in the span of less than 2 months. BarnBridge, Alchemix, Synapse, Thorstarter, Inverse Finance, Spooky Finance, SpiritSwap, Keeper DAO, Everipedia, mStable and Angle Protocol are some notable protocols that have connected with OlympusPRO for their bonding services.

The initial concept for KarmaDAO wants to focus on helping protocols on ICON gather their own Protocol Owned Liquidity and reward users who do so similar to OlympusPRO (with smaller improvements). Extension to other use cases of POL to follow with future integrations with which KarmaDAO will accomplish its vision.

Karma Bond

The Karma bond a.k.a Bond Marketplace provides users with a suite of different bonds they can purchase their favorite Defi token from at a discounted price. It represents the core of Karma. This proposal will provide funding to develop Karma DAO and cover the following topics:

Smart contracts which:

  • Handle the bonding of the liquidity providing (LP) token
  • Handle the treasury of each protocol
  • Allow protocols to provide their native tokens for exchange of bonding LP tokens
  • Allow seamless deployment of the suite of SCORE-s for each new protocol
  • Handle governance over Karma DAO
  • Handle XKARMA token (native protocol Karma token)

Frontend which:

  • Allows users to easily interact with smart contracts
  • Provide an overview of current bonding status
  • Can be connected to by various ICON wallets

Design & Marketing:

  • A user friendly design and marketing material
  • Social engagement campaign
  • Promotional website

Funding breakdown

Development:

  • 2 Smart contract developers - 25,000$
  • 2 Frontend developers - 20,000$
  • 2 Designers - 20,000$

Project management: 1 project manager - 15,000$

Design and marketing material: 5,000$

Community management and promotion: 1 Community manager - 10,000$

External testing costs: 5000$

Total estimated costs: ~100,000$
Requested amount: 60,000 bnUSD

Requested amount is 60% the remaining 40% will be funded by the team.

How will the Funds be used

Development of Karma DAO breakdown:

  • Development of Karma Bond SCORE-s
  • Development of Karma Bond frontend
  • Development of Karma presentational website
  • Infrastructure setup
  • Brand and frontend design
  • Marketing
  • Social engagement campaign
  • Build knowledge base
  • Testing

Project milestones

First milestone (1 month)

  • Develop Karma Brand
  • Develop Marketing / Promotion material
    Create Lite / White paper
  • Start frontend and SCORE development

Second milestone (1 month)

  • Start work on Karma promotional website
  • Internal SCORE alpha testing process
  • Frontend and design merge with first alpha features
  • Approach existing DeFi protocols campaign (OMM, Balanced, etc…)

Third milestone (1 month)

  • Release beta frontend
  • Release beta SCORE-s on testnet
  • Release Karma promotional website
  • Analyse & Improve frontend and SCORE-s based on the testing results

Fourth milestone (1 month)

  • Full release on mainnet
  • Increased social engagement and marketing on social platforms
  • Establish Karma Discord server
  • Launch campaign to approach potential new protocols to implement bonding for (Gangstabet, Craft, …)

Tokenomics

To ensure a fair launch, there will be no pre-mine activities or venture capital allocation. Instead, we are going to further decentralize Karma protocol and allow community members to make meaningful decisions with voting power on the future of the protocol through our token distribution and rewarding models:

  • 35% to Liquidity Token Providers
  • 15% for Long-term Staking rewards
  • 20% to Karma Worker Tokens
  • 30% to DAO Treasury

Note: The tokenomics are not final and can be changed during the course of the development.

Worker Tokens are going to be used for further development, maintenance and promotion of Karma DAO. 50% of all the tokens dedicated to worker tokens will be locked as a Long-Term Stake. The next step for KarmaDAO is to build the Decentralized Reserve Currency for which the treasury is planned to be used as an underlying defensible value.

The first version of KarmaDAO will use xKARMA for which the transition to KARMA will be enabled once the integration of Decentralized Reserve Currency is live.

About us

We are a team of 8 driven members based in Slovenia that has been in the ICON Community since 2018. As a main P-Rep Protokol7 which has members that have contributed to the development of the OMM protocol, Bridge and LICX. Since then we have helped promote and develop new projects in the ICON network. Our decision on making DeFi 2.0 on the ICON network was to help this great community grow even further which supports our mission to develop protocols which will bring more investment possibilities and incentivise users from other BTP connected chains to interact with the ICON network and its amazing DeFi space.

For any questions, please do not hesitate to reach out to us.

Thanks

2

Absolutely amazing ! I was willing to build one too. Let’s do this.

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3

This took a while to wrap my head around but if I’ve understood this correctly this is a win-win situation for the ICON ecosystem. My thoughts below. Please let me know if I’ve misunderstood any of this.

Situation as of today

  1. When a protocol first launches, it must set aside a large percentage of their token supply to incentivize liquidity providers (LPs). The protocol rewards LPs with their native token as the incentive. Example for omm.finance: LP provides in a ratio of 50/50 OMM/USD to the OMM/USD pool and receives OMM tokens as a reward, usually at an attractive APY to attract LPs in the first place.

  2. Due to the high amount of OMM token rewards LPs receive, their natural short-term behaviour is to sell their OMM tokens to recover their initial investment.

  3. Because LPs are not always believers in the protocol and instead are attracted by the high APY, they constantly sell their tokens until the APY dries up and they remove their capital to the next protocol offering the best APY.

  4. This creates a huge sell pressure on the native token, in this case OMM, instilling FUD in the protocol and therefore more and more LPs keep selling the OMM token and ultimately remove their liquidity.

  5. The liquidity providers suffer from impermanent loss since their 50/50 contribution is now worth a lot less than at the beginning when the price of the token was higher. If they were to withdraw their liquidity, this loss would be realised.

I for one have been heavily affected by this and even though I haven’t sold my OMM tokens or removed my liquidity from the pools since I believe in the protocol long term, the price chart clearly indicates that I’m a rare believer.

Screenshot 2021-11-27 205051

This instils more and more FUD until huge amounts of liquidity are removed, meaning the pools have less and less liquidity, leading to greater price crashes.

Benefits of Karma for the ICON community

As we know, the ICON community plays an important role in the sustainability of the ICON ecosystem. Karma would create:

  1. Opportunities to buy discounted tokens. If you’re a believer in the protocol, then chances are you will be a long-term holder of the token. Through bonds, users can supply LP tokens (e.g. OMM/USDS) to the protocol of their choice in exchange for its native token (e.g. OMM) at a discounted rate. This is a win-win scenario for the token holder and the protocol itself. My only question is who funds that discount?

  2. No exposure to impermanent loss! Long-term holders aren’t incentivized to provide liquidity because of impermanent loss. So, if you shift this loss to the protocol, this allows better alignment between the token holder and the protocol.

  3. 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.

Benefits of Karma for the protocols

  1. 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.

  2. With more liquidity, the different liquidity pools can support much larger trades and guarantee price stability and protect themselves from massive liquidity exits. This in turn creates a healthy price action for the native token (less volatility), attracting long-term holders.

  3. Since protocols own their liquidity, they also capture most of the liquidity fees. This means protocols can use these fees to improve the protocol and attract even more users.

  4. Protocols through Karma would gain extra exposure as their bonds will be featured on the Karma bond market.

4

I don’t understand the tokenomics part, if you are issuing bonds for the lps these bonds will be given to the Dao at a discount with a vesting period for karma Dao tokens. My understanding is in this process a little goes to the team. Is this not the case?

Also you know I love this idea, I don’t know how I feel about paying for a community manager… This should come from the protocols sucess and funded from it.

I am keen to see some references to what token model you have used. Unless I am mistaken the selling of bonds is what funs the Dao/ team/ rebasing of staking rewards based on what’s has come into the treasury(I am still wrapping my head around this so keen to have more detailed insights passed on)

Sorry this is meant for the team, didn’t mean to attach the comment to your comment hyper

5

That is a very good understanding of Karma (Bond) indeed!

To answer your question who funds that discount. So currently liquidity providers (LP) are incentivized with protocols native tokens (e.g. OMM, BALN, …). This means that daily some percentage of distributed protocol native tokens goes to them. This usually leads to "bad behaviour as you explained it well. So instead of protocols emissioning their native tokens to those LP providers they would emission them to their Karma treasury. Treasury then is responsible to hold them and swap for LP tokens when user bonds.

I hope this answers your question!

1 Like
6

Just a bit of a clarification to term Karma treasury. For each protocol new treasury will be created by Karma and Karma will have no power over managing those treasuries. Karma DAO treasury on the other side is a whole new story because it will be just one instance of it and it will be used to aggregate value (daily Karma emission + bond fees).

7

So if I’ve understood correctly:

  1. Once you’ve bought a bond using a liquidity pair (e.g. OMM/USD), you have a vesting period, say 5-10 days, until you can claim your OMM tokens.

  2. During those 5-10 days, that liquidity pair is earning liquidity rewards from the Omm protocol.

  3. After the 5-10 days vesting period, the LP provider would receive their initial liquidity pair value in OMM + the accumulated OMM token rewards.

Another clarification point. Is the vesting period subject to impermanent loss?

  • Say at the time of providing liquidity for the OMM/USD pair, OMM price is worth 1$
  • The liquidity provider provides 50 OMM and 50 USD to the protocol. A total of 100 USD.
  • After 10 days the price of OMM is now 0.8$
  • Does this mean the provider will receive 80 USD worth of OMM tokens in return? (+ the OMM token rewards for providing liquidity for 10 days)

Thanks for clarifying.

8

Hey Fezbox nice to see you here!

I think you may be focusing on Olympus (OHM) a like protocol where as Karma first plan is to build Karma Bond marketplace (e.g. Olympus Pro) where user will bond their LP tokens in return for discounted protocols (e.g. OMM, BALN, …) native tokens.

Where the team would generally take “fee” from is the amount user is getting when he bonds (amount = discounted tokens amount - Karma fee). We see that on Olympus Pro with default fee being 3.3% I think. This is not going to be the case with Karma. Instead we will focus to redirect those fees in our Karma DAO treasury and utilise them in different strategies to safely grow their value. This is still in process of research so can not give any stable answers at this stage.

Based on that new approach I described token economics part is not derived from any existing model I know of. We will focus early on to build white paper on gitbook that will explain in details all of the decision and thinking behind it.

Last but not least, paying for a community manager. We think that building a very strong narrative, raising awareness of all of the benefits our protocol can and will bring is one if not the most important thing in this project. If users do not strongly believe in this, both DeFi protocols and our project will suffer. This is why we also accounted “small” portion of that in to our funding breakdown. But keep in mind that this is a simplified breakdown as well as that the actual costs vs requested are a lot higher. This is because we strongly believe in our project and will continue to evolve it in to much more (Decentralized Reserve Currency e.g. Olympus (OHM)) without requesting extra funds.

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9

So regarding the first point:

  1. When user bonds, his LP tokens go to protocols (e.g. OMM) treasury and user is set to be able to linearly claim discounted tokens amount through vesting period (5 or max 7 days) as they vest.
  2. During those 5-7 days, the LP tokens aggregate network fees from their origin (e.g. Balanced DEX) inside protocols (e.g. OMM) treasury. Protocols would no longer incetivize (reward e.g. OMM tokens) LP token holders directly but indirectly through Karma protocol bonding.
    1. and 2. point answers the 3. point you made - user that bonds LP tokens still receives same amount of native protocol tokens he was promised when he bonded.

Impermanent loss is theoretically possible. Given the relatively short vesting period, ability to claim linearly and Karma rewards for LP token providing it is very low chance you would have less USD value in the end. We will keep IL in mind and see if we can find a way to eliminate that possibility.

I hope this clarified your questions!

2 Likes
10

Have you considered building it on ICE and utilising a lot of battle tested code from Ohm finance? I know it’s not a copy of Ohm, but I’m suer you could reuse parts of it and not build everything from scratch that way.
Are there any benefits of building directly on Icon instead of ICE?

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Have we considered building it on ICE ?
Yes, but we decided that this would bring too much of an overhead early on as well as we want to connect DeFi that lives on Icon first.

Will we utilise battle tested code from Ohm Finance?
We will definitely utilise as much battle tested code form Olympus as well as many other forks of it. Of course with our uniqness some things will change and be audited before release to the mainnet.

Benefits of building on Icon instead of ICE?
Like I said before, Icon DeFi space is the focus early on. Besides that, there is still some uncertainty around ICE and how it will work. Further down the line we will definitely utilise BTP to connect to as many chains as possible.

2 Likes
12

good…welcoming the proposal

1 Like