Hello, Kwenta Community! As part of our ongoing blog series covering major milestones and a high level overview of ongoing developments happening within the KwentaDAO (preceded by our first entry on growth, Acquisition Adventures), we’ve put together a summary of upcoming events and goals relating to Kwenta’s future tokenomics. With the upcoming rollout of Perps v3, a new era begins for Kwenta which will allow the DAO to both sustain and grow based on the success of our core project.
As you engage with the topics in this blog, please keep in mind that no individual community member, regardless of their role, can implement a tokenomics plan on their own. All the plans discussed in this blog must advance through each part of Kwenta’s governance process prior to implementation, which includes a public presentation and opportunity for public comment. All community members are welcome in this process, and may even draft their own alternative proposals. To get involved, please come say hello in Discord.
Before we dive into the fine details of tokenomics proposals, it's essential to discuss the current state of Synthetix governance. Although Kwenta is now an independent protocol with the freedom and flexibility to build new products and seek our own partnerships and integrations, Kwenta has worked closely with Synthetix to build perps.
Under the terms of a previous governance proposal, Kwenta currently receives 5% of fees paid by traders on Kwenta in $SNX tokens, tracked on chain with each transaction. These rewards have been used in a variety of ways including funding for our Risk Protection Fund which identifies bugs, and contributions to Kwenta’s protocol owned liquidity, but were not sufficient for the DAO to become self-sustaining or foster growth. Due to the manual nature of the incentive distribution and the finite supply of $SNX held by the Synthetix treasury, an expansion of fee sharing from Synthetix requires new contracts to be built and deployed which support alternative fee distribution structures. Expected to launch in October, Perps v3 enables this technical capability and opens the door for Synthetix governance to offer an attractive and sustainable incentive for integrators.
As a member of the Spartan Council, I'm pleased to share that there's a positive sentiment among the council members towards a more significant integration incentive for Kwenta. While there hasn't been a formal proposal regarding the percentage or structure, Synthetix is committed to onboarding the best builders for their v3 system and will take up the challenge of setting these parameters during the current governance epoch, which has only begun in recent weeks.The primary concerns from the Spartan Council are ensuring that integrators bring demonstrable value to the Synthetix ecosystem. Thankfully, Kwenta is in the perfect position to continue our work with Synthetix bringing value to the ecosystem beyond a simple frontend. Kwenta’s contributions include
A suite of contracts and features allowing users to interact with Synthetix liquidity
A fully open sourced codebase and SDK empowering new builders
A strong partnership history with over $20B in historical volume and millions in fees
Aggressive contributions to marketing including trading rewards and our new referral program
Although Kwenta may explore other avenues and strategies for bringing value to the DAO, it’s my firm belief that this demonstrable value and our existing trust and social equity with the Synthetix community make our participation in the Synthetix ecosystem the best path forward for both projects. Successful execution of this strategy will grow the usage of Synthetix perps through Kwenta beyond what either project could accomplish alone and maximize our participation in the growth of the perps DEX space.
Although there has been limited formal discussion, Kwenta contributors have drafted several plans for the use of resources from the integration incentive. With these plans, we hope to both present the Kwenta community our tokenomics ideas and strategy, as well as show the Synthetix community how resources will be used to pursue an ambitious growth strategy and continue our participation in the ecosystem. As this conversation develops, we’ll update the community on progress.
When considering Kwenta’s tokenomics plans, there are several goals which must be taken into account.
Although it may be possible to reduce spending on the referral program over time, an aggressive user acquisition should help Kwenta capture and retain our community of users as the DEX perps space grows.
Currently, the referral program is funded with $KWENTA tokens, allowing the DAO to jumpstart growth (see our Acquisition Adventures blog for more about Kwenta’s growth strategy), but tapping integration incentives may provide a scaleable and sustainable source of funding for the program. In keeping with DEX competitors, we’re targeting 10% of feesPaid in these projections.
A sustainable DAO is a benefit to all DAO community members. Kwenta’s long term prospects depend on the DAO’s ability to build and maintain a high performance exchange, acquire users. The ideas shared in this blog outline a path to fund DAO operations using Synthetix integration incentives and provide a funding buffer.
Given Kwenta’s strategy of maximizing our integrations with Synthetix liquidity, the accumulation of some $SNX tokens can have several benefits for the DAO. Staked $SNX can allow Kwenta to directly control liquidity in v3 pools, participate in Synthetix governance, and expose the DAO to additional upside from increased use of v3 liquidity.
Initial allocation for this strategy should likely be placed at a lower priority than growth or sustainability for our core features, but could be a practical use of resources and a significant driver of value as fees grow, or if spending on referrals is reduced in the future.
Distributing incentives from Synthetix directly to $KWENTA stakers is a hotly debated topic, but comes with some significant advantages to both token holders and the DAO. As the single largest token holder, the Kwenta treasury may benefit from direct rewards distribution through a few mechanisms. First, staking some or all of the Kwenta treasury would allow the DAO to be flexibly exposed to Synthetix integrator incentives, allowing the treasury to use rewards from staking to accomplish DAO goals and cover expenses, or unstake to increase staking rewards for the community.
Additionally, direct distribution provides an ongoing intrinsic value for the $KWENTA token as long as Kwenta’s core product continues to generate revenue. Since $KWENTA tokens are also the primary fuel for future incentives and DAO compensation, this value would help to ensure more impactful incentive campaigns and more valuable community participation.
The primary drawback of direct distribution is the inability of this mechanism to create a long term commitment. Unlike investments in treasury assets, product improvements or user acquisition, direct and immediate rewards do not necessarily create long term alignment and community participation.
To ensure a healthy balance of incentives, the DAO may consider an additional locking mechanism which provides increased exposure to the benefits of staking – both rewards and voting power – for those who choose longer lockup periods.
One last consideration is that at their core, each tokenomics plan is simply a way to allocate the same projected rewards, and each plan has the same goal of rewarding the community in a way that’s sustainable. Sustainability, of course, means that the DAO must survive and even grow.
The KwentaDAO is fundamentally directed by stakers, and remains committed to increasing decentralization, and experimentation in both technology and organizational structure and should approach every challenge with a creative and open minded approach.
That said, we’ve outlined 4 potential plans for allocation of Synthetix integrator incentives which are meant to give the community an idea of what’s possible as we move forward. In these projections, we make a few assumptions:
Fees on daily volume for the whole SNX perps product will be about 4.2 basis points, or %0.042. This is based on historical payments to Kwenta under the current program, and is likely a good estimate for forward looking fees, which are heavily weighted toward the most popular pairs (with an average fee of 4bp, or 2bp/6bp maker/taker), and some use of lower OI, higher fee pairs.
Volume can be maintained at about $100m daily notional volume. This number should be considered a realistic short term target based on historical volume, but does not assume any growth in the perps space. While we believe growth in the overall space is possible, we believe the first steps should be to form a plan to maintain the DAO under current conditions.
The cost of running the KwentaDAO is approximately $200,000 every 30 days. The Kwenta DAO is a relatively lean organization, but does require highly skilled full time contributors and significant infrastructure costs. This cost should be considered a moving target, and the actual cost will be highly dependent on both available resources, and the projects and initiatives proposed and approved by Kwenta Council.
These examples will *only* consider the split between SNX liquidity and integrator rewards. While it’s likely that in the near future SNX offers ETH backed pools, Kwenta governance will need to weigh the cost of supporting these pools with their individual opportunity and the likelihood that ETH allows liquidity to scale with demand. While this topic is important, it is a complex consideration which warrants its own exploration.
The cost of running a competitive referral program which awards affiliates 10% of feesPaid (competitive with rewards paid by competitors such as GMX) would be approximately $126,000 sUSD every 30 days. This is based on $100M daily volume, and scales linearly with feesPaid.
In these examples, the preceding % represents the share of overall feesPaid awarded to the KwentaDAO through an integrator incentive. Total 30 day integrator incentives provided by Synthetix with these assumptions, before any resources are spent, would total approximately as follows:
5%: ~$63,000 sUSD
20%: ~$252,000 sUSD
30%: ~$378,000 sUSD
One important note is that a referral program is used in these calculations as a stand-in for any similar DAO expense beyond basic operating expenses which should be prioritized. We’ve used the referral program here because we believe in Kwenta’s early stages, growth is a top priority and will be the most impactful way to ensure healthy operation. Over time, success of the referral program may warrant a lower spend, allowing resources to be redirected toward accumulating and staking SNX as previously discussed, directed at a new initiative, or toward staking rewards. Actual distribution will depend on the priorities decided by community feedback and governance.
With these assumptions in mind, let’s consider the incentives earned by the DAO and their possible distributions based on a few outcomes.
In this structure, all fees are distributed to stakers. The rewards earned by each staker will be proportional to their share of the overall staked supply. The treasury would be responsible for funding the DAO by staking up to the amount of KWENTA held by the treasury.
The treasury currently holds 43% of supply. Minimum projected integrator incentives for 100M 30 day average volume earned by the treasury would be as follows:
5%: ~$27,090 sUSD
20%: ~$108,360 sUSD
30%: ~$162,540 sUSD
While scaling these rewards may result in the treasury being able to reduce their own staking position, thus increasing the rewards directed toward KWENTA stakers, these projections are a good starting point:
5%: ~$35,910 sUSD
20%: ~$143,640 sUSD
30%: ~$215,460 sUSD
In this case, the consideration of allocating additional spend to the referral program, SNX staking, or considerations beyond funding essential DAO operations would be limited, however the distribution would be immediately beneficial to stakers. Beyond ~$123m average daily volume, the DAO would be able to begin funding growth and marketing initiatives, accumulating and staking assets such as SNX, or hiring new contributors for more ambitious projects. Growth spending remains limited below about ~$500m daily volume, which creates an important balance to consider for stakers prioritizing rewards. While this model is the simplest and may be extremely attractive and sustainable long term, the growth necessary to achieve $500m daily volume may be more resource intensive than this model provides in early stages.
Under this plan, a flat % of feesPaid would be allocated to the referral program, SNX accumulation, or other initiative as a first priority. The remainder of rewards would be distributed proportionally to all KWENTA stakers.
The treasury currently holds 43% of supply. Projected monthly earnings for 100M 30 Day Volume Average would be as follows:
5%: ~$27,090 sUSD - After 0% of feesPaid has been allocated. Due to a need to focus on DAO sustainability, we’ve chosen not to allocate to growth initiatives in the lowest tier of this example.
20%: ~$81,270 sUSD - After 5% of feesPaid has been allocated, which would be the most likely maximum expenditure on a referral program or SNX accumulation program.
30%: ~$108,360 USD - After 10% feesPaid is allocated to be spent on referrals, which is competitive with top competitors.
In this case, after allocating for specific initiatives, the proportion of rewards directed toward non-treasury stakers would be the same as the previous example:
5%: ~$35,910 sUSD
20%: ~$107,730 sUSD
30%: ~$143,640 sUSD
At 30% share of feesPaid, minimum projected monthly earnings for 200M 30 day average volume would be required for the treasury to reach sustainability and in the event Kwenta was sold, used for developer or trader incentives, the treasury would require further growth to reach this goal. However if Kwenta surpassed 200M 30 day average volume, the rewards would continue to scale for the treasury and stakers.
Below 30% share of feesPaid, allocation to growth initiatives or accumulation of SNX would likely be the first concession as DAO sustainability becomes the focus, however in best-case-scenario arrangements with Synthetix, this model does provide reliable funding for initiatives which could jumpstart growth and help the DAO achieve our 200M+ sUSD daily volume target.
Under this plan, a flat % of feesPaid would be allocated to the referral program, SNX accumulation, or other initiative as a first priority. The treasury will claim up to the total monthly expenses plus 20% as a buffer for treasury accumulation ($240,000.00 USD). Any amount of rewards produced in excess of this target will be redistributed to stakers.
Once a flat % of rewards were sequestered for referrals, the remainder of the rewards at $100M 30 day average volume approach sustainability quickly.
Treasury’s projected monthly rewards for $200M 30 day average volume after guaranteed allocations:
5%: ~$63,000 USD – After 0% of feesPaid has been allocated.
20%: ~$189,000 USD – After 5% of feesPaid has been allocated.
30%: ~$240,000 USD – After 10% of feesPaid has been allocated. Treasury hits maximum allocation.
Stakers’ projected monthly rewards for $200M 30 day average volume after guaranteed allocations:
5%: ~$0 USD – Threshold not met
20%: ~$0 USD – Threshold not met
30%: ~$12,000 USD – Staking incentives begin
Once a flat % of rewards were sequestered for referrals, rewards at 200M 30 day average volume begin to quickly hit the maximum treasury allocation and accumulate as staking rewards.
Treasury’s projected 30 day rewards for $200M 30 day average volume:
5%: ~$126,000 USD – After 0% of feesPaid has been allocated.
20%: ~$240,000 USD – After 5% of feesPaid has been allocated. Treasury hits maximum allocation.
30%: ~$240,000 USD – After 10% of feesPaid has been allocated. Treasury hits maximum allocation.
Stakers’ projected monthly rewards for $200M 30 day average volume:
5%: ~$0 USD – Threshold not met
20%: ~$138,000 sUSD – Staking incentives scale
30%: ~$264,000 sUSD – Significant scaling of staking incentives
Although the Threshold allocation at low volume may seem unattractive for non-treasury stakers, once the core perps product meets more ambitious volume targets above $200M, the proportional rewards directed toward KWENTA stakers increase quickly. This approach prioritizes DAO sustainability and an aggressive approach to growth while ensuring success is reflected in incentives for participating in the DAO through staking.
While the primary downside of this approach is the threshold itself, which provides little direct incentive before targets are hit, and some governance overhead to review and manage threshold allocations, this approach allows staking incentives to quickly take priority once the thresholds are met without additional governance action, resulting in a strong incentive alignment between KWENTA and SNX stakers to maximize the notional volume originating from Kwenta.
The Kwenta Council dictates the proportion of rewards that referrals, the treasury, and stakers receive at the end of each month, accepting tolerable losses and gains when appropriate for the benefit of each matter. This would, however, burden the Kwenta Council with a significant amount of manual overhead.
Although we are unable to give precise projections of a forced split due to the manual nature of the process, the primary advantage of this approach is that DAO expenditures and their impact will be closely monitored by governance. In any case, regular reviews of expenditures would be beneficial for the DAO to consider changing conditions and new opportunities.
While all four options have been laid out as a way to consider the pros and cons of each approach, and stimulate conversation around the purpose and future goals of the KwentaDAO, we must ultimately narrow down a single approach which works best for us right now.
Given the critical nature of DAO sustainability, the Threshold approach is a great compromise between placing the KwentaDAO’s survival as top priority, but will allow for the largest increase in staking rewards should the project prove successful. The threshold approach also has some flexibility if the treasury were to stake a small amount of $KWENTA holdings in order to fund the purchase of $SNX or some similar initiative.
Ultimately even if we begin with a more defensive option which guarantees funding for the DAO and growth initiatives, the end state of the KwentaDAO could look closer to option #1, with pure redistribution to stakers at the contract level. It should be considered that the best choice early in the project may be different from the best choice later on, and a highly successful DAO could be able to fund itself purely by staking some, or all of the treasury.
While we are confident that Synthetix and Kwenta are both aligned in our goals of creating the best perps frontend and directing the most volume toward Synthetix perps, the Kwenta community is independent and free to weigh the eventual governance decisions of our partners alongside other opportunities and avenues. The DAO may consider working with other liquidity partners, launching a native perps product, exploring other products and opportunities entirely. These options can exist alongside our Synthetix integration, or could replace our Synthetix integration if necessary.
While we must keep these options on the table and be willing to take a pragmatic and flexible approach, we believe the most mutually beneficial arrangement for both DAOs is one which allows us to make our Synthetix integration a priority. Although ultimately up to governance, we estimate 30% of feesPaid to be the point where this strategy is the clear winner, though even a smaller incentive from Synthetix should provide the necessary resources to explore new approaches and invest in further growth and development.
Kwenta has experienced both an exciting and challenging year. In many ways, the universe has repeatedly tested Kwenta with difficulties to overcome. Between launching our DAO into a period of declining interest in web3, launching a perps product into historically low volatility, and rising to meet a constant onslaught of new challengers both inside and outside our ecosystem, Kwenta has remained strong. By maintaining a solid double digit percentage of overall perps volume and consistently placing among the top 3 exchanges in DeFI, we’ve gained a stubborn reputation as one of the best places to trade on chain.
I will admit that at times, even I’m surprised we’ve pulled it off. Contributing to Kwenta often feels like climbing a mountain so massive that you can’t quite see the top, and yet every time I turn around and look I’m in awe at just how far we’ve gone. There are many paths to the top of this figurative mountain, but (in my humble opinion) the way forward has never been so clear. We have more support than ever from our largest partner and v3 gives us the option to not just be a sustainable DAO, but actually build a bunch of really cool products and blaze trails on the cutting edge of what’s possible.
Whether you agree with these takes, hate them, or have a completely different idea you want to share, the best part about the Kwenta community is that it’s made up of some of the smartest people in the world, and becoming part of it only takes a few clicks. So please, fire up your Discord account, come join us, and I’ll pop some champagne at the summit.
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