Sacred Finance - Competitive research :

In fast growing past environnement, privacy is becoming a necessity, that is what Sacred is trying to achieve in the blockchain Space. Sacred finance being a DEFI protocol built with Zk snarks to ensure privacy of users, users will be able to enjoy in the near future the ease to earn yields privately on Ethereum L2’s thanks to Sacred.

The goal of this paper is to learn from successes and failures of different DEFI DAO’s policies in order to help the current state of Sacred Finance policies. We will then give suggestions on solutions to implements.

TREASURY

Supply Distribution and tokenomics play an important role in the success and growth of a project. Therefore it is important that the treasury of Sacred DAO is well distributed, vested with a thoughtful issuance schedule and smart policies.

Tokenomics should promote a growth environnement by being able to thrive in a volatile market.

Governance & Distribution :

This come by assessing the risk and using different mechanism to prevent them.


 Among the risks, we can identify multiple risks in DEFI that different DAO’s have been facing in the past years, here are some example :

  • liquidity risks, smart contract risks, vampire attacks etc..

To get protected, a protocol should get audited by top external teams in the space such as Certik and also planning on having additional integrations with some hack mitigating platforms such as Loseless which is important for the security of a Defi DAO.

Sacred DAO in DEFI should also get protect against vampire attack. Some of the most famous attacks such as Curve finance DAO attack by Swerve, the good news is that it is preventable by having good tokenomics, a thoughtful token issuance process and a good distribution.

For a good protection, Sacred DAO should also have a good reserve of liquidity from the treasury to weather any storm and to provide users with dynamic and changing incentives to attract liquidity that will remain on the protocol long enough.

Distribution should be done with a scheduled issuance and also following a bonding curve model, the model of XOR can be used in this case, this will allow the token to thrive in volatile markets of booms and busts. The bonding curve will allow prices to follow an elastic supply or demand.

What we can see in most of successful crypto projects is a slow and steady issuance with issuance growing at a slower rate to avoid too much inflation. A large portion of tokens should also be devoted towards program, grants, funding and treasury. For example, Curve DAO has a diminishing rate issuance of 2¼ a year which mean the entire supply will not be issued in more than 300 years.

DAO issuance vs BTC vs ETH
DAO issuance vs BTC vs ETH
Curve issuance
Curve issuance

Distribution could happen through anonymous liquidity mining.

Furthermore, the 2 tokens design is new and also showing good outcome such as LUNA and UST. Sacred could have a same relationship with Incognito Credits. Only one token should have an appreciating value, while the other would have a fixed conversion relationship with the other.

This graph is showing the most common of token issuance model, today in crypto :

INDEX token issuance
INDEX token issuance

Governance and Voting :

This can be used as an example of governance:

The $Sacred DAO should maintain at all cost a liquidity reserve that will be used for the protocol development such as voting power, liquidity pool management, incentives management.

This mean around x% of the token should be reserved for future development as governance will use these tokens to help balancing liquidity pools weights on the protocol.

I would advice team members to take a look at the Gauge Weights model used by Curve.

(Ressource : https://resources.curve.fi/reward-gauges/gauge-weights).

In this model, voting brings inflation necessary at a low and controlled rate to rewards voters who locked there tokens and help protocol governance in the long run.

Community members, investors, team members and foundation will be eager to lock their token because they believe in the future of Sacred and will get rewarded by receiving tokens from the reserve, in addition they can receive boosted rewards for the liquidity they provide.

#HODL strong plan.
#HODL strong plan.

This will allow proposals, upgrades and program being approved on-chain. Users can choose to vote or delegate their voting power by following the DAO treasury automatically or by using their own vote, this can be done freely with the Snapshot tool integration.

We should oriente user in Sacred Finance towards the right behaviors, as voting is one thing, but incentives should also be towards value producing of the protocol. This can be achieved by putting long term incentives in place.

Venomics is taking over Defi, with the voting escrow model that allow users to earn higher and more stable rewards.

Sacred team is highly encouraged to take a look at this new model :

  • The FEI protocol failure shown that not all governance should go to voting rights as it can sometime produce an inverse effect. 
 A DAO should also allocate from the beginning to promote developer funding, branding funding that could be outside of the scope of the voting power to avoid short terms decision making or malicious attacks.

Delegation can prevent those attacks as community member can delegate their voting to trust parties such as founders, or DAO treasury. Other mechanism advised by Vitalik, are the « limit governance » model, where some parameters are fixed in the protocol itself.

The other model is the one from GEB, where governance has control over fewer features with time or even a delay time mechanism when voting.

Some other hybrid solutions that can be used for governance are « reputation » or special elected governors.

Advisory votes are also used to mitigate risk when voting doesn’t directly implement a proposal, instead it will only be created to make its outcome public and transparent to build legitimacy and then implementation will be off-chain governance to make that change.

https://vitalik.ca/general/2021/08/16/voting3.html
https://docs.reflexer.finance/ungovernance/governance-minimization-guide

YFI has also worked on adopting this tokenomics mechanism initiated by Curve Fi.

https://gov.yearn.finance/t/yip-65-evolving-yfi-tokenomics/11994

Rewards and Incentives :

Rewards are one of the major forces a DAO can use to incentive token holders, Sacred DAO can for example give an x% of the income and fees with Sacred Holders. For example 50% of Curve Trading fees are distributed among VeCrv holders. 
 Sacred DAO could use similar mechanism by introducing Staking ,Vote Locking and Boost programs.

These mechanisms are being successfully used among different DEFI protocols. The double incentive mechanism make it easier as Incognito credits and Sacred tokens will have different utilities.

Incognito Credits in this model can be used as the rewards with a conversion mechanism or claiming mechanism with Sacred tokens.

Voting tokens can be locked in different times frame (4 weeks, 3 months, 6 months, 1 years etc), the greater the lock the better the rewards. The locked Sacred can also earned additional boosted rewards from the liquidity they are providing.

This ensure the constant growth of TVL, by locking of tokens which will lead to a more stable environnement.

There is a saying from a famous VC « who says whoever control liquidity control DEFI ». Liquidity mining will be one of the Sacred mechanism to attract liquidity but it should come along a voting and locking mechanism so deposit have additional utility and are aligned with long term incentives.

Here is an article on Curve War which show how excellent tokenomics help a protocol thrive and being profitable for the community as a whole.

https://tokenbrice.xyz/crv-wars/

Here is an other article on detailed calculation used by convex finance to achieve sustainable growing revenue.

https://medium.com/@portiadog/convex-finance-1cc6c9c1c733

In the case of an attack, an Emergency DAO committee should be in place to make sure any takeover is solve by the foundation.

Fees :

To prevent the DAO from liquidity risks, malicious voting and flash loan attack, the fees structure should always attribute at 50% of the fees to the Sacred DAO. Fees are collected from depositors, liquidity providers, we can even think about a higher fee or tax for users who remove liquidity early setting up a maximum and minimum fee.

Fees should also come from liquidity pools, deposit into the protocol, volume can be a non-negligeable extra revenue for the protocol.

Swap features between pools or on the protocol will also allow to generate trading fees : for example swap between stable, or between token anonymously. This will be an additional stream of income for Sacred Finance.

  • 3 Parameters are important : Deposits amounts, volumes, liquidity pools and deposits amounts. These will be used to align with rewards, APY, Voting, Staking rewards in form of Incognito credits.

A Burning Mechanism can be put in place, and fees could be used to do buy back program of Sacred token which will be bought back from the market and burned to prevent too much inflation and protect token holder. This can be a fixed (fix percentage of fees) or a variable mechanism (in a timely manner such as a quarterly voting on token burning).

Utility :

Sacred should be used to govern the protocol who act as privacy DEFI token who has the utility of incentivizing liquidity on the platform but also users and community involvement.

Sacred Depositor will get IC credits by depositing their sacred on the platform and then more rewards by Locking, staking SACRED tokens with incentives on the duration of the deposits. SACRED token could be used and distributed as rewards for liquidity providers on the platform.

As mention by Vitalik, the long term success of a protocol will rely on its ability to integrate as tools with other existing protocols, the privacy and Zktech offering being the main driver, and the right incentives in place maintaining a liquid environnement.

Integration with existing solutions such as Lido could be a good solution to attract and build liquidity with staking.

Stablecoin Strategy :

A great way of starting to attract liquidity would be with stablecoins, by attracting stable liquidity from Sacred users and community members to get the joy of privacy and earning Sacred or Ic credits while doing so.

Multiple pools strategies should be in place for stablecoins. Stable are a growing market and a source of opportunities. Partnership with existing market maker defi protocol would also be a great idea for Sacred.

Community

The Sacred community should be the reward for their contribution with an x% percentage of the supply, the will allow long term incentive protected by early adopters who understand the vision and will also allow them to participate and be the 1st users of the platform, allowing them to attract liquidity and also making them spread the word of mouth. They will be more align with long term incentive protecting price and growth.

The reason Early contributors and community governance is important, is to allow for decentralization of the protocol and a good spread of the distribution of tokens. The community will allow more trading and circulation of the tokens, which is important for token pricing and liquidity.

  • Conclusion : Zktech and Privacy is with no doubt the future, Sacred is working on a novel tech and will need strong and thoughtful policies based on successful and stable model to thrive.
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