Introducing the Risk Threshold Mechanism
Incentivizing Manager Participation in Betoken
Today, we’re introducing a significant update to Betoken’s Incentivized Meritocracy, which would provide more incentive for managers to actively participate in the Betoken fund’s management process, rather than “freeloading”. The update consists of a new mechanism called “Risk Threshold”, and we believe this update will greatly improve the fund’s efficiency.
It’s your first time here? Check out Betoken.fund and learn more about our decentralized and meritocratic crypto hedge fund. And yes, we have a F.A.Q!
Why are we making this update?
In the January 2019 investment cycle, two of our fund managers were able to effectively exploit a quirk in the simulated price oracle used for Betoken Beta, and made unrealistically high returns. By the end of the cycle, the top manager had more than 10,000 Kairo tokens, and the next best manager had more than 1,000 Kairo, magnitudes more than other managers, who mostly had less than 100 Kairo.
We don’t think the two managers did anything wrong; in fact, as we dug deeper we became quite impressed at how they managed this feat. They did not use any scripts or hacking program, but simply picked out a slight pattern based on the price changes displayed in our manager portal, and manually executed the trades to exploit this pattern. This actually boosted our confidence in the power of our Incentivized Meritocracy to make the best investments.
The fact that the top 2 managers own more than 70% of the total supply of Kairo, however, is deeply concerning to us. In our current system, if the top managers refuse to make any investments, they would still be able to earn a huge amount of commissions every month. While their incomes do approach zero as other managers catch up with them, it would take a very long time for that to happen, due to the sheer amount of Kairo they have.
Thus, if the top 2 managers do decide to stop participating, they would be able to effectively steal a lot of money from the Betoken fund while taking little to no risk.
Betoken would likely be dead in the water if something like this happens right after our Mainnet launch, and it’s far too great a risk for us to ignore. For this reason, we have devised a new mechanism that will incentivize participation and prevent freeloading altogether — Risk Threshold.
What is Risk Threshold?
Risk Threshold is a mechanism that alters the amount of commission a manager will receive in a month based on the total risk they have taken.
More concretely, the amount of risk each manager has taken in an investment is measured in the stake multiplied by the duration of the investment, and at the end of each month, the risks are added together and compared against a predetermined threshold. If your total risk is below the threshold, then you will receive a commission penalty that’s proportional to the difference. You don’t gain anything extra for going above the threshold, however.
The threshold we’ve decided on is 9 days times your starting Kairo balance.
To better illustrate what this all means, here is an example. Say I’m a manager who has 100 Kairo at the beginning of a cycle. In order to receive full commissions, I would need to take on a total risk of 9 x 100 = 900 (Kairo x Day), which can be achieved by:
- Staking all of my 100 Kairo in an investment for 9 days ;
- Staking 50 Kairo in an investment for 18 days ;
- Staking 10 Kairo each in 5 concurrent investments each lasting 18 days.
and infinitely many more ways.
If all I did this month was staking 10 Kairo in an investment for 9 days, then the total risk I had taken would be 9 x 10 = 90 (Kairo x Day), and I would only receive 90 / 900 = 10% of the full commission amount.
If I only have 10 Kairo, then the total risk I need to take would be 9 x 10 = 90 (Kairo x Day), which is scaled down proportionally to my Kairo balance. So small managers don’t have to worry about never getting commissions under this new system; as long as you actively make investments, you will get your commissions!
This system will be part of our Mainnet release.
How Risk Threshold Solves Our Problem
With the new system in place, people who make zero trades also receive zero commissions, no matter how much Kairo they have. The commissions they would’ve gotten is given to all the managers who have taken the risk instead. No more freeloaders!
In addition, Risk Threshold improves the efficiency of our Incentivized Meritocracy. Since a manager gains nothing by making zero investments but gains at least some commission by making investments (regardless of good or bad ones), managers are incentivized to actually start making trades instead of abandoning their account, so some level of participation is guaranteed. This means bad managers are deprived of their power much more quickly, and good managers can rise to the top a lot faster.
Final Words
Risk Threshold will greatly improve the Betoken fund’s efficiency, and we’re quite proud of this innovation. We hope it strengthens your confidence in Betoken and Incentivized Meritocracy, and we also hope developers of other blockchain projects may learn something from it and improve the participation rates of their own systems.
We can’t wait to see it in action!
Find out more about Betoken
Landing page | F.A.Q | Testnet dApp | Buy a manager account | Invest in Betoken
