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KLAYswap DAO: KSP Token Economy and Governance

Since its launch in November 2020, KLAYswap has become a uniquely powerful liquidity protocol in the Klaytn ecosystem. We’ve been able to achieve tremendous results including a total value locked of $98 million USD and an average daily trading volume of $4 million USD. Even so, we’re working endlessly to provide a better service environment. As a result of these efforts, KLAYswap was selected as an outstanding decentralized exchange in 2021 and was recognized for its technology and usability in the global blockchain market.

We plan to continue to make remarkable achievements and develop KLAYswap in a fully decentralized form, and to introduce governance to complete a DAO (Decentralized Autonomous Organization) after the KSP token unlocking. This post will give a quick overview of the governance mechanism and go over KLAYswap’s key structure.

KSP Token Lockup Release

KLAYswap is an on-chain swap protocol that operates in a completely trustless way without any specific operator. In line with these goals and the decentralized philosophy of blockchain, KLAYswap issued the KSP token to ensure that governance can be transparently observed by ecosystem participants. The KSP token is designed to be aquired through participating in a liquidity mining program that began at 9 a.m. (UTC+9) on November 11, 2020 at Block 43407094. The KSP that is mined will be locked up until Block 48681371 to stabilize the ecosystem and token economy. Soon, after about two months of lock-up, the KSP token, which will be responsible for governance, will finally appear in the world on January 11, 2021 (unfreezeBlock 48681371).

KSP tokens can be used in future KLAYswap governance, and the key mechanisms of governance can be found below.

Governance Incentives

KSP holders can use their KSP as decision-makers of the protocol for 1) agenda items 2) official agenda voting 3) and staking for additional rewards.

Major agenda items include changes to the costs needed to list token pairs, updates to smart contracts, and changes in mining distribution rates. These and other key agenda items that can be directly linked to the growth of the ecosystem are things that KLAYswapDAO, a decentralized autonomous organization, needs to create in the future.

Additionally, for the fast-growing decentralized protocol to work smoothly with a decentralized autonomous organization (DAO), a well-organized voting system and a corresponding reward are needed to help participants engage in growth with close coordination with each other within their interests.

Below are some of the governance mechanisms designed to enable key members of the KLAYswap ecosystem to actively engage in governance (1. Voting, 2. Staking, 3. Incentives), and additional expanded models will be addressed after ongoing validation.

  1. Voting

To participate in governance voting, you must first stake your KSP (Vote-staking) to obtain votes (vKSP). vKSP is tokenized voting power. Even if the same quantity of KSP is staked, the longer the staking duration, the more voting power (vKSP) is given. This is to recognize long term participants in governance, and strengthen their governance decision making power.

<Voting Power for 1 KSP at different staking durations>

  • When staked for 4 months → 1 vKSP Gained
  • When staked for 8 months → 2 vKSP Gained
  • When staked for 12 months→ 4 vKSP Gained

1) Voters may vote for or against the official active agenda.

2) vKSP is not burned at the time of voting. If multiple agendas are in progress at the same time, you can vote for each agenda with as much vKSP as you have.

2. Staking

KSP holders can stake KSP and obtain vKSP, a token received during steaking. At the overall governance level, vKSP ownership is a manifestation of a willingness to actively participate in the operation of the KLAYswap protocol and exercise voting rights. It has the following rights in governance:

  • Official Governance Agenda Voting Rights
  • Determination of KSP Mining Distribution Rate for Each Liquidity Pool
  • Additional Pool Fee Rewards from Governance Contributions, KSP Acquisition Rights

1) Voting rights (vKSP) will be given for each KSP staking case. Staking cannot be canceled during the period it is contracted. (Example Contract Period: 4/8/12 Months)

2) At the end of the contract period, the staked KSP can be claimed directly and received in a wallet. If a claim is made, the vKSP held will be burned and the corresponding voting rights will be lost.

3) If no claim is made after the end of the contract period, the same voting rights will automatically be granted without a separate renewal.

4) vKSP cannot be distributed separately.

3. Governance Incentives

The distribution of limited KSP resources is a key decision-making issue in governance that is directly linked to the protocol’s growth of the pools’ liquidity. Depending on governance, vKSP holders (voters) receive additional transaction fee rewards and KSP from the pool. Currently, the KSP distribution rate for voters is initially set at 10%, with the remainder distributed to liquidity pool providers. The distribution rate of KSP per liquidity pool is determined directly through real-time voting by voters.

3–1 Determining KSP Mining Distribution Rates per Liquidity Pool

Currently, the KSP distribution rate per liquidity pool is set at the initial value, but with the introduction of governance, voting by vKSP holders can decide the mining distribution rate for each pool.

1) Voters may spread their voting rights (vKSP) across multiple liquidity pools for more control.

2) Depending on the percentage of vKSP shares cast in each liquidity pool compared to the protocol’s overall voting rights (vKSP), a new distribution rate is determined. The distribution rate may change in real time at the time of each voter’s vote.

3) The distribution rate is tallied as an integer between 1% and 100% . For pools with a distribution rate of less than 1%, KSP is not distributed.

4) Excluding the KSP distribution rate for voters (10%), the remaining KSP is distributed according to the distribution rate for each liquidity pool.

3–2 Distribution of Transaction Fee Rewards

KLAYswap will charge a 0.3% commission on transactions (swaps) in liquidity pools, and voters will be able to receive additional transaction fee rewards from the pools they supported when voting for the KSP mining distribution rates per liquidity pool. 50% of the transaction fee commission incurred will be allocated to vKSP holders who support the pool, and the remaining 50% will be distributed to the pool’s liquidity providers.

1) Voters receive additional fee rewards according to their share of vKSP in proportion to the total vKSP cast in the pool they support.

2) All transaction fees incurred during the voting period for the pool are subject to distribution.

3) If the total vKSP voted in the pool is 0, the first user who votes can receive the entire accumulated commission.

3–3 KSP Distribution

If you stake your KSP after governance is introduced, you can earn the right to vote (vKSP) and receive additional KSP for your contributions to governance. The distribution rate of KSP mining for Voting Rights holders is initially set at 10%, and can be changed through a full governance vote. Currently, of the 73,440 KSP tokens distributed daily, 10% or 7,344 KSPs are distributed to vKSP holders, and the remaining 66096 KSP are distributed to the pool’s liquidity providers.

1) Corresponds to vKSP voting rights holders after KSP staking.

(Not related to voting for determining the distribution rate per liquidity pool)

2) Additional KSP is distributed to vKSP holders based on their vKSP ratio to the protocol total.

3) The KSP distributed as voting rights can be freely claimed and liquidated.

Once KLAYswap governance is introduced and a reward policy is established, the expected reward rate for staking based on distribution and additional rewards from transaction fees can be found in Table 1 and 2, below.

Table 1: Staking Rewards Information

*Based on a 10% KSP distribution rate for voters and a circulating supply of 12,960,000 KSP (150 days after distribution (March 2021))

Table 2: Expected Transaction Fee Rewards

We are not satisfied, even with the current TVL of around $90M USD and a daily trading volume of $4–5M USD, and will create an environment in which more assets can be used to provide liquidity. In particular, we plan to move the decision making rights directly related to liquidity to the community voting agenda and build an environment where an even greater diversity of heterogeneous assets can come in and greatly increase the sources of liquidity. In addition, if we look at the growth of TVL from launching to now, we can expect the total value locked to grow to over $300M USD. This would mean that users participating in staking would share from a total of $50M USD in transaction fee rewards .

KSP holders who participate in KLAYswap staking and participate in the ecosystem by strategically supporting liquidity pools and taking advantage of their contract period can generate rewards opportunities of up to 4X more efficiently.

To summarize the tables above, participants who have received voting rights through staking with the introduction of governance can obtain additional fee rewards and KSP rewards from the liquidity pools through voting in addition to participation in voting on key agendas. Therefore, in the general KLAYswap economy, each governance participant will support a liquidity pool based on the pool that is most advantageous to them, with the transaction fee as the most direct incentive. The more support a pool gets, the more KSP will be distributed through that pool.

The abundant liquidity provided by KSP, which is in itself a strong incentive to supply liquidity, can lead to the influx of various transaction (swap) purposes on the Klaytn network, which in itself will lead to the continuous generation of transaction fees. Accumulated fees are expected to form a positive feedback loop of redistribution to liquidity providers and governance participants who support the pool.

Going Forward

With the goal of introducing KLAYswap governance in Q1 of 2021, we will continue to release updates on various aspects. Future disclosures will cover a variety of topics, including technological advancements along with key agendas of governance/exchange fee distribution/KSP mining distribution, so that participants can access them in more detail.

Governance is directly linked to the interests of the whole of the KLAYswap community, so as the protocol grows and expands, participants will get greater value. This will accelerate an influx of new users into the community and eventually enable the operation of the protocol in a fully decentralized manner by KSP holders.




Klaytn’s decentralized, automated liquidity protocol

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KLAYswap is an AMM-based swap protocol that allows users to swap any KCT token on the basis of KLAY. The active website is https://klayswap.com

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