The Money Machine: Exploring the Financial Mechanics powering Klink Finance

As the co-founder of Klink, I am often asked about the mechanics and sustainability of the rewards we provide to our users. In this article, I aim to address these questions to instill trust in our solution, which is especially relevant in the current climate of the crypto market.

On a top level, the yield generation can be divided into staking driven proof of stake tokens (PoS), and non-PoS tokens, which are the currently available Stablecoins on Klink, but also Bitcoin falls into this category.

By delving into the history of prize-linked savings and exploring the strategies for generating interest across decentralized finance (DeFi), we can showcase how Klink is removing barriers that retail investors often face when entering the crypto space, to fully unlock the potential benefits of the DeFi ecosystem and democratize access to high quality investments.

The Age-Old Inspiration — Prize-Linked Savings:

To understand the foundation of Klink, we must take a trip back in time to the concept of prize-linked savings, most well known in the form of premium bonds in the UK. Premium bonds are a savings account issued by National Savings & Investments (NS&I) on behalf of the UK government. Instead of fixed interest, investors are entered into a random draw to win prizes on their savings. This model has proven to be one of the most successful and sustainable savings schemes, being first introduced in 1956 and continuing to see strong inflows even today. In April 2023, there was £120 billion invested in Premium Bonds, up from £86.1 billion in March 2020, with the average Premium Bond holder investing £5,250.

This proven financial mechanism of interest payouts in the form of prizes served as the inspiration for Klink’s innovative approach. Whilst interest on Premium Bonds are UK governmental lending rates, interest on Klink is powered by decentralized finance.

Klink — DeFi Yield Engine:

In a recent article, I have covered the landscape of earning potential in crypto, diving into the most common methods to generate interest and earn with cryptocurrencies, highlighting their advantages and risks.

Klink operates a prize-linked crypto platform, with interest on cryptocurrencies being generated across the decentralized finance landscape. As a quick explainer, decentralized finance (DeFi) builds on distributed ledger technologies (DLT) to offer services such as trading, lending and investing without using a traditional centralized intermediary.1 The fact that DeFi components can be programmed opens up new possibilities for more competitive and globalized financial markets, which can lead to significant efficiency gains.

The development of the DeFi space has been remarkable. In a relatively short period, it has grown to a thriving ecosystem, attracting significant investments, talent, and user adoption, leading to a large amount of decentralized applications (DApps) and protocols. As more global traditional financial players move into the space, the future of DeFi looks promising, paving the way for a more inclusive, transparent, and efficient financial ecosystem.

With the industry evolving rapidly, we at Klink are committed to continuously optimize our treasury operations while prioritizing security, transparency, and performance and apply highest standards to partner selection including deep technical and economic analysis both internal but also with regard to external audits performed on those partners.

The status quo — Generating Interest on Stablecoins:

As of today, 22nd of June 2023 the Klink platform supports three stablecoin cryptocurrencies, USD Coin (USDC), Tether (USDT) and DAI (DAI).

The investment strategy that stands behind our daily rewards on the aforementioned stablecoins is the following. We deploy a blend of liquidity provision to DeFi protocols, DeFi lending, and investment into tokenized treasuries, all carried out on chain. By participating in these mechanisms, Klink generates interest that is passed on to the users, enabling them to benefit from holding these stable assets.

We closely work with top tier DeFi projects Aave, Compound, Yearn Finance, Curve, and Uniswap to secure the best liquidity opportunities for our company.

Klink additionally leverages liquidity provision into tokenized US Treasury bonds. This strategic move allows Klink to tap into the traditional investment opportunity that is widely considered to be the lowest-risk and most liquid investment option available and offer the rewards to retail investors. By enabling participation at lower ticket sizes, Klink therefore fosters financial inclusivity and democratizes access to high-quality, stable investments.

Klink is whitelisted by both OpenEden and Ondo, which follow highest technical and regulatory standards, with token subscription, issuance, and redemption all executed on-chain, while proof-of-reserves and attestations by independent parties provide maximum transparency. Both parties implement best practice security measures, and all key smart contracts are audited and certified.

Up next — Introducing Proof of Stake Tokens:

Building upon our initial success, Klink is embarking on the next phase of our product. Starting next week, Klink will start rolling out its services across various major cryptocurrencies to broaden the investment opportunities for its users. This rollout will be mainly driven by introducing proof of stake (PoS) tokens. This development enables Klink to include staking into the yield generation strategies, whilst actively contributing to the network’s security and consensus protocol.

Staking is exclusively available through the proof-of-stake consensus mechanism, a specific approach employed by most major blockchains to ensure efficient and secure operation of the network, paying returns to stakers in the form of percentage yields.

Prominent proof of stake tokens include Ethereum (ETH), Polygon (MATIC) Cardano (ADA), Solana (SOL), Avalanche (AVAX) and Polkadot (DOT).

As a company generating yield with stacking, there are three main strategies:

1. Collaboration with centralized staking partners who handle the technical aspects of staking on behalf of the company.
2. Leveraging of decentralized staking protocols, which provide a trustless environment for staking and eliminate the need for intermediaries.
3. Running own nodes and participating directly in the staking process.

Whilst running own validator nodes can potentially lead to higher yield, it carries additional challenges such as more technical and operational complexity, security vulnerabilities, financial risks including slashing penalties, and the potential for network consensus challenges. To mitigate any unnecessary risk at this stage of the business, we are mainly leveraging time-tested and audited centralized and decentralized platforms, with decentralized being the main priority at this point. The most prominent decentralized projects are Lido, with 7.3 million ETH staked as of today (US Dollar value of $13bn) and RocketPool, with 740,000 ETH staked. Lido applies a 10% fee on staking rewards that are split between node operators and the DAO Treasury.

One crucial factor to consider is unstaking periods. Unstaking periods, also known as lock-up or cooldown periods, refer to the duration during which staked funds cannot be withdrawn or unstaked from a staking contract or platform.

These periods serve several purposes, including:

• Network security (ensuring that staked funds remain committed to the network, discouraging malicious actions and protecting network security);
• Slashing prevention (reducing the risk of slashing penalties by allowing the network to observe participant behavior and discourage violations of network rules);
• Consensus mechanism stability (contributing to the stability of the consensus mechanism by preventing participants from easily exiting the staking process, maintaining network consensus);
• Tokenomics design (helping to manage token supply dynamics, promote long-term engagement, and prevent excessive volatility caused by sudden mass unstaking actions).

By implementing unstaking periods, blockchain networks aim to balance out network security, stability, and flexibility needed for participants to manage their staked assets. It is worth noting that the specific duration of unstaking periods can vary depending on the network and its governance parameters. For example, current unstaking periods for ETH on Lido are 1–3 days.

To comply with unstaking periods and ensure network security, we will integrate them into the Klink app where appropriate during the withdrawal process. From a user perspective, everything will stay the same for many currencies. For some proof of stake tokens, there will be a set period between triggering a transaction of sending funds out of the Klink platform and the actual execution. The unstaking periods will be transparently displayed on deposits and withdrawals.

With this approach, Klink removes barriers that retail investors often face when entering the staking space, to fully unlock the potential benefits of staking, paid out in the form of daily prizes.

Promotional interest boost on Klink:

Users of the Klink application have noticed the current high and attractive interest rates on stablecoins with a 10x boost up to 30–35%. These rates are not generated from treasury management activities alone, but also include marketing budget from Klink’s own corporate treasury to promote and celebrate the launch. We build this for you, our users, and will always strive to maximize your rewards. These rates change over time to mirror more sustainable rates, but Klink hosts promotions across various different tokens frequently to give an additional incentive and reward to everyone.

Adapting Treasury Management for Stability, Sustainability and Transparency:

It is important to emphasize that Klink’s treasury management strategy is a living, ever-evolving process. We continuously refine our approach to ensure low risk, stability, and sustainable rewards for our users. By strategically diversifying our investments and carefully monitoring market conditions, we aim to provide consistent and predictable rewards to our users while mitigating potential risks. Our commitment to prudent treasury management practices ensures the long-term sustainability of the rewards we offer.

Klink recognizes the importance of transparent operations and will regularly provide insights like this and eventually detailed reports to stakeholders.

Please note that the content and format of the insights and reports will vary over time and get more sophisticated at a later stage of the business, depending on the resources available and specific information and metrics relevant to Klink’s operations.

Conclusion:

In conclusion, Klink is revolutionizing the world of finance by offering sustainable financial mechanics that prioritize trust, stability, and accessibility. Drawing inspiration from the successful concept of prize-linked savings, Klink has developed an innovative approach powered by decentralized finance (DeFi). By leveraging the capabilities of DeFi, such as staking, lending, liquidity provision, and investments in tokenized US Treasury bonds, Klink generates interest across major cryptocurrencies, opening doors to retail investors from as little as $25 USD in token value, that were once exclusive to high net worth individuals or institutions.

With a focus on transparency, trust, and prudent treasury management, Klink is building a platform that empowers users and sets a new standard for the future of finance.