Adjustment towards Dynamic Earn Rate
Hello, Kokoans!
We are planning on a significant protocol parameters update, and through this post, we hope to share with you the specifics of the upcoming update as well as why this is necessary. The update will focus on two main parameters: 1) lowering the vault stability fee and 2) Adjusting to a Dynamic Earn Rate System.
1) Lowering the KSD Vault Stability Fee: Currently Kokoa’s Borrow feature(as well as our Lever-easy Vault) requires a stability fee rate of a maximum of 18% APR(i.e. 20% APY). We are lowering this upper bound to 10% to reduce the borrower’s burden.
2) Adjustment to Dynamic Earn Rate: Previously “fixed” Earn Rate will no longer be used, and the new Earn rate will be determined as the minimum value of the following two rates:
(i) APY that is calculated assuming that a protocol-determined portion of each vault’s revenue is allocated to KSD Earn.*
(ii) Ceiling APY set by the protocol(Currently 20%)
(i) For example, if the annual aggregate vault revenue was $50 and the total KSD Earn deposit was $200, a protocol-predetermined portion of, for example, 60% would allocate $30(60% of $50) to KSD Earn. The calculated APY then would be 15%(=$30/$200). This protocol-predetermined portion is the parameter that will be managed by the team in the short term but delegated to DAO governance in the long term.
Let’s say the Ceiling APY in (ii) is set as 20%. So if the calculation derived from (i) were 25% APY, then KSD Earn APY would be 20%, whereas if the calculation from (i) were 12%, then KSD Earn APY would be 12%.
The main objectives of this adjustment are 1) further expansion of KSD supply and 2) higher value accrual to sKOKOA holders. Further elaborations are provided below.
1) Further KSD Expansion
KSD, through steady expansion, is consolidating its position as the dominant stablecoin within the Klaytn ecosystem. However, the stability fee of up to 18% APR has been a restraining factor for further expansion. Vaults created from collaterals with relatively lower yield require a +10% APR stability fee rate and thus are barely used as collateral. Moreover, large fluctuations in collateral yields also trigger stability fee fluctuations, rendering risk management hard for vault users. We expect that a lower KSD vault stability fee will lighten the burden of the borrowers, as well as make the stability fee more predictable, hopefully encouraging KSD expansion.
Furthermore, the market stablecoin APR throughout the Klaytn ecosystem is currently declining, attracting more users to KSD Earn, and increasing Earn’s portion of KSD’s total market cap. This itself is good news for KSD, but it also means less usage of KSD around the market, which is a potential limiting factor for liquidity provision. Thus, a timely adjustment to dynamic Earn APY is introduced, allowing adaptability to the protocol’s expansionary policy.
2) Value accrual to the Governance Stakers
Until now, revenue streams created from various vaults have been directed mostly to KSD Earn. Not only was this a compensation to KSD HODLers who risked price volatility in its initial stage, but it was also a powerful incentive mechanism that advertised itself throughout the whole Klaytn DeFi ecosystem.
However, as KSD is securing its solid position as a dominant native stablecoin departing from its initial phase, a further value accrual system around sKOKOA holders needed to be implemented. From a long-term perspective, governance token stakers need to be further incentivized in order to sustain a DAO governance system where the stakers can participate in the major parameter updates of the protocol.
With dynamic Earn APY in place, additional value accrued above the Klaytn market interest rate will be directed to sKOKOA holders. Thus, sKOKOA holders’ returns will be tightly aligned with KSD expansion. Still, in order to maintain KSD’s competency as a Store of Value, Earn APY will continuously be monitored and managed under the primitive objective “to remain as the stablecoin with highest APY in the Klaytn ecosystem.”
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