KIP-112: Kwenta Liquidity on Base
This KIP proposes to bootstrap liquidity for KWENTA on Aerodrome by commencing an optimized liquidity strategy with weekly incentives and Protocol Owned Liquidity.
Kwenta is in a unique position to grow its user base and boost awareness with bridging for KWENTA soon enabled on Base. The next logical step for Kwenta will be to replicate its battle tested strategy on Optimism to bootstrap deep liquidity for KWENTA on Aerodrome. This simple yet proven playbook which consists of weekly incentives combined with Protocol Owned Liquidity will aim to complement the KWENTA token launch on Base and ensure deep enough liquidity and sustainable APRs long term.
This KIP proposes commencing a weekly program to deposit up to $10K worth of KWENTA incentives towards a KWENTA-WETH Aerodrome pool and seed a Protocol Owned Liquidity position of $X*
Aerodrome is the central trading and liquidity marketplace on Base. As a sister protocol of Velodrome - one of the largest protocols on Optimism by TVL and users - it can deliver a similar value proposition for Kwenta by serving as its primary liquidity hub on the Base ecosystem.
Aerodrome works by directing AERO emissions to liquidity pools based on votes by veAERO (vote-escrow AERO) holders. Kwenta can use veAERO vote power or voter incentives (bribes) to attract votes and emissions to its liquidity pairs.
Kwenta will also receive rewards in the form of veAERO proportional to its contribution to the Aerodrome flywheel as part of the “Flight School Program”. 10% of Aerodrome's initial token supply has been dedicated towards rewarding partners based on their deposited voting incentives, veAERO locks and volume compared to other projects. A full breakdown of the 3 categories can be seen below.
Rewards are calculated across every 4 epochs and are then distributed as veAERO the following epoch. Over $300K worth of veAERO was distributed to participating partners over the first 2 which means Kwenta will accumulate some veAERO votepower throughout the period it is incentivising on Aerodrome. veAERO rewards for the 3rd round of Flight School rewards can be tracked here.
This KIP entails the Kwenta Treasury DAO to deposit up to $10K worth of KWENTA to the following pool each week and adjust the amount of incentives deposited based on current voting incentive efficiency on Aerodrome in order to maintain stable APR and TVL:
Based on current voting efficiency of about 2.5X, Kwenta can deposit $6K worth of KWENTA in order to attract about $1M in TVL assuming 75% APR (as per on Velodrome).
This KIP additionally entails the Kwenta Treasury DAO to add the following liquidity in the vAMM-USDbC/THALES Aerodrome pool:
- X WETH + matching KWENTA tokens (at time of writing ~ X KWENTA)
Protocol Owned Liquidity (POL)
Kwenta can also allocate some treasury assets towards a small POL position on Aerodrome. Protocols with POL are able to capture and farm a portion of $AERO rewards that are streamed to their pool/s.
With a POL position, Kwenta can lock farmed $AERO as veAERO in order to grow its voting position - Protocol Owned Votepower (POV) - that will direct additional emissions in perpetuity, while earning rewards in fees and incentives. Other protocols that are doing this include Stargate, Yearn, Inverse, QiDAO among many others.
Protocols with POV which are tracked in the Aerodrome veAERO Leaderboard have the flexibility to decide whether to compound their weekly rewards into [a] building more POV or [b] growing their POL - both of which will reduce reliance on voter incentives over time.
Kwenta could focus on locking all farmed $AERO as veAERO initially in order to accumulate significant POV before beginning to compound emissions or rewards into POL. A third option that unlocks with having POL is being able to [c] recycle $AERO emissions as bribes for the following epoch. This is particularly capital efficient during times of high voting incentive efficiency like they are right now.
The Aerodrome team can suggest a comprehensive and optimized strategy utilizing all 3 options should Protocol Owned Liquidity become a possibility.
If this strategy performs above expectations, Kwenta can migrate additional POL to Base to add to Aerodrome to capture a larger percentage of AERO rewards directed to its pools and reduce net costs further. The Aerodrome team will also work to promote Kwenta through its ecosystem and help onboard new users to Kwenta.