How We Motivate Users to Move Liquidity on Kima Platform: Part 2, Incentive Schemes
Our incentive schemes are essential to liquidity management on the Kima platform. Designed with both users and liquidity providers (LPs) in mind, they not only help ensure the platform maintains deep liquidity but also help maximize its participants’ capital efficiency.
As you know from the previous article, moving liquidity on Kima is a two-sided process.
On the one hand, the platform ensures automatic liquidity management. On the other hand, we also rely on liquidity movers and providers to make liquidity pools function efficiently.
We previously discussed taker bounties and maker penalties as part of the incentives we offer to motivate liquidity movers. Now, let’s explore more of these incentives: deposit bounties, withdrawal penalties, a special case for liquidity providers, and protection schemes.
Incentive Scheme: Deposit Bounties and Withdrawal Penalties
To return to our previous example scenario, let us establish that our user (Jane) wishes to exchange USDC from her address on Ethereum to her address on Solana. If the liquidity is below K and approaching Kp in the USDC-Ethereum pool, she can earn a deposit bounty on her deposit. She will pay zero penalties on her withdrawal on Solana if the liquidity is higher than K or may incur a small withdrawal penalty if liquidity is approaching Kp. In summary, her total cost would be:
Fee = Withdrawal Penalty (if any) + Network Fee (0.05% of the amount) – Deposit Bounty
Incentive Scheme: A Special Case for Liquidity Providers
The Kima protocol prioritizes liquidity provider transactions to secure the liquidity bounty and reduce costs for subsequent withdrawals. This makes bounties easy to win and low-risk, which we believe will encourage liquidity providers to build machines that follow liquidity levels and execute for an optimal profit.
As long as it is easy and profitable for a liquidity provider to deposit an asset and collect a bounty, and if they can do so quickly, we can rely on system incentives to guide liquidity to where it is desired. This ensures the maintenance of at least a level of Kp liquidity for all pools. The high quality of service and the low fees on well-funded pools (with levels above Kp) help contribute to an attractive business case for liquidity providers that earn a portion of the costs.
Incentive Scheme: Protection Mechanisms
Kima has several mechanisms to protect user and liquidity provider income, which we believe motivates them to support/move liquidity pools on the platform.
First, users can define that their transaction is executed only if the total fee does not exceed a max amount (max_fee_limit).
Suppose transactions cannot be executed in the current block due to the fee being too high. In that case, the deposit to blockchain A will be executed, and the withdrawal from blockchain B will be considered for the next block, B, with a retry limit in place.
Similarly, liquidity providers can choose to only deposit a liquidity transaction to blockchain A (no withdrawal on blockchain B or another chain). In this case, they can set a minimal_bounty_limit, under which the system will not execute the transaction. The transaction can also wait for the next A block, with a retry limit.
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