How We Motivate Users to Move Liquidity on the Kima Platform: Part 1, Incentive Schemes.
In the current Web3 world, moving liquidity between different blockchains is complicated. People use bridges to maintain liquidity pools and increase their utility, but these tools often fail to provide the expected capital efficiency. Most of the liquidity they support is idle.
We’ve designed the Kima platform to enable the smooth and efficient transfer of liquidity and empower our users with cost-effective liquidity opportunities – from active liquidity management to adaptive rewards (more on this later!)
While the Kima protocol can automatically control liquidity pools, it is equally important that we build strong relationships with external liquidity providers to replenish or move liquidity as needed.
How are liquidity providers motivated to move liquidity from over-funded pools to pools that need replenishment on Kima? Keep reading to find out!
Liquidity Movers and Liquidity Providers
Let’s assume a user (Jane) wishes to send USDC from her address on Ethereum to her address on Solana. She wants the transaction to happen quickly, securely, and cheaply – and she wants to be 100% sure the transaction occurred successfully (we call this transaction certainty).
To support Jane in achieving these goals, the Kima protocol should automatically adjust optimal liquidity (K) in the pools per the following rules:
🔷Maintain optimal liquidity in the active pools to allow low-fee, rapid transactions and quickly replenish them if the level falls below K.
🔷Maintain minimal liquidity in low-activity pools (Kp).
🔷Easily identify inactive pools becoming active (i.e., a rise in liquidity demand that approaches K) and identify active pools whose activity is diminishing (approaching Kp).
Our platform relies on liquidity movers and providers to accomplish this.
These short-term liquidity providers can collect bounties in return for depositing funds into prioritized pools. They can choose to withdraw their deposited funds immediately, once demand stabilizes and more liquidity is provided, or maintain their liquidity position in the pool, becoming Liquidity Providers.
These players deposit liquidity into the system for an extended time. They earn a portion of the entire system fee and other income throughout this period.
To efficiently move liquidity from to-pools and align with liquidity players’ motivations, we offer incentive schemes that cover taker penalties, maker bounties, deposit bounties, withdrawal penalties, and more.
In this article, we’ll focus on what taker penalties and maker bounties mean in practice.
Taker Penalties and Maker Bounties
Let’s go back to our previous scenario: we’ve established that our user (Jane) wishes to send USDC from her address on Ethereum to her address on Solana. She is requesting liquidity from the USDC pool on Solana, which is low – below K. When liquidity in a pool goes below K, any user requesting liquidity from this pool is charged a “taker penalty.”
This penalty grows as the extracted amount reduces liquidity further below K. As the liquidity approaches zero, extracting an asset from this pool becomes significantly more expensive. This is the “taker penalty.” Jane is charged a “taker penalty” and receives her assets, minus the taker penalty, on her Solana address.
Similarly, if liquidity is below K (i.e., in the USDC pool on Ethereum), any liquidity mover or provider that deposits USDC into this pool earns a bonus – a “maker bounty.” The bounty amount decreases as liquidity approaches K.
The “taker penalty” is higher than the “maker bounty”, which means the Kima protocol collects (in advance) more than it needs to pay out in bounties for replenishment of the pools.
As long as the liquidity in the pool is above K, depositing into the pool earns no bounty, and withdrawing from the pool does not cost a penalty. In this case, Jane’s only cost to transfer assets is the Kima network fee (0.05% of the transaction total). In summary, her total cost would be:
Fee = Taker Penalty + Network Fee (0.05% of the amount) – Maker Bounty
In the diagram below, the horizontal axis represents the pool’s liquidity. The vertical axis shows the taker penalty and maker bounty.
🔷A taker withdrawing X above K pays no penalty.
🔷A taker withdrawing X below K pays a penalty that increases as liquidity approaches zero.
🔷A maker depositing X above K receives no bounty.
🔷A maker depositing X below K receives a bounty that grows as liquidity approaches zero.
Penalties: Rare Cases
In rare scenarios, a liquidity provider or user can be charged a deposit penalty. This ensures a pool’s balance does not grow too much (becoming out of alignment with the market).
It is also a failsafe mechanism to protect the Kima platform against extreme dumping scenarios. Specifically, when the assets in the pool are stablecoins (e.g., USDT, USDC, or UST), this protects the system against players who seek to dump off-pegged stablecoins in one pool and extract pegged stablecoins from another pool. This event’s overall risk and cost has an upper limit (K1).
In our next article, we’ll talk about Kima’s other incentive schemes – deposit bounties and withdrawal penalties as well as specific cases for liquidity providers.