Shifting incentives towards TBTC v2 and Coverage Pools

Terminology

  • Vending Machine - the new set of contracts which, when deployed, will enable a mechanism to mint and unmint TBTC v2 tokens by depositing TBTC v1 tokens
  • TBTC v2 - the token minted from the new vending machine, and eventually from the tBTC v2 bridge
  • TBTC v1 - the token minted from using the tBTC v1 Bridge currently operating on Ethereum and the Keep Network
  • tBTC v2 Bridge - the new set of contracts which, when deployed, will enable minting of TBTC v2 on Ethereum with BTC
  • Threshold Network - the network formed from the merger of Keep and NuCypher, and on which tBTC v2 Bridge will be deployed
  • KEEP-only Coverage Pool - the new set of contracts, which, when deployed, will enable a buyer of last resort for TBTC v1 tokens on the Keep Network

Shifting incentives towards TBTC v2 and Coverage Pools

In order to prepare for a successful TBTC v2 token launch, the coverage pool launch, and the tBTC v2 bridge launch on Threshold Network — Keep Network should change its incentives.

Keep has been working on a safe upgrade path for the eventual launch of the tBTC v2 bridge on Threshold Network. This proposal attempts to solve for multiple positive outcomes:

  • Launches a v2 TBTC token early so so we can start working on integrations with major networks
  • Allows for a graceful unwinding of the tBTC v1 bridge when the tBTC v2 bridge is launched
  • Changes liquidity incentives so we can reward behavior that we need for the new network and bridge
  • Transitions the v1 tBTC bridge to be secured by our KEEP-only Coverage Pool.

What Keep does now

  1. Every week, Keep allocates 25k (TBTC/ETH) + 170k (KEEP/ETH) + 250k (Saddle stableswap) = 445k KEEP of liquidity rewards.
  2. Once a month, Keep allocates 200k KEEP for a KEEP-only pool.

What Keep should change

  • Cut off rewards to ETH/TBTC completely (25K KEEP)
    • This is debatable, but it seems to be giving no value to the ecosystem to have this liquidity
  • Move rewards from v1 TBTC stableswap pools to a new v2 TBTC stableswap pool on Saddle (250K KEEP)
  • Move KEEP-only pool rewards to our Coverage Pool when it’s deployed (200K KEEP)
  • Transition the rewards from ETH/TBTC pool to some mixture of KEEP/ETH, Saddle v2 stableswap, and our Coverage Pool.

Reasoning

As mentioned above, launching the TBTC v2 token with incentives unlocks early growth for TBTC v2 and smooths out the upgrade path to switching over to the new tBTC v2 bridge on the Threshold Network. Coverage Pools enables us to incentivize more TBTC v1 minting in the short term, which can grow the pool of TBTC v2 in existence.

If a liquidation were to happen, the TBTC v2 can easily be unminted to v1 and used for a redemption. But the idea is to hold as much in TBTC v2 as possible and grow the adoption of the token across the DeFi landscape until the bridge launch later this year. This way the v2 tBTC bridge will be usable everywhere when it launches on v2.

How the v1 <-> v2 TBTC vending machine works

In v1 a user can deposit BTC to receive a non fungible TDT token specific to the Keep that holds the users deposit. The user can then exchange the TDT token for a fungible TBTC v1 token through a vending machine contract.

TBTC v1 is always backed by BTC.

A new vending machine contract to exchange TBTC v1 for TBTC v2 and unminting TBTC v2 for TBTC v1 will be deployed. This means that TBTC v2 tokens that are minted by the vending machine contract are backed by TBTC v1 tokens held in the vending machine contract, which are backed by BTC held by the Keep created for the deposit.

Once the tBTC v2 bridge is released users will be able to mint TBTC v2 directly with BTC.

TBTC v2 will always be backed by either BTC or TBTC v1 that is in turn backed by BTC.

Overview of the minting mechanism

  • Everyone can mint TBTC v1-> TBTC v2 and unmint TBTC v2-> TBTC v1 WITH or WITHOUT a fee
  • The DAO can raise or lower the redemption fee – this is important in case we want to pause unmints
  • This strategy should be active all the time until the tBTC v2 bridge is ready.
  • Holders will migrate to TBTC v2 because there will be incentives there.
  • Holders will migrate to TBTC v1 in case of a collateralization ratio drop.

Proposed High Level Timeline for Rewards Transition

  • Launch the TBTC v2 token, transfer ownership of the minting fee to the DAO
  • Move rewards from where they’re unnecessary to where they’re needed the most. All v1 TBTC pools are no longer useful, and we need to incentivize v2 TBTC pools in order to get people to lock up their v1.
  • Launch the KEEP-only Coverage Pool
  • Move rewards from KEEP-only pool to the KEEP-only Coverage Pool
  • Maintain rewards for KEEP/ETH pool because liquidity is essential for proper functioning of KEEP-only Coverage Pool
  • Decide how to allocate the rewards freed from shutting down the ETH/TBTC pool rewards
8 Likes

Thanks for all the work @benlongstaff! I think this is a good proposal, and gives v2 a head start.

Do you know if this is taken into account in the v1 coverage pool liquidation auction bot. So that it’s attempting to buy v2 and unmint to v1? Or would it want to buy v1, and someone would have to unmint to v1 first.

1 Like

Thanks for the proposal @benlongstaff! It makes a lot of sense, and the background you’ve laid out is very helpful.

I support this, with the modification proposed by @evandro_saturnino here, which would retain the current incentives of 25k KEEPs weekly in TBTC/ETH pool.