Beneficiary address: F7fq1jMZkfuCuoMTyiEVAP2DMpMt18WopgBqTJznLihLNbZ (Parachain 2000)

Requested allocation: 22,000 KSM

Short description:

This is an application for KSM subsidy using aUSD (Acala Dollar) as a credit lever to bootstrap liquidity on/via multiple parachains and protocols. This will serve as a proof-of-concept for further programs to deploy KSM-based aUSD credit liquidity/reward subsidies into multiple parachains and DApps to bootstrap Kusama and Polkadot’s multichain ecosystem.

Context

KSM is the engine oil of the Kusama ecosystem and the economies surrounding KSM. It is to every KSM holder’s benefit to help increase KSM utilization and the velocity of KSM. We are proposing to collateralize KSM assets to generate aUSD credit, to deploy into applications that utilize aUSD (in turn utilizing KSM) in the form of liquidity and rewards, which will drive KSM-based economic growth and ecosystem adoption. This will in turn drive KSM utilization and further expansion of Kusama’s multichain economy.

We hope this will set a precedent for further programs to deploy KSM-based aUSD credit liquidity/rewards into multiple parachains and DApps to bootstrap Kusama’s multichain ecosystem.

Karura

Karura is a Kusama-based parachain that creates instruments to increase KSM utilization and the velocity of KSM:

1. Acala's flagship product - Acala Dollar (aUSD) is the native decentralized stablecoin of Polkadot and Kusama. It uses KSM and KSM derivatives (on Karura/Kusama), DOT and DOT derivatives (on Acala/Polkadot) as reserve assets and collateral to generate stable currency to be used as a medium of exchange in the decentralized web. aUSD is trustlessly fungible across the Kusama parachain ecosystem (via Karura) and the Polkadot parachain ecosystem (via Acala). It is also a multiplier instrument that increases hodlers' exposure to KSM/DOT. It allows KSM/DOT holders to use KSM/DOT’s value in the Kusama/Polkadot ecosystem services on any parachain without the need to liquidate (selling off) KSM/DOT and without price volatility. Acala aims to integrate and empower aUSD liquidity to parachains and Dapps built-on parachains, and to support web3 adoption, which in return shall increase the velocity and utilization of KSM/DOT.
2. The supporting DApp, Homa Liquid Staking, creates a non-custodial trustless staking pool and an L-Token (LKSM on Karura, and LDOT on Acala) that tracks the KSM principle and the staking yield earned. Proof-of-Stake networks create an opportunity cost for using their network token in other applications versus staking. LKSM allows users to provide network security, earn staking yield, and use LKSM to mint aUSD liquidity to participate in the Kusama ecosystem activities.
3. The other supporting DApp, Karuraswap, provides liquidity pools that support aUSD liquidation, and KSM and KSM derivatives that can be used as collateral. It will require sufficient liquidity to ensure the health and safety of the stablecoin protocol. KSM can also be used as fees on the Karura Network.

Tools to be used to provide liquidity to the above instruments

Taiga Stableswap

Taiga is a synthetic asset protocol designed to enable maximum efficiency for uniform assets on Kusama. Bringing efficient liquidity for Parachains, Liquidity Providers, Traders and Project Teams.

Taiga is built using Substrate Pallets and deployed on Karura. The proposed 3-pool stablecoin swap (“the 3-pool”) will be powered by the Taiga protocol. The 3-pool will bring liquidity from

• USDT natively minted on Statemine and trustlessly crossed to Karura via XCM / OR USDC originated from Ethereum via the Wormhole Portal bridge if USDT @ Statemine is not ready
• USDC originated from Ethereum via the Wormhole Portal bridge
• aUSD minted locally on Karura

Taiga protocol pallets are integrated with Karuraswap pallets to share liquidity across the network and allow cross-DEX trading.

Additional Information

• Website: https://taigaprotocol.io/
• Taiga’s Web3 Foundation Grant: https://medium.com/nuts-foundation/web3-foundation-grants-recipient-stable-asset-by-nuts-finance-f8b1a6ece7c9
• Github: https://github.com/nutsfinance/stable-asset
• Merged on Acala/Karura: https://github.com/nutsfinance/stable-asset/tree/bae3f0c3e664c8b7433fe72efb56a484e7701d08

Wormhole Portal Bridge

Wormhole is a generic message passing protocol that connects to multiple chains including Ethereum, Solana, Terra, Binance Smart Chain, Polygon, Avalanche, Oasis, Fantom, and now Kusama and Polkadot via Karura and Acala. Taiga and Karuraswap will be made available on the Liquid Market of Wormhole for bringing liquidity from other consensus networks into Kusama.

USDC and other tokens bridged in can be made available as Substrate native tokens, and crossed to other parachains as liquidity via XCM.

Additional Information

• Dapp Interface: https://portalbridge.com/#/transfer
• Wormhole Documentation: https://docs.wormholenetwork.com/wormhole/overview-liquid-markets

Kusama’s success depends on the success of parachains connected to it and more so the increasing utilization and velocity of KSM on those parachains. Karura is an infrastructure to deliver on-chain KSM credit and liquidity to the parachain ecosystem, and is highly aligned with Kusama’s ecosystem growth. All of these instruments have a classic chicken-and-egg challenge: it requires liquidity to enable utility, which will then generate more adoption and value.

Amount

We request a total 22k KSM subsidy:

• A 2k KSM liquidity subsidy to mint LKSM then generate aUSD and deploy into the 3-pool as liquidity. This will serve as initial liquidity to help kickstart the pool. The Treasury owns the LP shares with any rewards and fees earned as a result.
• And a 20k KSM reward subsidy to incentivize liquidity of USDT, USDC and aUSD collateralized from KSM-based assets in Taiga stableswap pool deployed on Karura. The reward subsidy will be given out to liquidity providers of the pool based on their share of the liquidity.

The stablecoin (especially aUSD) liquidity can subsequently be used by other protocols and parachains which creates a trickle up effect for KSM velocity and utilization.

The KSM reward subsidy can be directly deployed in its raw form, or (we recommend) mint LKSM then generate aUSD as reward, which:

• Reduces liquidation-pressure of KSM
• Allows cost of generating aUSD be paid for by LKSM staking yield
• If KSM grows in value over time, some KSM can be recouped to extend the reward program or fund other programs
  This can be executed via on-chain governance on Karura as mentioned below in the Managing the Funds section.

Duration of Subsidy

1 Year (52 weeks)

Audits

Taiga protocol was audited with Acala code base (as it’s built in pallets) by SR Labs
https://github.com/AcalaNetwork/Acala/tree/master/audit

Wormhole
https://github.com/certusone/wormhole/tree/dev.v2/audits

Managing the Funds

Karura Treasury has the ability to host multiple accounts that have no private keys and are managed via governance e.g. on-chain referendum. The received funds can be stored in a separate account under the Karura Treasury; deployment proposals can then be voted and executed on-chain.

More details here

Furthermore the Kusama governance can be configured to have full access to this address. Proxies with limited access to the holding address can be controlled by a fund manager/s selected by the Kusama governance.

Other Considerations

KSM Exposure

With the ability to borrow stablecoin using KSM and KSM-based derivatives, we do not need to sell off KSM for liquidity/rewards, and instead we can borrow and keep the KSM holdings. However we will recommend a relatively conservative collateral ratio e.g. 2x or more than the liquidation ratio at the time (to ensure the aUSD vault is still safe even when KSM’s price is halved, the collateral ratio can be even higher to lowering the risk further) when making the deployment.

Staking Rewards

When providing aUSD liquidity/rewards, it is recommended to use KSM to mint LKSM, and use LKSM to generate aUSD liquidity. Then KSM will still be used to provide network security and receive staking yield, which could offset the interest rate for minting aUSD.

Read why LDOT prevents yield competing with network security.

Tracking

The following metrics can be used to track progress

• TVL of the 3-pool
• Track aUSD/USDT/USDC issuance and deployment on Karura and other parachains and protocols
• 7d trading volume for respective pools overtime: targeting $500k.

Live data will be provided for tracking and monitoring upon launch. Dashboards are available here and here.

Below is an indicative allocation of the reward subsidy, and the expected APRs at varied levels of TVLs.

Contacts

Bette Chen | Acala
Terry Lam | Taiga Protocol powered by Nuts Finance
Susu Feng | Wormhole