[KGP-9] Adding KLAY Liquidity Provider

[Kaia_Treasury]

1. Summary
Klaytn Foundation is proposing a loan of 15,000,000 KLAY to a qualified liquidity provider for a period of up to 24 months. While not increasing circulating supply, this loan will help maintain liquidity for KLAY and create a more robust centralized and decentralized exchange market, improving the overall functionality of KLAY on and off-chain.

2. Background
As Klaytn’s native coin, KLAY, is currently listed on various centralized exchanges, the Foundation is committed to listing it on additional exchanges globally.

On the other hand, Klaytn Foundation made a contract with a global liquidity provider firm in the first half of 2022, and with the contract terminated in the fourth quarter in 2022, the Foundation has kept the loan amount unused until now.

3. Proposal
Liquidity providers play a crucial role in offering deep liquidity on both sides of a market, which helps prevent an illiquid order book, leading to a poor user experience and potentially deprioritizing or delisting the asset on an exchange.

Without a liquidity provider, an order book of CEXs tends to become illiquid, which could in turn lead to a poor user experience when interacting with the asset on that exchange. This can lead to an exchange deprioritizing or delisting that asset. Many of the largest centralized exchanges actually encourage an active liquidity provider as a point of reference.

Liquidity providers typically require a loan of assets. Assets being loaned are important to a liquidity provider because it allows them to service both sides of the market. A liquidity provider needs to narrow bid-ask spread around current price to ensure market participants have enough liquidity to suit their desires around accumulating or divesting an asset.

Liquidity providers typically adhere to certain service level agreements (SLAs) covering a range of obligations such as spread, quote depth, uptime and other metrics to continually ensure a smooth functioning market.

In exchange for these services, liquidity providers are usually either paid a fee for services rendered or compensated by a structured ‘call’ option that keeps them aligned with the asset they’re liquidity providing. For the latter, they will either return the asset borrowed for liquidity providing or a cash equivalent at a predetermined strike price.

The Foundation has communicated with highly reputable firms that have references for cryptocurrency liquidity providing, and several firms have expressed interest in collaborating with the Foundation. Once the proposal is passed, interested firms will submit their proposals, and the Foundation will choose the best partner aligned towards Klaytn’s long-term success and sign a contract carefully but quickly.

In conclusion, Klaytn Foundation seeks to introduce a liquidity provider in order to achieve several objectives: broaden the range of exchanges and regions where KLAY can be well traded, establish a system of checks and balances among LPs, and maintain an appropriate level of liquidity within the ecosystem, taking into account the current amount of KLAY in circulation.

4. Execution
To ensure KLAY’s market is functioning smoothly, the Foundation proposes providing a loan of 15,000,000 KLAY to a qualified liquidity provider who will support free-flowing liquidity of KLAY across multiple venues, especially for major CEXs and Klaytn Network DeFi ecosystems. This service will not have any fees, but the liquidity provider will have an option to buy KLAY after the term expires at predetermined prices, aligning their upside for services rendered with Klaytn.

The loan will not be more than 24 month period and this proposal will not increase the circulating supply of KLAY differently than new KCF/KFF disbursements as the 15,000,000 KLAY used for the contract is the exact volume of last year’s repaid loan. After the term, KLAY would be returned to Klaytn Foundation or an equivalent amount of USDC at a price per KLAY that will be determined at contract time.

5. Voting Schedule
The on-chain voting system Klaytn Square will be utilized for the first time next week to conduct the voting process for this governance proposal.

We encourage you to support this proposal as it will lead to a more robust market for KLAY, benefiting all market participants.

[KaiaGovernance]

The on-chain voting on KGP-9 started today. Please visit Klaytn Square to see the progress of the voting.

KLAYTN SQUARE

[Kaia_Treasury]

I addressed the community’s inquiries regarding KGP-9 and would also like to provide a comment here.

KGP-9 background:
KLAY is listed on multiple CEXs, and we’ve observed that relying on a single liquidity provider leaves some CEXs without sufficient coverage.

While our current liquidity provider is effective in enhancing the order book on most active exchanges for KLAY, we’ve noticed their limitations in areas where we aim to expand.

To address this, we’ve decided to add more liquidity providers to reduce untouched areas and introduce some competition, thereby reducing market inefficiencies.

Suitable quantity:
Based on discussions with liquidity providers and insights from other chains, we’ve determined that utilizing approximately 3% of the circulating volume(3.093 billion), which amounts to approximately 92.8 million KLAY, is appropriate for LP purposes.

By adding 15 million KLAY to the existing liquidity providing amount, we will approach the desired 3% ratio. We have no plans to exceed this amount through additional agreements.

Repayment:
Any KLAY loaned that is not exercised through the call option by the end of the contract will be returned to the Foundation. Our disclosures already show the loans and returns, with 27 million out of a total of 1.06 billion loans returned in the 1H22 disclosure.

Additional Comment:
While these liquidity-providing contracts may be repaid to the Foundation, distributing excessive amounts can be inefficient instead of fulfilling its purpose on CEXs. However, we have a lot fewer assets to leverage after burning the reserve, and it’s an important KLAY asset for us as well. We present this proposal after careful consideration to minimize outflows.

[Jay_Swapscanner]

안녕하세요. 스왑스캐너 팀입니다.

스왑스캐너팀은 KGP-9 안건에 대하여 찬성 투표 하였습니다.
전체 투표권의 약 8.84%에 해당하는 13표를 행사였습니다.

말씀 주신대로, 많은 CEX에 상장되어 있는 KLAY에게 MM은 필수적입니다.
다만 단순히 MM을 한다가 아닌, 정말 믿을만하고 잘 하고 신경 써줄 수 있는 업체와 MM을 진행해야 합니다.

이에 추가로 재단에 요청합니다.

계약을 진행하려 하는 MM업체가 정말 믿을만한 업체인지, 전략은 어떻게 되는지 최소한 GC들에게 한해서라도 프라이빗하게 더 많은 정보가 공개되어야 합니다.

시장에 대한 이해도가 높은 스왑스캐너와 같은 전문 GC들과 함께 믿을만한 업체 선정에 적극적으로 참여하겠습니다.
(매수를 위한 Fiat에 대한 동원 전략등에 대한 필수적인 내용들에 확인이 필요합니다.)

메이저한 CEX에 집중적으로 MM하는것이 필요합니다. 그러나, 1500만개의 KLAY로는 의미있는 MM을 할 수가 있는 수량이 아닙니다.

과거부터 이미 나가있는 훨씬 많은 물량의 KLAY를 활용한 MM은 결과적으로 실패하였고, 제대로 케어조차 되고 있지 않습니다.
이미 많이 나가있고 의지가 없는 MM물량이 현저히 적은 신규 MM물량과 함께 한다면 MM결과가 의도대로 흘러가지 않을 수 있습니다.

기존에 나간 MM물량에 대한 계약기간 및 조건을 확인하고 조기 상환시키고,
이번에 신중하게 검토하여 선정하는 신뢰있는 MM업체에 조기 상환된 물량까지 포함하여 더 현실적인 MM 플랜을 공유받았으면 합니다.

프로젝트 재단과 MM팀이 합을 맞추는것이 굉장히 중요합니다. 좋은 로드맵과 결과물이 잘 활용 되었으면 합니다.

재단 및 MM팀 그리고 정보를 듣게되는 GC들에 대한 KLAY 정보 보안 및 거래관련 계약을 철저하게 체결하고 강화하여, 이러한 전략을 강화하길 요청합니다.

항상 고생이 많으십니다.
감사합니다.

[EZ_Klaytn]

Hey Jay. Thanks for sharing your view. Could you post in English again so that it can be shared with other non-Korean community members?

[EZ_Klaytn]

Also, could you help us understand the rationales of your assertion which is “MMs that utilize the much larger amount of KLAY already out there from the past have failed and are not being properly maintained”?

[Vincent_SKNetworks]

We are in favor of this KGP-9 proposal.
However, due to the follow-up process related to the staking tracker address change, we will not be able to participate in this vote.
This is the first on-chain voting, and I wonder what it would have been like if all the GCs were ready.

And It would be great if the Foundation could elaborate a bit more on this matter. (Overall history and status of MM, information on new companies currently under review, etc.)
Of course, since this is a sensitive issue, there must be mutual trust in security if necessary.

With this decision, we hope that KLAY will be traded more soundly and the ecosystem will expand.

We will always support you and contribute to the development of Klaytn.

thank you