New way to play DeFi | Learn about keeperDAO liquidity and arbitrage mining mechanism in 3 minutes

According to the latest announcement released by DeFi project KeeperDAO, starting at 7:00 UTC on November 3, KeeperDAO will launch the initial ecosystem reward plan, distributing a total of 200,000 ROOK tokens to liquidity providers (LPs) and liquidators (keepers), accounting for 20% of the initial total.

This article outlines the KeeperDAO token’s distribution rules, functionality, and role in the protocol.

Introduction

KeeperDAO is an economic experiment. The project received seed round financing from investment institutions such as Polychain Capital and Three Arrows Capital in July this year. For a detailed description of the project, you can read its white paper. Please note that the KeeperDAO project is constantly evolving. Although it has been audited by an auditing company, it is recommended that users first study and understand the risks involved in the project before deciding whether to participate.

ROOK Token

The KeeperDAO system requires adjusting incentives for two types of stakeholders: liquidity providers (LPs) and liquidators (Keepers). The motivation for liquidity providers to provide assets is obvious, and KeeperDAO abstracts the financial and technical complexity of participating in liquidation and arbitrage strategies, allowing participants to profit.

On the other hand, keepers also need incentives to maintain the infrastructure for clearing and finding arbitrage opportunities. Keepers are encouraged to participate in liquidity pools, but without additional incentives, the system can easily cause a free-rider problem, where everyone wants to share in the profits, but no one is willing to work. In practice, the very optimistic assumption is that any one participant will be able to provide enough assets to the pool to make it worthwhile for everyone to be a keeper. Therefore, a mechanism is needed to incentivize long-term and sustainable keeper participation.

We introduced the ROOK token, which acts as a governance token in the KeeperDAO system. ROOK is an ERC20 asset that allows token holders to propose and vote on all protocol upgrades, and manage profit sharing between LPs and keepers and new system proposals. We believe in the concept of gradual decentralization and are committed to transforming the protocol into a decentralized autonomous organization (DAO) supported by the native token.

Initial ROOK Token Distribution

The initial token supply is 1,000,000 ROOK, and all ROOK tokens are unrestricted at the time of issuance and should be counted as part of the circulating supply. However, as ROOK will move to an inflation model in the future, the exact total supply of ROOK cannot be determined at this stage. It is planned that future ROOK rewards will be changed through governance so that protocol participants can find appropriate inflation parameters over time.

Liquidity Mining & Arbitrage Mining

The main mechanism for distributing the initial ROOK tokens to the community is the liquidity mining and arbitrage mining contracts outlined below. The contract will hold 200,000 ROOK tokens ( 60,000 ROOK and 140,000 ROOK for LPs and Keepers respectively) and will distribute rewards to community members who stake ETH, WETH, USDC, renBTC, and DAI. Through the reward mechanism, early participants will be incentivized to participate in liquidity provision, arbitrage trading, and liquidation, and both liquidators (keepers) and liquidity providers (LPs) will benefit from the future growth of KeeperDAO.

For Liquidity Providers (LPs):

For liquidity providers (LPs) who provide assets to the pool during mining, rewards will be distributed proportionally based on the ownership percentage of the total assets in a single pool, with reward blocks starting from 11190930 to 11784518.

It should also be noted that the rewards for each asset pool are independent, which means that providing $100 of BTC to the BTC pool may have different rewards than providing $100 of ETH to the ETH pool. The rewards are calculated and issued on a per-block basis. You can access the interface for depositing and withdrawing assets via: https://app.keeperdao.com

For Keepers:

We have introduced "arbitrage mining" for early keepers, with the goal of bootstrapping activities in the initial stages of the protocol. For keepers who join during the launch phase, rewards will be distributed proportionally based on the percentage of total profit returned to the asset pool, and rewards will be distributed from block 11191865 to block 11790005.

We believe that providing rebates to keepers in the form of ROOK tokens can financially subsidize the switching costs of high-performing liquidators joining the collective management pool. This also has the dual benefit of creating a fair token distribution for participants directly based on revenue contribution.

detail

Total ROOK rewards: 200,000 ROOK (20% of the total initial token supply).

Block rewards: 30% to liquidity providers and 70% to Keepers.

Liquidity mining rewards are distributed on a per-block basis, while arbitrage mining rewards are distributed on a weekly basis because arbitrage mining takes longer and large liquidations (which contribute greatly to KeeperDAO) do not occur frequently.

 daily_block_reward = 2000
lp_daily_block_reward = daily_block_reward * 0.3
arb_daily_block_reward = daily_block_reward * 0.7

ROOK rewards are evenly distributed among the pools, which means that the mining benefits of different asset pools will vary, depending on the amount of assets in each pool.

The daily ROOK reward distribution for a single asset pool is defined as:

 daily_block_reward/num_pools

The liquidity mining formula is:

 lp_reward = (individual_lp_deposit_pool_A * total_lp_deposit_pool_A) / num_eth_blocks_in_day

The arbitrage mining formula is:

 arb_reward = pool_reward * individual_arb_profit_pool_A / total_arb_profit_pool_A

Deposit Fee

Storage users need to pay an "instant fee" of 0.64%, which will be paid to previous depositors. This mechanism can incentivize sticky liquidity and prevent frequent deposits and withdrawals. We hope this will help guide the initial liquidity pool, because the majority of ROOK rewards are biased towards liquidators (because their work is more troublesome).

Early liquidity providers

From the initial dashboard launch date (July 18th) to date, liquidity funds provided to the protocol have only been occupied by a single (internal) liquidator bot, all earnings of which have been returned to the liquidity pool.

However, recognizing that the current v1 protocol does not re-collateralize funds to other yield-generating/lending platforms when idle, early liquidity providers actually paid the opportunity cost of capital for KeeperDAO. For this reason, the official will allocate 2% ROOK token rewards (20,000 ROOK) to early liquidity providers. The participation time is from 00:00 UTC on July 19 to 7:00 UTC on November 3 (blocks 10486594 to 11190930).

Future roadmap

It is expected that at any given time, the KeeperDAO liquidity pool will hold more assets than it uses. For example, the Ethereum liquidity pool may expand to $100 million, but the liquidator keeper may only need up to $10 million. In these cases, KeeperDAO is able to collect excess funds and distribute them to various yield-generating protocols.

ROOK holders will be able to manage this exact threshold, as well as allocate funds to different yield-generating protocols. This way, anyone can propose a merger, and ROOK holders can allocate funds to it based on (a) risk, (b) yield, and (c) the amount of liquidity that is acceptable before yields are reduced.

KeeperDAO will continue to evolve, and there are a few features currently under development that will be added to future iterations:

1. The ability for ROOK holders to delegate their ROOK tokens to a liquidator, the keeper, to encourage/discourage behavior that cannot be automatically caught by on-chain smart contracts (e.g., ensuring that the keeper triggers external adversaries, and ensuring that the keeper does not act inappropriately), as well as to expand the scope of transactions beyond single-block transactions.

2. KeeperDAO is able to pre-empt attacks against DeFi protocols and return funds safely to the appropriate parties.

3. Allows users to route their liquidity, whether for trading or lending, through specialized agents. These agents automatically capture any profits that can be extracted from arbitrage or liquidation and pass these profits back to the users (see "Hidden Game" in the whitepaper).

4. Continue to research universal MEV solutions to capture as many opportunities as possible.