What is the true power of blockchain? Permission-less? Global? Well, apart from all of that, true magic of blockchain lies in composability. In the financial world, composability not only makes the systems from the bygone era friction-free, it also exposes us to new possibilities which weren’t imagined before. Smart contracts in very simple terms,
…go beyond simply allowing for instant and verifiable transactions for various applications though — they can also be programmed to interact with each other. In other words, they make crypto programs composable, like building blocks.
How does composability work in DeFi and why should we care about it?
We’re all familiar with tokenized positions that represent a position/ownership which accrues something of value as long as the position is maintained— it could be interest from a pool like on Aave, fees from providing liquidity like on Uniswap etc. These tokens are inter-usable in the sense that LP tokens from Uniswap can be used as collateral in lending protocols.
Remember we discussed about how the size of an economic unit (country, industry etc.) is strongly correlated to the rate at which it provides and utilizes capital (through investment and borrowing) to create more capital producing goods? How would composability look in the tradFi world? Imagine you’re a seller of wood who holds a buffer stock for 10 days. You use this buffer stock as a collateral to rent tools. You further sublease these tools to a mason in return for a fixed payment in terms of cattle fodder. You sell this cattle fodder in the market in return for cash. You use this cash to start another food processing unit and purchase a piece of land. You enter a JV with a manufacturer and share the profits from the business. You use the profit to purchase more wood…well, you get the idea. It’s not difficult to see how wealth is being multiplied in an economy that facilitates these transactions effortlessly. But if you know the traditional world, you know these interconversions take days, or even months. We’re very far from tokenizing all working capital in the world, but composability has made it possible for us to at least think about how this would be done, whenever that might be.
Coming to DeFi, composability allows developers to build their projects and communities without having to build everything from scratch. These projects talk to each other to create a billion opportunities leading to more choice, diverse user experiences, multitude of use cases. Platforms like Ethereum are massive, open sandboxes to build systems that can reach a built-in global audience. As synergies increase, bootstrapping efforts go down resulting in a positive incremental addition to value with every investment.
The money legos of DeFi are powerful — introducing novel mechanisms for yield extraction, complex derivatives, and composable financial engineering. But how the legos interact is confusing, even to the degens. DeFi is complex.
How does this apply to Kepler in the context of a community VC? Let’s look at what the building blocks of a VC are, essentially — be it in any world. A venture fund needs capital to begin with. So it needs people who can provide that capital and a capital raising machinery. Both of these get elegantly solved through the bonding mechanism. Next, it needs a toolkit to manage that capital — which broadly has 3 parts— capital deployment, return realization and return redistribution. While the third part is relatively straightforward to implement through smart contracts, the first and the second part are 2 pieces of the jigsaw that’ve not been entirely solved in the most elegant manner yet. There currently are no widely popular strategies in DeFi that can be modularly used to deploy capital into very young DeFi projects with sufficient confidence. This is the piece that KeplerDAO aims to solve with every step that we take towards making this piece of the project as decentralized as possible.
Let’s keep the details of how we would be deploying treasury liquidity into other protocols aside for now — that would be a very nuanced article in itself. But let’s take a look at how we would set up the perpetual machinery which would allow for participation in treasury investments assuming that they are efficiently made.
The Double-tap machine
Troves are nothing but receipts for depositing KEEPER tokens back into the staking contract which increase on each rebase event. Rebase is triggered upon profit realization in the treasury which, in turn, comes from executing market operations and bonding. As a VC DAO, another major source of profits in the Kepler treasury is in the form of ROIs generated by the Kepler SPV (special purpose vehicle). Needless to say, every time a positive return is realized, an additional rebase would be triggered which would be distributed as profits in the form of Trove/wTrove.
The mechanism that makes this possible is what we’re calling double tap.
To earn additional rebase from the returns of the SPV, a trove holder can stake again all or some of their Trove/wTrove balance into an investment contract that disburses capital to the fund management contract. The investment contract would periodically receive an endowment from the treasury which would solely be used to invest in other protocols though the FMC. It’s worthy to note here that it’s entirely up to an individual of the community who holds Troves to allocate whatever proportion of it to the investment vehicle. The realized returns from the investment would be distributed pro rata to the double-tappers.
What is iKEEPER?
iKEEPERs would be a tradeable class of tokens in the Kepler ecosystem that would reflect individual ownership of the SPV. Owners are rewarded in rebases accruing from appreciation of the enterprise value of the fund which increases when a net positive ROI is made.
A valid concern at this point is — well, what happens when investments go bad and the SPV actually loses money?
- Investments, and specially crypto investments are far from being free of risk. If you want a safe haven for your $$, VC investing is definitely not the right place to start your crypto journey.
- The fund would be managed by a team of professionals who would be voted in by the community and who would largely be compensated through a performance fee. This will make sure incentives are aligned to realize as supernormal a return as possible.
- We will be marking the value of the investment done taking into account various parameters such as market and project riskiness, team, stage of the project, traction etc. For example, suppose the FMT is interested in investing $50k into a gaming project Xylo that is currently on the testnet. One Xylo token costs $0.1 at the time of purchase, which means 500k tokens have been purchased by the FMC. Now, basis FMT’s assessment of the project, these 500k tokens would be marked-to-value (MTV). It could be less, which means the tokens were purchased at a premium. Or it could be more, which means the tokens were purchased at a discount. So any event of change in token value would be baselined to the MTV price of that project token.
4. Depending upon the stage of the project that’s invested in, how the MTV is calculated can differ — for projects already live and established, the tokens would probably be trading on a centralized/decentralized exchange. For these projects, our job is easy, we can take the market price as is. The real upside, is however, in projects currently in stealth/on testnet. How these are scouted and analyzed is going to be the most important task of the FMT. Each project will have its own lifecycle, and hence different rebase amounts and timelines.
An interesting thing to note here is that treasury rebases are a “safer” bet as against the SPV rebase. But also, the SPV rebase would be exponentially higher from the appreciation in value of the project tokens. And because of that, each holder of Trove/wTrove will have the option to ration (“double-tap”) what percentage they want to allocate to the investment contract. Say, you currently have 10 Troves. You can choose to only double-tap on 2 of them in exchange for iKEEPER tokens.
Hence, net rebase R = x*R1 + (Trove-x)*R2.
R1, ordinarily, is a softly increasing function. R2, however, is a probability distribution function the shape and skewness of which will largely depend on how the investments are made. R can be linearly optimized for the more motivated soul later on, but it’ll always be a multivariate linear function, with variables R1 and R2 to begin with. Is there another rebase R3 in the pipeline? Well, we can’t say for sure yet — keep a watch to participate on any decision we take on that front.
This is a simple construct of how we can add modularity to our investment choices and take part in upside from sound strategy decisions that we make as a community. We introduced an additional token in this article which, of course, can be traded so that anyone who just wishes to invest in the SPV can do so. In that sense, iKEEPER tokens are a derivative of Kepler’s SPV of which anyone can become an owner in a capacity that they deem fit.
More interesting use cases on the way till we gear up for Kepler’s mega public sale event scheduled for 3 days starting December 15, 2021. Join our discord community to stay up to date with developments.
A round up of the important timelines from hereon
Dec 15-Dec 18: Copper Launch
Dec 18: Audit Report
Dec 24: Mainnet Launch
Dec 27: Kepler’s Bday Bash
Until then,
KEEP spreading love.
Kepler
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and visit our website keplerdao.finance to become a part of our phenomenal galaxy.
