How xXTKa currently works:
When users stake their XTK in the xToken Management module they will receive receipt ERC20 tokens, xXTKa proportional the the amount of XTK they staked. As fees generated from xToken Management products are harvested they will be distributed to xXTKa holders by being converted into XTK and subsequently distributed to the staking contract.
To incentivize long term staking participation xXTKa is subject to an unstake fee, currently configured to 1.75%. Exiting the staking module is immediate and the fee levied is split among all users remaining the xXTKa module. However XP-7 discusses making changes the unstake fee and distributing a portion of it to the xToken treasury to be better aligned with protocol growth.
The xXTKa module is being incentivized with XTK distributed to stakers from the Community Vesting Pool, which was allocated 50% of XTK total supply at genesis. The current distribution schedule is 1% of XTK total supply to be distributed as incentives over 3 months starting Monday, July 26, 2021.This alone gives xXTKa ~54% APR currently.
There are no risks, besides contract risk involved with xXTKa. Stakers in xXTKa are not subject to any form of slashing and their XTK isn’t really ‘at stake’. Stakers are receiving rewards, yet not providing any value or serivce to the system. Despite having ~$18M worth of XTK (now down to ~$7.5M) staked at the time of the recent xSNXa exploit which resulted in ~$4.5M in losses to xSNXa holders, xXTKa stakers assumed zero losses. Instead XTK from the dwindling Community Vesting Pool was once again used to compensate the losses of xSNXa holders. This is not a sustainable behavior. On top of that the amount of XTK distributed to exploit victims currently falls far short of full remuneration, All of this is causing potential and current xToken users to re-think using the product. The AUM of xToken has been decreasing since the Aug 29 xSNX exploit and it’s not just due to the market doing poorly in general. The outstanding number of xU3LP positions noticeably went down.
To regain trust and confidence in xToken Asset Management products as well as ensuring the long-term sustainability of xToken, I believe an overhaul of the xXTKa module is necessary. My thoughts are as follows:
In return for earning xASSET fees and incentives stakers in the xXTKa module should provide some service or value to the system. To do this I propose we put their XTK ‘at stake’. In the event of a future shortfall, users staking in the xXTKa module would be subject to having their XTK slashed to reimburse the losses incurred by xASSET holders. This slashing percent can be capped as commonly done in various other DeFi protocols such as Aave, and Reflexer for example. Or potentially be able to be entirely slashed such as in dYdX. This method may not necessarily ensure full remuneration for xASSET holders, but at least provides a long-term, sustainable backstop to provide confidence in the product(s). Projects like MakerDAO and Aave also have the last resort ability to mint new tokens in the case that they can’t cover the outstanding shortfall. However I don’t believe this is a viable option for xToken currently, as the project does not yet have a large enough community nor backing of major VC funds that could act as a buyer of last resort like MakerDAO and Aave do.
With the implementation of slashing, stakers should no longer be able to immediately exit xXTKa and a cool-down window will need to be implemented. In the event an exploit happens, stakers should not be able to exit the staking module prior to it being discovered by the team or community and being decided via governance that a slashing will be necessary to reimburse xASSET holders. The exact length of this cool-down window is up for debate, but >1 week would be standard.
Immediately after an exploit the value of XTK and therefore the backstop is likely to decrease dramatically (and has done so each time previously). To counteract this I propose instead of staking pure XTK in the xXTKa module, we introduce the use of LP tokens. An ETH:XTK or stablecoin:XTK LP would significantly dampen the volatility in the value of the backstop, allowing for greater confidence that xASSET users could be reimbursed. This method also has the added benefits of creating a strong liquidity pool for XTK and as such would no longer require a separate allocation of XTK from the community vesting pool for incentivizing that single purpose as has been done in the past. Aave and Reflexer are among the projects that have made use of this method to great success, as seen in the AAVE-ETH Balancer Pool Token and the FLX-ETH Uniswap V2 LP
Seeing as under this proposed system xXTKa holders will be at risk from losses incurred by xASSET holders due to exploits, hacks, oracle issues, etc. a successful governance vote should be required from a threshold amount of xXTKa holders to introduce any new xASSET. It is expected xXTKa holders with their XTK at stake will be more discerning and require higher levels of assurances that the products have been coded and implemented safely and extensive testing and auditing has been carried out prior to launching.
This list is not an all or nothing list and in my view implementing any number of these would go a long way to instilling confidence in xToken Asset Management products for current and potential users. It is also dependent on the launching of the governance/DAO platform first, as such a large overhaul would require buy-in from the community and because the operation of it requires active governance like it points 2 and 4.
I’m also interested in hearing of any other methods that could be implemented to achieve the desired result of increasing confidence in and long-term sustainability of xToken Asset Management products.