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.
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.
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.
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.