Klaytn Tokenomics Optimization Governance Proposal – Securing a Sustainable & Verifiable Token Economy
TL;DR:
- As of February 2023, the total supply of KLAY, including the amount issued during the Token Generation Event (TGE) at the launch of the Klaytn mainnet and the amount generated from block rewards, totals approximately 11 billion KLAY, of which approximately 3.073 billion KLAY is currently in circulation.
- To secure a more sustainable token economy, the Klaytn Foundation has proposed the initial burn and removal of 5.28 billion KLAY that has not been used in the last 3 years and 8 months, out of the initial issuance reserve of approximately 7.48 billion KLAY. An additional 2 billion KLAY will be burned and removed from supply in 3 years if no use case is found in collaboration with Klaytn’s Governance Council (GC).
- The Klaytn Growth Fund (KGF) and Klaytn Improvement Reserve (KIR) will merge and be re-established as the Klaytn Community Fund, while a new operational fund, the Klaytn Foundation Fund will be established. The GC will lead all reviews and approvals, all to be conducted in public forums.
- With the long-term goal of establishing KLAY as a deflationary asset in mind, we will continue to support the growth of KLAY demand while managing KLAY supply by implementing management models that will allow more visibility into token emissions.
- The GC will vote on the KLAY Tokenomics Optimization Proposal (KGP-6) from February 22nd to 28th.
As a utility token, KLAY serves two primary functions on the Klaytn network: as a means of gas fees for transactions, and as a reward for ecosystem contributors who contribute to the development and expansion of the network. To be an effective incentive for ecosystem participants, KLAY’s tokenomics, which includes its supply and demand model and policies, must be well-established. In this article, we will assess the current state of KLAY’s tokenomics and propose optimizations that can help Klaytn develop into a sustainable decentralized network.
1. Current Status of KLAY’s Tokenomics
Together with the launch of the Klaytn mainnet, 10 billion KLAY was issued at genesis, with additional KLAY being issued per block as block rewards. Initially, 9.6 KLAY was issued per block, amounting to around 300 million KLAY per year. However, to optimize the level of KLAY emissions, the [KGP-3] Reduction of Klaytn Block Reward proposal was proposed and applied to Klaytn’s Cypress mainnet on November 13, 2022. Since then, emissions have been reduced to just 6.4 KLAY being issued per block, totaling approximately 200 million KLAY annually.
As of February 19, 2023, the total supply of KLAY, which includes the initial supply at genesis and annual minting from block rewards while excluding token burns, is approximately 11 billion. Over 75 million KLAY has been burned to date through strategic buybacks and the burning of gas fees. Currently, around 3.073 billion KLAY is in circulation. The distribution of total supply versus circulating supply is as follows:
Of the total supply, the following five KLAY wallets are not included in the circulating supply. These are defined below:
- 0xAfD197d383453b08B7c1509BdB4B6afEe9F66578
- Undesignated initial reserve supply.
- 0x5678300abc1f599d865c3525df851b3902c88266
- Remaining reserve of initial supply, with a portion having been used to fund ecosystem initiatives and projects.
- 0x58e53a72DF8982D9A2103fD064951c39448223E6
- Remaining service fee to be paid to GroundX for various contractual services – infrastructure development, network operation & management1
- 0x278e6332d69eed782784d21802e3504a64a16456
- Remaining KGF funds from inflationary issuance
- 0x3d803a7375a8ee5996f52a8d6725637a89f5bbf8
- Remaining KIR funds from inflationary issuance
At present, KLAY serves as the gas fee for transactions on the Klaytn mainnet and is integral to the deployment and operation of diverse DApps. In the past 18 months, considerable ecosystem resources, including the initial issuance of KLAY, KGF, and KIR, have been devoted to fueling the ecosystem’s exponential expansion. However, the present demand for KLAY2 falls short of the available supply, creating a supply-demand imbalance.
2. The Road to Sustainable Tokenomics
To ensure the sustainability of KLAY’s tokenomics, it is imperative that we reduce supply and increase demand. As a way to expedite the road to a more sustainable token economy, the Klaytn Foundation is proposing the burning of uncirculated KLAY (hereinafter referred to as “Reserve”), enhancing transparency in information disclosure, and modifying the management structure of ecosystem resources. KLAY token inflation is largely attributed to the circulation of new token supply, while deflation is wholly attributed to demand and use-cases. To pursue the goal of deflationary tokenomics, the KLAY reserve supply represents potential inflation, thus the burning of reserves can be translated into a considerable decrease in future inflation, allowing token economy participants more visibility.
2.1 Proposal to Burn 73% of Reserve3, with Remaining 27% to be Burned in Three Years
Of the 7.478 billion, 0.197 billion KLAY has already been designated for use as service fees for GroundX per previously agreed contractual terms. This amount will be stored in a separate wallet and any transaction will be conducted transparently (Reserve 3 wallet).
Of the remaining 7.281 billion KLAY tokens in reserve wallets, the Klaytn Foundation is proposing the initial burn and removal of 5.281 billion KLAY from supply.
The Klaytn Foundation will also propose to designate the remaining 2 billion KLAY as a “KLAY Value Creation Reserve” – to be used only for eco-system opportunities and use cases that will directly help facilitate deflationary tokenomics. Approval regarding any kind of expenditure of the reserve (regardless of amount) will sorely lie on the GC, and all discussions and decision making regarding the use of the KLAY Value Creation Reserve will be conducted via public forums and on-chain voting, all through the Klaytn Square governance portal. If the Foundation and GC do not reach a consensus regarding opportunities and use-cases within 3 years, the 2 billion tokens in the KLAY Value Creation Reserve will also be burnt entirely, effectively removing a total of 7.281 billion KLAY from the total KLAY supply (approximately 66% of current total supply).
In the next part of this article, we will discuss the new operational plan for the uncirculated KGF and KIR funds, as well as the plan for funds generated via block rewards.
2.2 Changing the management structure of ecosystem resources
Previously, the Klaytn Growth Fund (KGF) was used to support services to grow the Klaytn ecosystem, and the Klaytn Improvement Reserve (KIR) was used to build the ecosystem’s public infrastructure.4 However, due to the increasing overlap between the two areas and the need for GC participation and transparency in both KGF and KIR processes, we have concluded that the distinction is no longer necessary.
Proposed Changes to KGF and KIR5
We will merge KGF and KIR, and reorganize the combined funds into the Klaytn Community Fund (KCF) and Klaytn Foundation Fund (KFF). Under this new structure, we will increase the proportion of funds that can only be spent with GC approval, and provide advanced notice to our community of all plans to spend ecosystem funds. As a result, any and all expenditure or liquidity injections from the uncirculated supply of approximately 450 million KLAY and the inflationary supply of approximately 100 million KLAY per year will be subject to review and approval by the GC via public forums on Klaytn Square. This will ensure that all ecosystem participants are aware of the impact of spending ecosystem funds in advance.
With the upcoming change to staking-based on-chain voting, KLAY holders will be able to delegate their voting rights by entrusting their staking to the GC.
Klaytn Community Fund (KCF)
The Community Fund is divided into four main categories of use:
- Rewarding Proof of Contribution: The KCF will provide follow-up support, such as gas fee support to projects that have made significant on-chain contributions to the Klaytn ecosystem among services that have already been developed.
- Building our Developer Community: The KCF will support various initiatives including hackathons, development education programs, collaborative research with the industry, and collaboration with various DAOs to foster and grow the Klaytn developer community.
- Fostering Ecosystem Services and Infrastructure6: The KCF will support essential ecosystem infrastructure, alongside the development of services with clear utility and provide marketing support.
- Klaytn Eco Fund Indirect Investment: The KCF will make indirect mid-to long-term investments7 by entrusting specialized crypto VCs, and most of the profits generated upon subsequent investment recovery will be returned to the Klaytn ecosystem.
The administration of the Klaytn Community Fund follows a process in which the GC reviews and approves the use of funds. The Foundation will submit a budget proposal for each category to the GC for approval. Within the approved budget, each specific use will be reviewed and approved again by the GC. In the future, the Foundation plans to establish ‘subcommittees’ to utilize the expertise of the GC to guide decision-making. Additionally, the Foundation is exploring the implementation of an incentive system to encourage GCs to actively participate in the decision-making process for the use of ecosystem resources.
Klaytn Foundation Fund (KFF)
The Klaytn Foundation Fund is divided into two main categories of use:
- Ecosystem Support8: This includes providing minor financial assistance, securing new GC members, liquidity provisions, and developing / funding services led by the Foundation.
- Foundation Operations: This includes operating expenses such as development, accounting, infrastructure operations, marketing, and labor, as well as financial management and investment attraction costs.
The execution of the Klaytn Foundation Fund will follow the process whereby the Foundation will submit budget proposals for each category to the GC for approval. To enable the swift execution of ecosystem support and Foundation operations, the Foundation may make executive decisions on a case-by-case basis. To ensure transparency, we will provide regular detailed expenditure disclosures detailing how and where the funds are used, as well as the amounts spent, and solicit feedback from the GC and the community.
GC Block Generation Reward Proposal
Regarding GC rewards, here is a summary of the previously approved [KGP-2] A New GC Reward Structure to Abolish the Gini Coefficient and [KGP-3] Reduction of Klaytn Block Reward.
Going forward, according to KGP-2 and KGP-3, GC rewards will be divided into Block Proposer Rewards and Staking Rewards. These rewards will account for 10% and 40% of the total block rewards respectively. This change will be implemented through the Kore hardfork, which is currently under preparation.
2.3 Increased Transparency
Since Q3 2022, the Foundation has been proactively sharing its quarterly KLAY token expenditure reports, detailing various ecosystem projects and teams that have received financial grants through its blog.
Moving forward, the Foundation aims to improve transparency in two ways:
- Proactive Disclosure: The Foundation aims to disclose the budgeting and GC approval process for the Klaytn Community Fund and Klaytn Foundation Fund via Klaytn Square, enabling ecosystem participants to know in advance how and when ecosystem resources will be spent.
- External Channels for Disclosure: The Foundation aims to leverage 3rd party disclosure channels to provide objective information containing various perspectives, in addition to the Foundation’s official communication channels. By creating a more accessible environment for people to access such information, the Foundation hopes to increase interest and participation in the Klaytn ecosystem.
3. Long-term Direction of Tokenomics
3.1 Mid to Long-Term Model
The ultimate goal of KLAY’s tokenomics is to establish KLAY as a deflationary asset. Ultimately, demand for KLAY (use cases, increased transactions) must be higher than the amount supplied in order for KLAY to become a deflationary asset. The long-term goal is for the ecosystem to operate sustainably with its own revenue, without generating inflationary quantities.
To achieve this, the Foundation is working on implementing management models that will allow more visibility into token emissions. As a part of this effort, the Foundation will be revising KLAY’s token release schedule9, among other initiatives. This will be discussed in detail in a separate article to be published at a later date.
3.2 Optimizing Ecosystem Funding Processes
As stated in previous announcements, starting from Q4 2022, additional KLAY expenditures were suspended due to increasing macro / market risks, and in turn risks to the Klaytn ecosystem. In addition to this suspension, most existing grants and investment contracts have been postponed or canceled.
Moving forward, the release of KLAY tokens into circulation will be strictly monitored and managed based on revised mid- to long-term tokenomics models and distribution policies. KLAY release policies will be based on a comprehensive analysis of market conditions, Klaytn node operation, and KLAY transaction volumes, with potential KLAY token releases being updated on a regular basis.10 Furthermore, as aforementioned, as the GC approval process for ‘Klaytn Community Fund’ expenditure is established, it is expected to contribute to the effective management of token emissions and supply.
3.3 Increasing KLAY Demand
Given that KLAY demand can be defined as ‘the utilization level of KLAY’, there are two main ways to increase demand: through increasing platform revenue and leveraging return on investments.
Among platform revenue streams, transaction fees are KLAY’s main utility. To increase on-chain interactions, efforts are needed to foster meaningful services that already exist in the ecosystem, or to attract and increase the use of new services. The Foundation will support DApps that require onboarding by offering streamlined development APIs and libraries, while exploring more collaborations, especially with DApps that look to utilize KLAY as their main utility token.
The Foundation looks to further increase KLAY demand by collaborating with major portfolio projects that the Klaytn Foundation has already invested in. At the same time, the foundation will look to help partner services reach global audiences, further growing KLAY demand.
The Foundation also aims to increase the utility of KLAY beyond transaction fees by securing necessary and frequently-used infrastructure services, such as oracles, and creating structures where KLAY can be used to access and utilize said services, further increasing transactional utility, leading to more gas burns.
With regard to increasing returns on investment, the Klaytn Eco Fund is an example of an investment activity that generates returns for the ecosystem. By investing in high-growth potential projects necessary for the Klaytn ecosystem, the Fund will return the investment income to the ecosystem and leverage said returns to expand KLAY demand.
4. Next Steps
The KLAY tokenomics optimization proposal (KGP-6), as described above, will be voted on by the GC and implemented if passed. The detailed GC voting schedule is as follows:
February 22: Submission of voting agenda (https://govforum.klaytn.foundation/)
February 22-28: Voting window
Voting begins on February 22 at 09:00:00 KST
Voting closes on February 28 at 23:59:59 KST
March 1 onwards: Implementation of voting results
The KLAY tokenomics optimization proposal outlined in this article introduces crucial changes that are vital for maintaining a sustainable and thriving Klaytn ecosystem. We kindly invite your interest and support for Governance Proposal KGP-6, which pertains to the tokenomics optimization proposal.
