Kinetic Money is an auto-repaying loan protocol on Terra that enables users to earn future yield on collateral in present time without risk of liquidation. One prevailing issue in DeFi is capital efficiency. While there are many opportunities for users to earn significant yields for staking and locking their digital assets in a variety of protocols, there is an opportunity cost of not being able to deploy those assets elsewhere. With Kinetic, users can deposit their digital assets into a smart contract as collateral and immediately withdraw a portion of future yield that this collateral will earn over time. This creates an extra dimension of capital efficiency by giving users access to their future yield instantly.
There are many different strategies throughout DeFi that users can deploy to earn significant, low-risk yield. One of the most popular pathways is through Anchor Protocol. In short, Anchor acts like a high-yield savings account in which users simply deposit stablecoins (i.e. $UST) and earn approximately 20% APY. One of the tradeoffs, however, is that this capital in a sense becomes locked. That is, in order for the user to earn the yield provisioned through Anchor, their assets must remain deposited within the protocol. This presents an opportunity cost and users must make a tradeoff between choosing to keep their assets locked in Anchor to earn a passive yield or deploy them elsewhere to potentially achieve a higher rate of return than 20%. Moreover, there is also a temporal component of realizing this yield. Even if a user does not wish to deploy their capital elsewhere, they must must wait for the yield to accrue on their deposit before they have access to it. For instance, if a user deposits $10,000 into Anchor, they will earn approximately $2,000 in yield during the first year, but must actually wait for 12 months for it to fully accrue. Currently, there is over $12B in $UST locked in Anchor that users are letting sit idly.
Kinetic Money presents an opportunity for users to unlock their capital and gain immediate access to its future yield. This is achieved without risk of liquidation and presented in a very user-friendly way. The way this process works is quite seamless: users deposit digital assets into a Kinetic smart contract as collateral, choose how much of the future yield that they want to borrow from their collateral, and then receive that amount in $kUST. While users deploys this capital elsewhere, their deposited collateral continues to earn yield in the background and automatically repays their debt position over time.
In general, this approach is quite similar to the auto-repaying loan primitive pioneered by Alchemix. Just like Alchemix’s use of $alUSD, Kinetic also employs a synthetic stablecoin. $kUST is Kinetic’s native synthetic stablecoin and represent the future yield of deposited collateral. It enables users to retrieve near instant tokenized value against their deposits and can be deployed in the same way that traditional stablecoins can be deployed. Users can retrieve their collateral at any time, by either repaying their outstanding debt position or by simply waiting until the gained yield covers the debt position. In the former case, this debt position becomes an auto-repaying loan.
In the meantime, Kinetic deploys the deposited collateral to different yield-bearing strategies. This allows the protocol to function properly and to generate revenue. Kinetic’s approach creates more capital efficiency throughout the ecosystem.
Looking deeper into the mechanic’s of Kinetic Money, there are two primary features. The first of which is the $UST deposit vault. Users deposit $UST into the vault and then can borrow up to 50% worth of the deposited collateral (denominated in $kUST). Kinetic takes this collateral and deposits it into Anchor to earn ~20% APY. This effectively secures the loan on the protocol’s side while allowing the user to earn passive yield in the background while they further deploy their borrowed yield. Users then repay the debt position in addition to a loan fee. The second feature is the $aUST vault. This operates in a very similar manner to the $UST vault, but allows Anchor users to borrow against their idle $aUST through an auto-repaying loan. Theoretically any yield bearing asset could be integrated into Kinetic in a similar fashion.
Another interesting aspect of Kinetic is utilizing other yield bearing assets to accelerate repayment rate on collateralized debt positions. So users can repay their loans faster by depositing additional yield bearing assets (e.g. $yLUNA) into Kinetic. Kinetic then uses the accruing yield for repayment of the outstanding $kUST (or later other k-Asset) position.
Finally, Kinetic has developed a native swap mechanism (i.e. Phaser) that lets users convert their $kUST to $UST over time and is designed to guarantee that any user can convert their borrowed $kUST back to $UST at a 1:1 ratio, even if the $kUST-$UST pair trades below peg.
Mechanism Design and Tokenomics
$KNTC is the native token of the protocol and its core objective functions are utility, fee-sharing, and governance. Each time yield is collected from Kinetic vaults, the protocol charges an 8% fee and distributes a portion to token holders. Overall, at least 37.5% of this fee is paid to $KNTC holders. In the earlier stages of the protocol, this portion of the fee could be upwards of 88%.
Users can also stake their $KNTC to participate in governance. In return they receive $xKNTC tokens, which functions as an auto-compounding token.
$kUST is another native token of Kinetic and is a synthetic stablecoin derived from $UST. By minting $kUST users can tokenize their future yield. $kUST can then be phased back into UST 1:1 or traded on DEXes (e.g. Astroport). Kinetic has developed the Phaser exchange mechanism to gradually convert $kUST to $UST at a 1:1 peg using harvested yield. This is particularly important for maintaining stability in instances $kUST and $UST are depegged.
In terms of token supply and distribution, $KNTC has a max supply of 100,000,000 tokens, which are released over 3 year period. Kinetic has dedicated considerable allocations to its lockdrop, liquidity bootstrapping, and airdrop efforts. Collectively, these represent 32% of the total token distribution.
Of the remaining tokens, 30.5% will be utilized for staking and liquidity pool rewards.
While the $KNTC token has not officially launched, there are a few interesting aspects that deserve some attention. One of which is protocol fee distribution. Again, Kinetic charges an 8% fee on yield that is harvested from their vaults. 25% of this total fee is distributed into a developer fund. The core focus of this fund is to incentivize ecosystem growth and expansion. In a way, Kinetic has created a flywheel to boost protocol adoption and expand its features that can be replenished in perpetuity. This fund is also capped at $4M and once this has been met, the portion of these protocol fees are redirected back to $KTNC token holders. So the intrinsic value of holding $KNTC will change over time as the developer pool is filled and depleted.
Another important aspect of the protocol is the Phaser exchange. This mechanism is critical to the success of Kinetic, especially in the short-term as the network gains adoption, any failure on its behalf could be quite harmful. If users cannot easily convert $kUST back into $UST, then they will be stuck in seemingly illiquid positions. This problem intensifies as the number of users seeking to convert back to $UST increases. The way that the Phaser is funded is through the yields being harvested from Kinetic’s vaults. More specifically, each time a yield is harvested, the protocol distributes a portion to protocol fees and then distributes the rest of this yield to the Phaser, boosting its liquidity for each harvest. So as long as the yield being harvested is greater than the funds being used to maintain the $kUST:$UST peg, the Phaser’s liquidity will grow. If the yield harvested is less than the funds used to maintain the peg, however, the there is a net decrease in the Phaser’s liquidity. Therefore, ensuring that the Phaser is sufficiently funded at all times will be paramount to the protocol’s success.
One final consideration is Kinetic’s reliance on Anchor. Much of the core design of the protocol is built around Anchor and its 20% yield. Should this yield change, then Kinetic’s ability to function properly may be at risk, especially in terms of loan repayment terms and the Phaser exchange. For instance, if the yield drops to 10%, then inflow of $UST into Anchor will most likely decline. As a result, less users will be in the market to borrow against their future yield. This will have a direct impact to the Phaser’s funding. So if this change were to occur with a large outstanding aggregate debt position, there would be a run on converting $kUST back to $UST. A drop in Anchor’s yield also represents an increase to the repayment duration of user debt obligations (e.g. a drop to 10% effectively doubles the time it would take to repay a loan originally disbursed at 20%). So all of these implications must be carefully considered on a proactive basis. As Kinetic grows over time, however, one way to lessen its reliance on Anchor is to utilize other low risk, yield-bearing strategies and use other protocols to diversify.
Further Reading and Resources
Cryptofunds, market makers, and trading desks can interact with these DeFi protocols with MetaMask Institutional
MetaMask Institutional offers unrivalled access to the DeFi ecosystem without compromising on institution-required security, operational efficiency, or compliance. We enable funds to trade, stake, borrow, lend, invest, and interact with over 17,000 DeFi protocols and applications.
Found this research useful? Connect with the ConsenSys Cryptoeconomic Research team at [email protected]
ConsenSys Software Inc. is not a registered or licensed advisor or broker. This report is for general informational purposes only. It does not constitute or contain any individual investment advice and is made without any regard to the recipient’s objectives, financial situation, or means. It is not an offer to buy or sell, or a solicitation of any offer to buy, any token or other investment, nor is it intended to be used for marketing purposes to anyone in any jurisdiction. ConsenSys does not intend for any person or entity to rely on any facts, opinions, or ideas, and any financial or economic commentary expressed in this report may not be relied upon. ConsenSys makes no representations as to the accuracy, completeness, or timeliness of the information or opinions in this report and, along with its employees, does not assume any responsibility for any loss to any person or entity that may result from any act or omission based upon this report. This report is subject to correction, completion, and amendment without notice; however, ConsenSys has no obligation to do so.