Understand KeeperDAO and its token ROOK
Original Title: "DeFi New Playbook | 3-Minute Guide to keeperDAO Liquidity and Arbitrage Mining Mechanism"
Original Source: The DeFi Way
Introduction
KeeperDAO is an economic experiment that received seed funding from investment firms such as Polychain Capital and Three Arrows Capital in July this year. For a detailed description of the project, you can refer to its whitepaper. Please note that the KeeperDAO project is evolving, and while it has been audited by auditing firms, users are advised to research and understand the risks associated with the project before deciding to participate.
ROOK Token
The KeeperDAO system needs to align incentives for two key stakeholders: Liquidity Providers (LPs) and Keepers. The motivation for liquidity providers to provide assets is evident, as KeeperDAO abstracts the financial and technical complexities of participating in liquidation and arbitrage strategies, allowing participants to profit.
On the other hand, Keepers also need incentives to maintain the infrastructure for liquidation and seek arbitrage opportunities. Keepers are encouraged to participate in the liquidity pool, but without additional incentive measures, the system could easily suffer from free-rider problems, where everyone wants to share the profits but no one is willing to work. In practice, a very optimistic assumption is that any participant will be able to provide enough assets to the pool to make everyone worthwhile as a Keeper. Thus, a mechanism is needed to incentivize long-term and sustainable Keeper participation.
We introduce the ROOK token, which acts as a governance token within the KeeperDAO system. As an ERC20 asset, ROOK allows token holders to propose and vote on all protocol upgrades, manage profit sharing between LPs and Keepers, and propose new system improvements. We align with the idea of gradual decentralization and aim to transform the protocol into a decentralized autonomous organization (DAO) supported by a native token.
Initial ROOK Token Distribution
The initial token supply is 1,000,000 ROOK, with all ROOK tokens being unrestricted at launch and should be considered as part of the circulating supply. However, as ROOK will transition to an inflationary model in the future, the exact total supply of ROOK cannot be determined at this stage. As per the plan, future ROOK rewards will be subject to governance changes, allowing protocol participants to adjust the inflation parameter over time.
Liquidity Mining & Arbitrage Mining
The primary mechanism for distributing initial ROOK tokens to the community is the liquidity mining and arbitrage mining contracts outlined below. This contract will hold 200,000 ROOK tokens (with rewards of 60,000 ROOK to LPs and 140,000 ROOK to Keepers) and will distribute rewards to community members staking ETH, WETH, USDC, renBTC, and DAI. Through the reward mechanism, early participants will be incentivized to engage in providing liquidity, arbitrage trading, and liquidation, with both Keepers and LPs benefiting from KeeperDAO's future growth.
For Liquidity Providers (LPs):
For LPs providing assets to pools during mining, rewards will be distributed proportionally based on the ownership percentage of the total assets in a single pool, with rewards blocks ranging from 11190930 to 11784518.
It should also be noted that the reward for each asset pool is independent, which means that providing $100 worth of BTC to the BTC pool may have a different reward than providing $100 worth of ETH to the ETH pool, and the reward is calculated and distributed per block. The interface for depositing and withdrawing assets can be accessed as follows: https://app.keeperdao.com
For Liquidators (Keepers):
We have introduced "Arbitrage Mining" for early liquidators (keepers) to carry out bootstrapping activities in the protocol's initial stages. For keepers who joined during the launch phase, rewards will be proportionally allocated based on the percentage of total profits returned to the asset pool, and rewards will be distributed from block 11191865 to block 11790005.
We believe that providing rebates to keepers in the form of ROOK tokens can financially offset the conversion costs for high-performance liquidators joining the collective management pool. This also has a dual benefit of creating a fair token distribution directly based on revenue contribution for participants.
Details
Total ROOK Reward: 200,000 ROOK (20% of the initial token supply).
Block Reward: 30% to Liquidity Providers, 70% to Keepers.
Liquidity mining rewards are distributed per block, while arbitrage mining rewards are distributed weekly, as arbitrage mining takes longer and large settlements (which KeeperDAO greatly contributes to) do not happen frequently.
daily_block_reward = 2000 lp_daily_block_reward = daily_block_reward * 0.3 arb_daily_block_reward = daily_block_reward * 0.7
ROOK rewards are evenly distributed in the pools, meaning mining rewards for different asset pools will vary depending on the size of each pool.
The daily ROOK reward allocation for a single asset pool is defined as:
daily_block_reward / num_pools
The liquidity mining formula is:
lp_reward = (individual_lp_deposit_pool_A * total_lp_deposit_pool_A) / num_eth_blocks_in_day
The arbitrage mining formula is:
arb_reward = pool_reward * individual_arb_profit_pool_A / total_arb_profit_pool_A
Deposit Fee
Staking users are required to pay a 0.64% "instant fee," which will be passed on to the previous staker, incentivizing sticky liquidity and discouraging frequent deposits and withdrawals. We hope this will help bootstrap the initial liquidity pool, as ROOK rewards are skewed heavily toward the liquidator keepers (as their job is more involved).
Early Liquidity Providers
From the initial dashboard release date (July 18th) to now, the liquidity provided to the protocol has been occupied solely by one (internal) liquidator bot, with all earnings of this bot returned to the liquidity pool.
However, recognizing that the current v1 protocol does not re-stake funds idling when not used for other yield-generating platforms/lending platforms, early liquidity providers effectively paid the opportunity cost of capital to KeeperDAO. As such, the team will allocate a 2% ROOK token reward (20000 ROOK) to early liquidity providers, with participation from UTC 12:00 AM on July 19th to UTC 7:00 AM on November 3rd (blocks 10486594 to 11190930).
Future Roadmap
ROOK holders will be able to manage this precise threshold and allocate funds to different yield-bearing protocols. This way, anyone can propose a merge, and ROOK holders can allocate funds based on (a) risk, (b) reward, and (c) how much impermanent loss they are willing to accept.
KeeperDAO will continue to evolve, with some features currently in development and slated to be added to future iterations:
ROOK holders will have the ability to delegate their ROOK tokens to a liquidator keeper to incentivize/deter behaviors on-chain smart contracts cannot autonomously capture (e.g., ensuring the keeper triggers an off-chain adversary and ensuring the keeper does not act untimely), as well as expanding transaction scope beyond single-block trades. KeeperDAO is capable of preemptively running attacks against DeFi protocols and safely returning funds to the appropriate party. It allows users to route their liquidity through dedicated agents for either trading or lending. These agents automatically capture any profits that can be extracted from arbitrage or liquidation and return these profits to the user (see "The Dark Forest" in the whitepaper). Continuing to research a general MEV solution to capture as many opportunities as possible.
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