Introducing ParaNotes - regenerative defi for advancing the paraverse

Introducing ParaNotes - regenerative defi to advance the paraverse

This post follows the the state of dotsama that first discussed the relationship between and the issues faced by Free Market Parachains (FMPs) and Common Good Parachains (CGPs).

ParaNotes are an attempt at resolving the underlying tensions between the two, with regard to demonstrating that a more regenerative DotSama economy is possible - one that aligns the long term interests of a relay, a parachain and importantly on-chain organisations (aka creators and artists) who currently play no explicit part in the core value accrual of the ecosystem - and importantly none in any other protocol.

These Substrate native financing instruments utilise on-chain governance, multi-chain interoperability and time delayed proxies to create asset backed loans with multi-chain oversight and a convertible option that aims to better align incentives between three parties - enabling them to build shared value together.

The approach is designed to be as simple as possible, but they also offer potential for more inventive financial engineering that may be advanced by other teams.

What problems do ParaNotes aim to address?

Relay

  • activate under utilised treasury assets.
  • de-risk funding through proxy pallet on-chain oversight.
  • gain exposure to assets of successfully bootstrapped parachains, removing reliance on crowdloans.

Parachain

  • bootstrap sustainable and predictable funding aligned to long term growth.
  • remove need for VCs or marketing to retail or a race to pump and dump CEX listings
  • ability to incubate teams with ideas but no funding who drive narrative, utility and adoption

On-chain organisations

  • Leverage their talent and imagination without selling their souls
  • Receive sustainable and predictable funding aligned to core values
  • Work within an optimistic framework that reduces administrative burdens

Overview of ParaNotes

The on-chain organisation is an anonymous time delayed proxy as pioneered by shokunin.

These organisations are established on a parachain for the purpose of coordinating a ParaNote.

We call these Substrate native organisations creative conspiracies.

ParaNotes utilise DotSama’s basic financial, governance and organisational super-powers - those introduced and expanded by common good parachains.

ParaNotes create a secured loan with a pre-agreed loan to value (LTV) ratio that is updated in real time through price oracles. This LTV is reviewed annually, with relay on-chain governance able to writeoff, recall, top up or expand the underlying collateral.

Both relay and parachain governance has cancel permissions with appropriate time delays to enable emergency oversight over delegated funds.

The structure is designed to be as simple as possible - and can be more easily explained as an asset backed loan with a convertible option.

ParaNotes are simple, but their fluid, transparent and incentives aligned design can offer foundations for more complex financial arrangements enabled by free market parachains and even public markets.

How a ParaNote works

  1. A creative conspiracy is established as an anonymous time delayed proxy account on a parachain.
  2. The CC pledges some assets to the proxy representing their idea/s in the form of upgradeable NFTs that are minted on Kusama’s common good parachain statemine - we call this cultural collateral.
  3. The CC pitches a parachain on their idea and requests funding in the form of their (illiquid or low value) network currency and also adds the parachain as an oversight member to the proxy.
  4. If the CC is successful in their pitch to the network they receive parachain tokens to the proxy. The parachain retains permissions to return funds to their treasury if the ParaNote does not complete.
  5. The CC then uses the pledged cultural collateral and network tokens to package a ParaNote with a live value to the collateral and a loan to value of 10%*
  6. The CC pitches the ParaNote to relay governance.
  7. If the CC is successful in their pitch to the network they receive relay tokens to the proxy. The relay retains emergency permissions over the loaned currency.
  8. A time delayed transaction is pre-signed to send the pledged assets to the relay treasury account - this transaction is the subject of an annual review.
  9. The annual review involves the three parties who negotiate the next year based on the performance, progress and potential of the on-chain agreement.
  10. If successful, all parties remain equally incentivised to continue the experiment in perpetuity, growing value together.

Test case - Kusama, Kabocha and Decent Partners

Right now there is no price discovery for KAB, though we may have some DEX listings soon (karura, basilisk, mangata), but the value or liquidity will not be enough to sustain ongoing development of project teams wishing to build on the network.

Ahead of these listings, we have modeled the ParaNote on the current value of Edgeware - the network that Kabocha was born from, and whose supply mirrors Edgeware.

*It is expected that execution and communication of the first KAB:KSM paranote will create positive price action for KAB - benefitting the model at launch.

Basic financial model

We can provide a basic model of the relative values of both KSM and KAB as their price will fluctuate over the next five years.

The following is simply to give an idea of the notional value of a ParaNote - all variables are flexible.

Then we can model a potential ParaNote based on an initial agreed 10% LTV ratio - with the pledged assets providing the collateral for the loan.

We are aiming to introduce the first ParaNote to Kusama, leveraging Decent Partner’s already agreed 1.5% of circulating supply which was part of the reward for coordinating the origination of the network.

This 1.5% must still pass on-chain governance once the Kabocha’s network goes live, making it the ideal candidate to test the model - since it will be Decent Partners risking its own assets.

•Since the treasury KSM is not earning any staking rewards, the staking returns can be used to pay down the loan, added to the ParaNote backing, or sold for working capital.

The below five year forecast is a basic model to demonstrate the potential returns and also to outline three potential scenarios that result in an on-chain agreement to cancel, continue or convert the ParaNote.

ParaNote - cancel

If KAB performance has been poor relative to KSM, there may be a decision to cut the experiment short and recall remaining KSM via governance, in this case, Decent Partners forfeits their stake in KAB and the pledged cultural collateral.

ParaNote - continue

If KAB performance has been good but not extraordinary relative to KSM, then the agreement may continue with minor adjustments or top ups to maintain the same LTV of 10%

ParaNote - convert

If KAB performance has been great compared to KSM, then interesting opportunities open up from a game theoretical perspective, with both network’s governance attempting to negotiate the best deal.

The loan may be paid off in full and the KAB assets returned in full to Decent Partners, or Kusama may wish to use their option and bring the assigned KAB (or a proportion of it) into their treasury, diversifying the chain’s reserves. Further, the ParaNote may be restructured and renewed - recapitalising with more KSM, to the point where KAB no longer needs the financing of its big brother.

You can view the full model here.

Next steps

We are aiming to refine the model based on feedback before approaching Kusama governance with the proposal that aims to unlock funding for Decent Partners to further advance the ideas, projects and talent in and around Kabocha.

Final thoughts

The primary motivation of the ParaNote model is to better align the core incentives of relays, parachains and on-chain organisations contributing work to decentralised networks.

This is a first attempt at actively including creators and artists in the core value accrual of the protocol with the hope that their sustained funding, will enable ambitious and original narratives to emerge from DotSama.

By utilising technology that is already functional and unique to Substrate, we hope that this may enable the creation of a novel new form of multi-chain defi, that is both simple and effective, whilst also enabling a financial instrument that could empower more complex derivatives and markets.

Our hope is that this framework can be useful as a starting point for other teams who may not have the resources to sustain development, nor the willingness/ability to chase marketing trends or CEX listings.

The above is a work in progress, so any and all thoughts, critiques and questions are appreciated.

There are many here far more experienced and accomplished in the financial side of these networks, so I apologise in advance for any dumb mistakes.

4 Likes

The concept of Paranotes is a novel and creative approach to providing liquidity for parachains. This is a great discussion starter!

As well as Paranotes providing liquidity, it also forms a coordinated pricing relationship between Kusama and its Paranote recipient. It also removes the necessity for DEX or CEX to find price discovery.

It might be useful to discuss the general concept aof Paranotes separate from the first instance of a pilot Paranote contract. This is because people may agree with paranotes in principle, but disagree with contract terms. I have more suggestions about the contract rather than the concept.

The Concept

  • Paranotes can provide liquidity to parachain sovereign accounts in a decentralised way.
  • A type of convertible note. Where the Kusama Treasury provides KSM to a parachain, but can also convert it into to “equity” depending on certain pre-determined conditions.
  • Paranotes could become a specific track in Gov2 or (Gov2.x).
  • Paranotes can add stablity to parachain token valuations in relation to the relay token.

The First Experiment

  • I think there is some conflation of ideas wrapped in one experiment and can be unpicked.
  • If i understand correctly, Decent Partners is posting its own funds or collateral (in KAB) as a way for Decent Partners to get liquidity and coordinate these KSM funds, indirectly creating an agreed price of the parachains native token (KAB).
  • It seems that this structure gives Decent Partners intermediate power over the parachain, circumventing the Kabocha collective.

Wouldn’t it be better to have a more direct approach?

  • The relationship between KSM and KAB can be established first THEN the distribution of funds can be decided by the Parachain’s governance from its Sovereign account. Funds can then be delegated to various entities within its ecosystem.
  • The collateral can be posted directly from the parachain (through treasury or diluting mechanism).
  • This seems like a much clearer and more balanced way to structure a paranote, giving the decision making power to the parachain’s governance. That seems what a paranote is for. If Decent Partners is the key recipient then that is more like a “DAO-note” or “Org-note”

It makes more sense to use the Parachains community owned funds rather than Decent Partners, because the 2 key principals are the Relay and Parachain.

A) Parachain proposes Paranote.
B) Terms are agreed,
C) On-chain voting is executed
D) Parachain Sovereign account receives KSM.
E) Parachain governance (Kabocha) coordinates funds

Full disclosure: I am a founding Kabocha (technical) steward, and have had the responsibility to launch the parachain. I clearly desire for Kabocha to get funded by Kusama treasury. Given that Kabocha has been birthed only through small grants from the Edgeware treasury, and some midwifery from a few stewards, with no VC investment, it wants to seek funding to coordinate through democracy, and it is exploring how to do so avoiding CEXs, and potentially not relying purely on DEXs for price discovery. As a Kusama stakeholder I also wish for the relay chain and the collective organism of parachains to be able to sustain, experiment, thrive and challenge conventional wisdoms. I am also the founder of Decentration, which is a builder in the substrate ecosystem and W3F funded (Supersig). So I also have some desire that Decentration can have funds delegated to it. But my main priority is how to fund Kabocha.

Thanks for response @decentration

Let me clarify some points below, as either I didn’t explain well enough or you didn’t get what this approach aims to do.

In the model suggested we are doing this all on-chain - we need some price oracle to ensure the swap stays up to date, so in the proposed model we do need some price discovery which will likely come through listing on one of Kusama’s DEX.

Having been involved in on-chain governance for a long time now, you are in cloud cuckoo land if you think we can coordinate prices without some price oracle.

To remove an on-chain org from this process and simply have an ‘agreement’ between a parachain and a relay reintroduces exactly the problem we removed when we removed the treasury from Kabocha and instead created the mint-pallet.

You create a new treasury, this time of KSM, that everyone in the project will then argue over, debate the merits of spending and we are literally back where we started.

Also, for relay governance, that is delegating funds with some oversight to an on-chain org via time delayed proxies, they are giving those funds for some express purpose, to an organisation that actually has some direct accountability and also the means to deliver on its promises.

If you just have a relay dedicate funds to a parachain - that has no lead team, or any agency, there is literally no agency, or responsibility - it becomes a blurry mess.

I’m sure there are ways to tweak this model, but it fundamentally requires the coordination of three parties who each offer different capabilities and resources.

  • Relay, has funds, wants oversight and some potential upside
  • Parachain, has blockspace and a lease and some basic price discovery but no liquidity
  • On-chain org, has ideas, coordinates contributors in some direction and takes responsibility.

This is just wrong. I have no idea why you’d think this - its actually quite the reverse, the on-chain org has to get the parachain governance and the relay governance to agree the terms of the on-chain agreement.

This is literally a process anyone can folllow.

  1. A creative have an idea or a vision they want funding for. They create a proxy account on a parachain (kabocha) and assign the ideas as NFTs to that address.

  2. The team use that address, asset and the idea to pitch Kabocha for funding.

  3. Kabocha governance approves or denies the funding. If it approves it is added as a member to the proxy with permissions that give it some oversight on the funds via time delayed permissions.

This is so far, only slightly different to Edgeware. It is literally a standard proposal process, except funds are delegated to a proxy.

  1. Funds arrive at the proxy and sit there. They are illiquid, pretty much useless. So far nothing new, but they can be now leveraged by the creative team.

  2. The creative team now take the creative assets, idea and use the KAB as a deposit within a ParaNote to Kusama governance.

  3. Kusama governance then gets to decide whether they will fund the ParaNote and the creative team based on the collateral, LTV and the oversight/ permissions.

  4. Kusama governance is added to the proxy as a member, and just like Kabocha, can have some time delayed permissions over the funds.

  5. The swap plays out in real time, and is reviewed every year or so giving some feedback to both KAB and KSM governance about their relative progress.

Etc etc.

This is all done on chain via a swap mechanism.

(This post was flagged, and I’ve now restored it. Please be more careful with the tone of future posts; this one really walks the line between what might be accidental or intentional discourtesy)

Thanks Rob.

Makes sense - if anything it’s frustration, will ensure better tone.

It seems that this structure gives Decent Partners intermediate power over the parachain, circumventing the Kabocha collective.

Wasn’t intended to be a major criticism just can seems that way from the pilot experiment.

However, I think your current structure does not solve the problem how to fund Kabocha (and generally parachains) funded by its relay parent. Instead, your structure gets Decent Partners (or orgs) funded afaiu. Which is absolutely fine, but i was under the impression that paranotes would get parachains funded. And that is a priority from the Kabocha parachain’s perspective, imo.

You made arguments that parachains are only blockspace, and parachain governance does not work, given your experience, which I disagree. I have formed a larger response, but i will just keep it brief and perhaps can contribute to more relevant thread related direct funding for parachains (involving a sort of convertible note model). While you may have a certain view on things, i think the general view of the Kabocha community would be that it would be great to raise some KSM that can be coordinated by Kabocha democracy. Thats what i assumed this thread was about. I think the term ParaNote threw me.

It would be great to explore ways parachains dont need to go on an exchange to find price discovery, given that many private currencies, assets, insurance and national currencies coordinate their pricing instead of float on a Bull/Bear exchange. I think through convertible notes with Kusama; or with a stable and gradual valuation curve, this could be an interesting solution as well.

Theres obviously space for parachain funding a cross-chain org funding, so i dont think its an either or, however my priority is how to give the parachain funding. Thereafter i will focus on the on-chain or cross-chain org funding.

Cheers.