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?
- 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.
- 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
- 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
- A creative conspiracy is established as an anonymous time delayed proxy account on a parachain.
- 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.
- 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.
- 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.
- 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%*
- The CC pitches the ParaNote to relay governance.
- 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.
- 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.
- The annual review involves the three parties who negotiate the next year based on the performance, progress and potential of the on-chain agreement.
- 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.
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.
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.