# Summary

This discussion post outlines a plan to increase the capacity of the Kintsugi ecosystem, which is currently bottlenecked by the limited supply of collateral, preventing growth and blocking the exit of vaults from the system. The proposed solution is to use tokens from existing yield-generating products, such as staking derivatives, as collateral for the bridge. The short-term solutions could be to increase the ceiling for LKSM and adding vKSM and qToken as collateral. Another proposed solution for the mid-term would be adding LP tokens as collateral and more generally, any yield generating, structured product long-term. 

# Issue - Opportunity Costs

Kintsugi capacity is currently close to zero and blocks the growth of the ecosystem and does not allow for vaults to leave the system. While the high demand is favorable for the ecosystem, the limited supply of collateral poses an obstacle for further growth. There may be different reasons for the limited supply of collateral. 

However, one of the main reasons for this being the bottleneck to the growth are the opportunity costs of vault operators. By depositing collateral such as KSM or USDT, they have to forgo the yield they would get when staking their KSM on the relay chain, depositing it into a lending protocol or providing liquidity into an AMM. Therefore, the bridge would have to compete with these other yield generating for the users capital.

# Solution - General

Rather than trying to compete with the existing yield generating products, these yield generating tokens can be re-used as collateral for the bridge. While this comes with additional risks for the protocol as well as for the vault operator, it offers a sustainable solution to attract enough capital to scale the bridge efficiently.

## Short Term Solutions

### Increase ceiling for LKSM

**Requirements/Dependencies:** None, deeper liquidity for LKSM (optionally)

---

It could be proposed to increase the ceiling for LKSM to a higher amount to attract more capital because vault operators can re-stake their LKSM in vaults, making the operation of a vault much more capital efficient and attractive.

The current ceiling is at 55,000 LKSM (~$190,000) due to a lack of liquidity. However, this assumed that the full amount would be liquidated at once and that this would require to swap the total amount from LKSM into KSM into a stable coin or other token. These assumptions are extremely conservative and could be relaxed to allow for more capacity while simultaneously increase the risk of an under-collateralization of kBTC during extreme market events. How the assumptions could be relaxed:

- In practice there would likely be premium redeems prior to liquidations, which would reduce the amount of LKSM that would need to be liquidated in the event of further price decrease.
- Additionally not all of the collateral capacity is being used by one vault, which makes the event of a single large liquidation less likely.
- A liquidator of the seized LKSM might still redeem kBTC for LKSM despite not being able to sell LKSM for KSM at a favorable price because the liquidator could unstake the LKSM for KSM, for which he would need to wait 7 days, and hedge the KSM price risk using futures.

It is unclear though, how much of the newly created LKSM capacity would be filled up with new capital as it may happen that existing vaults would replace their existing KSM vaults with LKSM vaults. 

### Add vKSM as collateral

**Requirements/Dependencies:** DIA oracle market price feed, coingecko price feed — time: 2-3 weeks , deeper liquidity for LKSM (optionally) — time: 4-5 weeks

---

Apart from Acalas LKSM, Bifrost offers the same solution with their vKSM staking derivative. Under the current assumption that resulted in the LKSM ceiling of 55,000, the ceiling for vKSM would be around 2,500 vKSM (~$65,000) due to it’s lower liquidity. This is, of course, based on the same assumptions as stated above for LKSM, which could be relaxed to allow for a higher ceiling for vKSM.

Interlay team is closely working with Acala and Bifrost to improve the liquidity of both tokens to facilitate more efficient liquidations. 

### Add qToken as collateral

**Requirements/Dependencies:** Adding support for qTokens as vault collateral on the UI — time 2-3 weeks

---

Another restaking solution would be to add the supply tokens of Kintsugi’s/Interlay’s lending market as collateral. Users that supply tokens to the lending market receive qToken, which can be used as collateral in the lending market. E.g. if a user deposits USDT into the lending market, he receives qUSDT, which is interest bearing and can freely be transferred by the user unless he decides to lock the tokens as collateral to borrow from the lending market.

Similar to that, these qTokens could be registered as vault collateral. This could solve two issues at once:

1. **Bootstrap liquidity:** Current vault operators might choose to deposit their tokens to the lending protocol and use the respective qTokens they receive as collateral to earn additional yield, which would help to bootstrap liquidity into the lending market
2. **Increase minting capacity:** Assuming that users would use the existing liquidity to borrow tokens, this would also make it an attractive opportunity for new vault operators to add more minting capacity because of the re-staking / double yield mechanism

While the above solution would, in theory, also work with lend tokens of other lending protocols, allowing only qTokens from Kintsugi as collateral would (a) encourage vault operators to deposit their tokens into Kintsugis lending market rather than a competitor, (b) give the DAO more control over the parameters of the underlying (interest rate, target utilization, etc.).and (c) avoid adding additional protocol risk.

## Mid Term Solution

### Add LP token as collateral

**Requirements/Dependencies:** Adding support for LP tokens on the parachain and vault client — time: unclear

---

Similar to the other solutions, the bridge could also accept LP tokens as collateral. Although this would require further research and modelling of the thresholds, the value of an LP token is well defined as a function of the price and amount of the tokens in the pool. LP tokens also possess two properties that make them an interesting collateral asset:

1. The value of an LP token is less volatile than a portfolio of the tokens it consists of, which is commonly known as impermanent loss (IL)
2. Compared to qToken or liquid staking derivatives, LP tokens can always be redeem for their underlying tokens by the liquidator, which can then be sold if required.

However, the downside of the second property is, that liquidations could potentially dry up the liquidity of a pool, so that the ceiling for LP tokens need to be set accordingly and regularly monitored.

## Long Term Solution

### Structured products

Apart from the existing tokens, this ‘restaking’ approach could be used with any other kind of yield generating tokens in the future. This could be any kind of structured products such as index funds, liquid crowd loan tokens etc., given there is sufficient liquidity to liquidate those tokens or a method to redeem them for the (liquid) underlyings.

## Additional Risks

This section is supposed to give an overview of the additional risks which the vaults and the protocol would bear compared to directly locking the ‘base’ token as collateral.

### Vaults

- **Protocol risk:** The risk that the protocol or parachain gets exploited or stops producing blocks.
- **Depeg risk:** The risk that the derivative token depreciates in value relative to the underlying. This could be due to a slashing event of the nominated validator for a liquid staking derivative. For a lending token this could be due to the default of borrowers without enough collateral to cover the loans.
- **Liquidity risk:** The risk of not being able to redeem the derivative token for the underlying because of high utilization of the supplied token in a lending market or due to the unstaking period of a liquid staking derivative. Generally derivative tokens also have lower liquidity on exchanges than their underlyings.

### Bridge/Protocol

Generally speaking, the bridge would be exposed to the risks as the vault operators, although some of the risks can be mitigated to a great extent. While protocol risk is usually relatively unlikely to materialize, the effect on the price of the token that relies on the protocol in question is very severe in most cases.

The liquidity and and depeg risk can, to a certain extent, be reduced by adjusting the collateral thresholds upwards to account for the additional risk.

Improve bridge capacity and efficiency

**NOTE: This post has been edited to update the suggestions for the pools and lending markets for the launch, in order to reduce scope and ensure a timely shipping of the DeFi Hub.**

<h1>TL;DR</h1>
Interlay is becoming a one-stop-shop for all things Bitcoin DeFi, launching a DEX and lending protocol. It is proposed that the DEX and lending protocols first launch on Kintsugi, Feb/March 2023. This proposal outlines the suggested DEX pools and lending markets. Possible DEX incentives, to be covered by the Kintsugi treasury, are also outlined for community review

<h1>Intro</h1>
As a preparation for the launch of Kintsugi's DeFi hub (https://tinyurl.com/InterlayRoadmap), this post aims to kick off a community discussion around the suggested structure of the decentralised exchange (DEX), the lending markets and parameters as well as possible liquidity incentives provided by the network treasury.

**DEX**
Launching with only 6 pools to concentrate liquidity into key assets: kBTC, KSM, USDT, ~~MOVR~~ and liquid staking derivatives (LSDs) is suggested.

**Lending**
Just like the design of the AMM focuses on high quality tokens, this is even more true for the lending markets, which rely on battle tested and liquid assets for the safety of the protocol and its users. Pools containing the aforementioned tokens are supposed to provide sufficient liquidity to ensure liquidations.

**Incentives**
To achieve deep liquidity for those assets, this proposal suggests that the community considers allocating treasury funding towards liquidity programs. To that end, the program would deploy 190,000 KINT over the course of 3 months. There are discussions around applying for a grant from the Kusama treasury to support liquidity bootstrapping, although applications are currently on hold with no clear timeline due to some legal updates to the program.

<h1>Design</h1>

**DEX**
The pools were designed with the following considerations in mind: minimise slippage for the most demanded assets, minimise risks for LPs and maximise trading volume. See https://tinyurl.com/InterlayDEX for a diagram of interconnection and order flows. Pairs with high trading volume will generate higher yield for LPs and contribute to a sustainable relationship between traders and LPs, reducing the requirement for incentives. An overview of the suggested pools, incentives, and target size can be found in the following table.

According to feedback from the community, the KINT/MOVR pool has been exchanged in favor of a KSM/KINT pool.
![](https://i.postimg.cc/W3Zjbb28/DEX-pools.png)
Pool #5 is a curve stable pool and will be composed of LKSM, wstKSM, vKSM and sKSM. Pool #6, the KSM-LSD/KSM meta-pool, will allow users to swap KSM into any LSD and vice versa. Due to additional development work needed in order to implement these pools, they will not be live at launch.

**Lending**
Of all available tokens in the Kusama ecosystem, the ones below were identified as being secure and liquid enough to serve as collateral. The max loan-to-value (LTV) ratio enforces the maximum borrowable amount against a user's collateral. If the user's LTV rises above the liquidation LTV, the position can be liquidated. To limit potential damage to user and protocol, the following supply caps are suggested.
![](https://i.postimg.cc/kGknv6fk/lending-markets-caps.png)
Please note, that the suggested max LTV for USDT is close to the liquidation LTV. While this can be a risk for the user, it also improves capital efficiency without adding risk for the protocol. Should a lower max LTV be set to protect the user?

LSDs, including LKSM, vKSM, wstKSM, and sKSM have high demand but lack sufficient liquidity and/or a price feed from DIA or other oracle providers, exhibiting oracle manipulation attack vectors. There is ongoing work with DIA to improve sourcing prices for all LSDs. In addition, the liquidity of LSDs is expected to improve through the LSD-stable-swap pool in anticipation of adding these assets as borrowing collaterals soon.

<h1>Annex</h1>
This part is for the more interested reader and elaborates the process and results of the proposal in more detail. 

**DEX**
While swaps from token A into token B can be routed through multiple pools behind the scenes without affecting the UX of a trader, LPs face a more complex decision process. Some of the key factors that influence an LPs decision are:
- Risks associated with the LP position (volatility, protocol risk, centralization risk, etc.)
- Availability of the token (free float market cap, access within the ecosystem, etc.)
- Utilisation of the pool (real yield from trading fees)
- Alternative investments (other pools or staking)

This proposal focuses on assets that are widely available in the Kusama ecosystem and have shown to create sustainable volumes on other DEXs. The main factors for determining the amount of incentives were the target TVL, as well as the volatility of the token pair. While kBTC/KSM, kBTC/USDT, and kBTC/MOVR have similar annualised volatility in the range of 64% to 72%, KINT/MOVR requires a much higher APR to compensate LPs for the 146% volatility (the same holds true for KINT/USDT or KINT/KSM).

For stable pools, the expected volatility is close to zero. In addition, LPs of the LSD stable pool already generate staking rewards which further reduces the necessity for a high pool APR. For the LSD-KSM meta-pool however, LPs have to give up half of the yield generated via LSDs and thus will likely require a higher, competitive APR.

**Incentives**
The treasury has remained largely untouched, with only a few minor payouts for grants and liquidity incentives on other DEXs: more than 2.48 million KINT remain out of the initial 2.5 million. The recent reduction of Vault rewards has allocated an additional ~230,000 KINT to the treasury budget. Allocating 165,000 KINT to ensure a successful launch and liquidity boost for Kintsugi's DEX seems like a useful spending strategy.  In addition to attracting liquidity, these incentives should also serve to encourage higher kBTC bridging volumes.

**Lending - Risk Parameters**
The estimates for the LTV thresholds that were shown above, were estimated using the same methodology as for the vault collateral, with the same scrutiny and considerations in mind: to safeguard the protocol and its users by ensuring full coverage of the underlying loans. The repository used to arrive at those estimates is publicly available for everyone to confirm the presented estimates or suggest changes to the parameters. A more in-depth description of the methodology and process can be found in the repository: https://github.com/interlay/collateralization-analysis

All thresholds, except for USDT, are estimated against USDT as being the debt, since most loans will likely be raised in USDT. USDT thresholds were estimated against BTC as collateral.
For the launch the analysis outputs a close factor of 50% and a liquidation premium of 110%. This means that a liquidator can close up to 50% of a borrower's position and will receive 110% worth of collateral for the liquidated debt. This should ensure that liquidations are profitable even for larger positions while limiting the potential loss for the borrower. tested. To build up a reserve fund to cover bad debt, 20% of the liquidated amount will go to the treasury's ‘bad weather fund’. Note that for severe under-collateralization, the close factor may cause multiple liquidation transactions to be necessary for clearing bad debt.

**Lending - Interest Parameters**
Following from the above, the proposed calibration of the interest rate parameters at launch is as follows:
![](https://i.postimg.cc/1zTYtGXh/lending-markets-rates.png)
Based on the analysis of these exact markets on other protocols, the parameters should, on average, maintain a utilisation close to the optimal rate of 90%. Utilisation close to this rate will limit the spread between supply and borrow rates while maintaining sufficient exit liquidity for suppliers. If the utilisation diverges too much from the optimal rate, this usually creates arbitrage opportunities with other lending protocols.



Recommendations for Kintsugi's DeFi-Hub Launch

# Summary
Hi, this is Tyrone from Bifrost, this proposal is in regard to using treasury to incentivise a kBTC/KSM pool on the Bifrost chain on Zenlink.

This proposal will send 3000 KINT tokens from treasury to Bifrost’s designated address to be used for the kBTC/KSM pool on Zenlink (Bifrost).

We suggest launching a KSM pair with kBTC on Bifrost for two reasons:
1. To increase kBTC exposure on Bifrost and Zenlink, specifically, introducing kBTC to the Bifrost community.
2. To facilitate profitable liquidation for kBTC vaults. Bifrost, with deep liquidity for KSM, and great volume in vKSM (which can be easily converted to KSM), could provide a great environment for this purpose.
# Proposal
The launch of Kintsugi 2.0 will introduce more opportunities for cross chain activities, a kBTC/KSM pool on Zenlink (Bifrost) is one gateway to introduce more use cases and liquidity to both Kintsugi and Bifrost, opening doors to future collaboration between the parachains. 

Besides the transaction of both native tokens, kBTC will be crossed to Zenlink DEX. Bifrost, Zenlink and Kintsugi will create a three-party incentivized KSM-kBTC pool, which may benefit more utilities for BTC spreading around Kusama ecosystems. Creating KSM-kBTC pool will in addition provide more liquidity options for KSM-vKSM pair users, kBTC and be indirectly swapped with vKSM between two pairs. 

We would like to propose a kBTC/KSM liquidity pool on Zenlink (Bifrost), with incentives running for 2 months: the first month triple incentives from Bifrost, Kintsugi and Zenlink, and second month continue with incentives from Kintsugi and Bifrost. By providing these incentives, we can help attract the necessary liquidity and ensure that the pool is able to operate effectively.

We propose the transfer of 3000 KINT tokens from the Kintsugi Treasury to our (Bifrost) designated wallet address mentioned below in order to be used as incentives for the kBTC/KSM pool. To better support this effort and achieve considerable TVL, we (Bifrost) would provide 6000 BNC in incentive in the course of 2 months, Zenlink will provide 15,000 ZLK in the first month. The incentives are scheduled to start on December 19th 2022.

Once the funds are received to the address below, they will be added as incentives to the kBTC/KSM pool.
**Bifrost Designated Farming Charge Address**:
dmTEFZ77m7WtJmd7PY6pMh111uTtW9jpwfwasTGsWKUGp5M
![](https://i.imgur.com/0GL4APs.png)
The kBTC/KSM Farming pool (id:12) is ready to be charged, charging will be exectued by Bifrost team.
*Considering the fluctuation of the average block producing time on chain, creating a Farming Pool in advance may cause the time deviation between announcement time and actual farming started.


Use Treasury Funds To Incentivise kBTC/KSM pool on Zenlink (Bifrost)

Up to this point, Kintsugi collators have been centralized to allow the team to focus on delivering kBTC Vaults. With the introduction of the changes [here](https://github.com/interlay/interbtc/pull/595) we're proposing to fully decentralize the system by allowing anyone to become a collator. To enable registration we require two parameters to be set:

- `CandidacyBond` is the amount of KINT required to be locked in order to register as a collator.
- `DesiredCandidates` is the number of external collators that can register.

More info here: https://docs.interlay.io/#/collator/overview

At this point in time there is no established incentive program for collators, but we suggest to trial the current model so that Kintsugi is more resilient to network outages. Collators do collect transaction fees from the blocks they produce but this will likely not be enough to cover infrastructure costs. We welcome additional suggestions for how to reward collators in the future.

Please use this discussion to signal your support and help decide what values should be set for these parameters.

Expanding Kintsugi Collators

## **Summary**

Each year there are calls scheduled for the rewards assigned for that year on Kintsugi for vaults and staking (the scheduled distribution of yearly rewards). These, however, need to be adjusted as in the current state they will no longer work. This is due to the change of runtime indices.   

## **Proposal**
Why will the scheduled (CURRENT) distribution no longer work?
The call for this scheduled distribution relies on the runtime indices. Since these have been changed, the current out of date call will fail. 
**Background:** reward distribution is encoded as a set of future calls (think transfers of the amounts described in the whitepaper) 
**Problem:** we made a breaking change to the runtime, invalidating these calls (the pallets they refer to no longer exist or are in the wrong order) 
**Impact:** Kintsugi: vault & staking rewards 
**Proposed solution:** clear storage and re-propose all rewards from year 2 - year 4

## **How to fix this?**
In order to fix this before the time comes when the reward distribution is called, a proposal needs to be made that clears storage and re-proposes all rewards from year 2 to year 4. 

The amounts that will be used in the new scheduled calls for staking rewards are the same as specified in the initial staking rewards referendum accepted in the past: https://kintsugi.subsquare.io/democracy/referendum/12 

The amounts that will be used in the new scheduled calls for vault rewards are the same as specified in the initial vault rewards referendum accepted in the past: https://kintsugi.subsquare.io/democracy/referendum/18 

## **What to do now/next?**
**Any member of the community can submit this proposal** by following the steps provided below and afterwards editing and adding the relevant information in the newly created proposal. 

**Recommended steps:**
1. Click on the link and submit the preimage using a wallet with sufficient vKINT - [Submit preimage and create proposal](https://polkadot.js.org/apps/?rpc=wss%3A%2F%2Fapi-kusama.interlay.io%2Fparachain#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) 
2. Go to https://kintsugi.subsquare.io  and login with the same wallet used to submit the proposal
3. Check proposals and you should see an untitled one. Hit edit and add a title and text. Feel free to use the text form this discussion post and any links to provide context. 
4. Feel free to promote the proposal and share with the Interlay team on the official discord channel. 
 
**Proposal encode hash:**

```  
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 ```

**Proposal Hash:**
``` 0x4da4c49267b4806e8929e378b2a7a7a67ff1229d298a83117d5f82ecfaad0d0a ```


 
**Resources**
Interlay/Kuntsugi 101: https://docs.interlay.io/#/getting-started/interlay-101 
Kintsugi token economy: https://github.com/interlay/whitepapers
Vault docs: https://docs.interlay.io/#/vault/overview 

Call for Proposal: Fix Vault & Staking Reward Distribution After Runtime Upgrade

I burned [0.0575407](https://kintsugi.subscan.io/extrinsic/0x91c5d58a4d1b796939de630b856f7a945ff663c376837c26de49710002885817) kBTC without getting KSM in return.
turn them from the treasury in equivalent KINT

Burning kBTC for 0 KSM

Dear fellow Kintsugi innovators, 

As most of you know, KBTC is currently secured by KSM collateral. 

In an effort to further de-risk vaults and improve liquidity, there have been proposals to add KINT and USDC collateral support (see [previous  proposal](https://kintsugi.subsquare.io/post/6)).

(Read more here: https://medium.com/interlay/kbtc-multi-collateral-support-proposals-for-usdc-and-kint-9aa18a8f1e28)

### Problem

**Unfortunately, there has been a slight setback for USDC Vaults**

The initial plan was to use anyUSDC, bridged over as follows: 

```
Ethereum --Mulitchain/anyswap--> Moonriver --XCM--> Kintsugi. 

```

The first path (` Ethereum --*Mulitchain/anyswap*--> Moonriver`) already works.
However, it is currently **not possible to use Moonriver ERC20 tokens with XCM**. The Moonriver team is actively working on adding this feature and coordinating with bridge projects. They are keeping us updated but at the time of writing, we cannot predict how long this might take. 

### Review of alternatives

Considering the demand for a USD-pegged stablecoin as an option for Vault collateral, we have the following alternatives on Kusama:

#### 1.  USDT via Statemine. 
**Pros:**
- This would be a native representation of USDT, meaning we avoid additional centralized bridging risk. 
- No technical blockers known so far

**Cons:**
- Currently no liquidity
- Tether is waiting for Ledger to release the Statemine app before they can mint more USDT. This process seems slow. Meaning: we will see liquidity earliest in July.
- Would need trading pairs with liquidity on Kusama for risk management 

#### 2. aUSD via Karura
**Pros:**
- Readily available, no technical blockers known
- Decentralized, asset-backed stablecoin
- Dotsama native asset, arguably good for ecosystem growth
- Buying aUSD as a Vault (not minting, see below) and using it as collateral is good for diversifying risk. 

**Cons:**
- TVL is a bit low at the moment (~4.18 million aUSD minted)
- Trading volume is low on exchanges (https://www.coingecko.com/en/coins/acala-dollar#markets) 

#### Other stables via Wormhole via Karura

**Pros:**
- We could get USDC
- Integrating with Wormhole is probably useful in any case, e.g. to make kBTC/iBTC available Solana


**Cons:**
- Currently no liquidity
- There is some technical work necessary by Acala to make Wormhole assets compatible with XCM.
- Would need trading pairs with liquidity on Kusama for risk management 
- Centralized bridge risk (we also have this with anyUSDC though)

====
**Summarizing, this means we can:**
(a) wait for USDC from Moonriver, USDT from Statemine, or USDx from Wormhole
(b) move forward with aUSD as a collateral asset

These are non-exclusive options - but we need to decide what to do first. 
Would love to hear thoughts & input before this is put up for a vote. 


USD-pegged Vaults: Setbacks and Next Steps

Acala vs Karura has a common stablecoin aUSD, so why does Interlay vs Kintsugi not have a common BTC, it will increase capitalization and influence!

Merge iBTC vs kBTC

It’s great to see the community actively engaging with Kintsugi. We would like to point out that in a decentralized bridge, users need to be careful with the trades they are executing against the chain. Please be advised that it is at all times the responsibility of users to ensure that their interactions on the chain are in their interest. 

When executing a burn operation, users burn kBTC for collateral of a Vault. This is ideally a beneficial arbitrage trade for users. You can read more here: https://docs.interlay.io/#/Vault/overview?id=burn-event-restoring-a-11-physical-peg

Due to an error in a migration (read more in the post-mortem below), the system was left with an imbalance of kBTC that needed to be burned but 0 KSM that would be returned.

The UI shows users the amount of collateral (right now only KSM) they would receive. Before burning kBTC, users should please check that there is an amount of collateral that would be received in return.

![burn](https://drive.google.com/uc?export=view&id=1ghCaqmDdZHOa68FSU3LScYXRzbpLBgtn)

Although the UI showed that 0 KSM would be returned, two users burned their kBTC and consequently received 0 KSM in return.

We advise that the community decides if the two users that burned kBTC for 0 KSM in return should be refunded.


### Proposal

- **User A:** One user burned 0.0575407 kBTC without getting KSM in return. However, the same user received 0.06347786 BTC from the initial liquidation of the Vault that was causing the kBTC available to burn.** This user has thus made a profit of 0.00593716 BTC. Since this user still made a profit overall we advise to not open a treasury proposal to refund the burn amount.**
- **User B:** This user burned 0.006 kBTC in total and did not receive any KSM or BTC. **Since this user burned kBTC without receiving anything in return, we encourage the community to open a treasury proposal to reimburse user B for 0.006 kBTC in KINT.**

### Detailed Post-Mortem

A user did a redeem with a Vault that had 2 instances running. This caused the Vault to send the Bitcoin twice, resulting in the Vault getting liquidated. The Vault did not execute the redeem. After the redeem expired, the user was able to call cancel_redeem.

However, there was a [bug](https://github.com/interlay/interbtc/pull/590/files#diff-a51dbc80f617db9fffe259eac5cd4ce3a24cec79bf6a95c50a286d75d4ff2dedR442) in the code that caused the cancel_redeem function to take the wrong code path, which caused the user to not receive any funds in the cancel_redeem. This was not seen as a problem for the user, since they had already received twice the bitcoin amount, and they got to keep their kBTC as well. Essentially, they got 300% of the value they should have received.

Additionally, there was a bug that caused some collateral to remain in the liquidation Vault if the liquidated Vault had toBeRedeemed tokens.

After the cancel_redeem, the liquidation Vault had tokens that couldn't be burned, and some amount of collateral. To restore the system to a valid state, we did two things: we [fixed](https://github.com/interlay/interbtc/pull/596) the reward calculation for liquidation_redeem, and we wrote a [storage migration](https://github.com/interlay/interbtc/pull/597) to decrease the liquidation Vault's toBeRedeemed tokens such that users could burn 0.064 KBTC in exchange for 30.5 KSM.

However, when we deployed this, the storage migration failed to run. We later found out that this was because substrate only runs storage migrations when the spec version changes, which we hadn't done. This caused the fix in the liquidation_redeem amount to be deployed before the storage migration ran. When another liquidation took place, the collateral was thus drained from the liquidation Vault. When the storage migration eventually did take place, the result was the liquidation Vault containing 0.06 KBTC but no collateral. This caused the reward for liquidation redeems to be zero. While the UI correctly showed the expected reward was 0, users still chose to do the liquidation redeem, causing them to effectively burn kBTC for no reward.

The user that burned most of the kBTC in this liquidation redeem is the same user that received 300% of the redeem earlier (User A). The kBTC that this user burned in the liquidation redeem is the KBTC that should have been burned in the cancel_redeem in the first place. As such, we do not feel this user needs to be compensated for the loss of funds in liquidation_redeem.

There was, however, another user (User B) that burned 0.006 KBTC:
- https://kintsugi.subscan.io/extrinsic/885067-2 
- https://kintsugi.subscan.io/extrinsic/885407-2 

Next Steps: Burning kBTC for 0 KSM

### Summary

A new type of vault can be activated using KINT as collateral. More details below. 

### Proposal

Currently only KSM is accepted as collateral for vaults. One of the main goals for kBTC stability is to diversify the number of tokens that can be used as collateral. This has also been requested by current kBTC vault operators. 

The next asset suggested as collateral is the KINT governance token. It is the quickest to enable and has also been one of the main requests from active vaults. 

Please find below the parameter configuration proposed for the “KINT vaults”:
- **Initial collateral ceiling:** 1 million USD equivalent
- **Secure collateral threshold:** 700%
- **Premium redeem threshold:** 600%
- **Liquidation threshold:** 500%

For context, we run modelling and simulations for every new collateral type. We used the same methodology for KINT as for modelling KSM collateralization thresholds. The threshold numbers are higher for KINT due to the following factors:
- Lower liquidity compared to KSM and other assets/tokens
- Low correlation with BTC
- Not enough historical data that the models can use.


We will of course review the threshold levels once more data is available - and invite other teams/community members to contribute to the risk assessment. In particular, we need more data on how arbitrage bots will impact liquidations. Once we see arbitrageurs being effective in preserving system-wide overcollateralization, the argument for safely lowering thresholds would be very strong.

The next step is hence to activate this vault type with the above parameters via an on-chain governance proposal. 

**NOTE:** *In light of the current situation (high demand for kBTC, not enough collateral to mint), we would like to unblock vaults and users as fast as possible so that new kBTC can be issued. Hence we also would like to fast track the on-chain proposal if the community is not strongly against the vault type.* 

**Fellow Kintsugi innovators - as always, we appreciate your time reviewing this proposal and welcome comments and feedback.**
Please be aware that this is only a discussion post and a formal on-chain proposal will follow.  

We have also set up an optional off-chain poll here: https://voting.opensquare.io/space/kintsugi/proposal/QmcgAVvCMTyz5sWm1jzBCoBaUkV67GbxZBQLJSuLFg3yxP

### Resources

- kBTC Collateral Analysis For KSM: https://medium.com/interlay/kbtc-collateral-analysis-ksm-f481f66f8a5e
- Kintsugi Governance 101: https://docs.interlay.io/#/kintsugi/governance 
- Governance guides: https://docs.interlay.io/#/guides/governance (incl. how to make a proposal)
- Kintsugi tokenomics: https://docs.interlay.io/#/kintsugi/tokenomics
- Python code used for analysis of new assets proposed as vault collateral: https://github.com/interlay/collateralization-analysis 


Enable A New Vault Type With KINT As Collateral

### Summary

A new type of vault can be activated using USDC via Moonriver (xcUSDC) as collateral. More details below. 

### Proposal

Currently only KSM is accepted as collateral for vaults. One of the main goals for kBTC stability is to diversify the number of tokens that can be used as collateral. This has also been requested by current kBTC vault operators. 

The next asset after KINT suggested as collateral is a USD stablecoin -  more specifically USDC. It is the stablecoin that we can enable the fastest which also has considerable liquidity on Moonriver (around $4.5 million) and has been requested by the currently active vaults. 

USDC can be imported from Moonriver via XCM - which in turn imports USDC from Ethereum via the Multichain bridge (formerly AnySwap). Note: once a native (i.e., directly minted on Kusama) USDC deployment is available, it would be best to switch to that. 

Please find below the parameter configuration proposed for the “USDC vaults”:
- **Initial collateral ceiling:** 1 million USD equivalent
- **Secure collateral threshold:** 160%
- **Premium redeem threshold:** 140%
- **Liquidation threshold:** 120%


For context, we run modelling and simulations for every new collateral type as well as many other references and points of comparison before we conclude on the collateral rates. 

The next step is hence to activate this vault type with the above parameters via an on-chain governance proposal.
**NOTE:** *In light of the current situation, we would like to unblock vaults and users as fast as possible so that new kBTC can be issued. Hence we also would like to fast track the on-chain proposal if the community is not strongly against the vault type.*


**Fellow Kintsugi innovators - as always, we appreciate your time reviewing this proposal and welcome comments and feedback.**
Please be aware that this is only a discussion post and a formal on-chain proposal will follow.

We have also set up an optional off-chain poll here: https://voting.opensquare.io/space/kintsugi/proposal/QmWYCMNbeMrdujZZx19qN8t6re2NSDkeSE1JjUoAA4EZWB

### Resources


- Kintsugi Governance 101: https://docs.interlay.io/#/kintsugi/governance 
- Governance guides: https://docs.interlay.io/#/guides/governance (incl. how to make a proposal)
- Kintsugi tokenomics: https://docs.interlay.io/#/kintsugi/tokenomics
- Python code used for analysis of new assets proposed as vault collateral: https://github.com/interlay/collateralization-analysis 


Enable A New Vault Type With USDC As Collateral

See the comment [here](https://github.com/interlay/interbtc/blob/f1ed5205c29934170b0674e6b60a847028b9735e/parachain/runtime/kintsugi/src/lib.rs#L438-L441). We are currently receiving a number of invalid proposals due to the minimum deposit being only 5 vKINT. Opening this discussion to decide on a higher value which is not too restrictive.

Increase MinimumDeposit to prevent spam


### Summary
Vault block rewards are ready to be activated, according to the Kintsugi tokenomics: 30% of 4 year supply (i.e., 3 million KINT), emitted as follows:

- 40% in the first year (1.2 million KINT)
- 30% in the second year (900k KINT)
- 20% in the third year (600k KINT)
- 10% in the fourth year (300k KINT)

### Proposal

**Why do Vaults receive block rewards?**
Vaults are the heart of the Kintsugi network. Vaults are network participants who ensure BTC remains locked on Bitcoin while kBTC exists - that is, they enforce the 1:1 peg to locked BTC. To prevent misbehavior, Vaults lock collateral (at launch in KSM) with the parachain such that the collateral value always exceeds the value of the secured BTC. If a Vault misbehaves, their collateral is slashed and users reimbursed. Vaults take up liquidation risk as well: if the price of the collateral assets decreases significantly compared to BTC, Vaults may be liquidated and lose their collateral. Vaults hence receive KINT as reimbursement for their risk - and to ensure they can protect themselves against hostile governance takeovers. Anyone can become a Vault, anytime. 
Reminder: Vault only earn block rewards if they have BTC locked. Rewards are distributed based on each Vault’s share of the total BTC locked.

**Why activate now?**
With the latest runtime upgrade, the parachain is ready to start kBTC minting. The next, and final step before kBTC launch, is hence to activate Vault rewards via an on-chain governance proposal.
Fellow Kintsugi innovators - as always, we appreciate your time reviewing this proposal and welcome comments and feedback.

### Resources

- Interlay/Kuntsugi 101: https://docs.interlay.io/#/getting-started/interlay-101 
- Kintsugi token economy: https://github.com/interlay/whitepapers
- Vault docs: https://docs.interlay.io/#/vault/overview 



Vault rewards can be activated

### GOVERNANCE FAQ

**How does Kintsugi and Interlay governance work?**
This is best described by 3 properties:
- Liquid. Token holders directly vote on what happens with the networks. There is no council. 
- Optimistic. To keep governance dynamic and fast, proposals with low turnouts (i.e., not of great interest to the community) require less "yes" votes to pass. Disputed proposals with high participation require more than 50% "yes" votes.
- Staked. To be eligible for voting, token holders stake (lock for a period of time) their tokens. The more and the longer you lock tokens, the more voting power you have - because you have a larger investment in the success of the network (i.e., if you vote to break the network, your tokens will devalue without you being able to sell them). For staking, you earn staking rewards. 

Read more here: https://docs.interlay.io/#/kintsugi/governance

**Why do we need governance?**
To decide on new features, treasury spending, kBTC/interBTC risk parameters. Basically, anything related to managing the Interlay network is controlled by community governance.

**How do I stake my tokens to participate in governance?**
Follow this guide to stake via the Dapps: https://docs.interlay.io/#/guides/stake?id=stake-kint-or-intr

**What are vKINT and vINTR?**
vKINT and vINTR represent your voting power. It is a measure of how many tokens you staked for how long. They are not transferable. 

**Why does my vKINT/vINTR balance decrease?**
1 vKINT = 1 KINT staked for 96 weeks (maximum staking duration on Kintsugi). 

As time passes, the remaining time your KINT is staked becomes less - and so does the vKINT value. You can always extend your lock time to increase your vKINT amount again (up to the max.).

Works analogous for Interlay.
Read more here: https://docs.interlay.io/#/guides/stake?id=important-considerations

**How can I make a proposal?**
Please follow this detailed guide:  https://docs.interlay.io/#/guides/governance

**How can I vote?**
Currently, the best way is to use the SubSquare platform. Follow this guide to set up an account https://docs.interlay.io/#/guides/governance?id=governance-platform and this guide on how to vote https://docs.interlay.io/#/guides/governance?id=vote-on-referenda

**What does the Technical Committee (TC) do?**
The only thing the TC can do is fast-track proposals, i.e., reduce the delay before a proposal goes to vote and make the voting period shorter. The goal of the TC is to asses and react to critical issues (e.g. bugs). Anyone can candidate to become part of the TC. 

**Is this really decentralized?**
Yes! We take decentralization so seriously, we even modelled long-term voting power distribution here: https://docs.interlay.io/#/kintsugi/governance?id=voting-power-distribution . Team and investors only control 20% of the tokens and have their voting power reduced for the first years (2ys on Kintsugi, https://docs.interlay.io/#/kintsugi/governance?id=restricting-team-and-investor-voting-power).

**My vote counts,  how do I start?**

1.Stake
- Kintsugi Dapp: https://kintsugi.interlay.io/staking
- Guide: https://docs.interlay.io/#/guides/stake

2.Vote
 
- Kintsugi voting platform: https://kintsugi.subsquare.io/
- Guide: https://docs.interlay.io/#/guides/governance

Governance FAQ and Guides

### Summary

Staking rewards are ready to be activated, according to the Kintsugi tokenomics: 5% of 4 year supply (i.e., 500k KINT), emitted linearly (i.e., 125k KINT per year). 

### Proposal

Kintsugi’s governance model requires KINT to be staked to participate in voting. The more and the longer KINT are staked, the more voting power a user receives - and hence the more staking rewards. Rewards are distributed proportionally based on the voting power - so called vKINT (Note: vKINT is not a token and cannot be transferred. It is only a measure of an account’s voting power). 

Staking is already active - but no rewards are currently distributed. Rewards are important to incentivize active staking and governance participation which is critical for Kintsugi’s security and growth as an ecosystem.

The staking user interface has been added to the Kintsugi Dapp (https://kintsugi.interlay.io/staking) making it easy for both beginners and advanced users to stake and participate in governance. 

The next step is hence to activate staking rewards via an on-chain governance proposal.

Fellow Kintsugi innovators - as always, we appreciate your time reviewing this proposal and welcome comments and feedback. 

### Resources

- Kintsugi Governance 101: https://docs.interlay.io/#/kintsugi/governance 
- Governance guides: https://docs.interlay.io/#/guides/governance (incl. how to make a proposal)
- Kintsugi tokenomics: https://docs.interlay.io/#/kintsugi/tokenomics 
