Peripheral Contract Development Updates
Community Newsletter #25: November 2023
Throughout the past month, we’ve continued to proactively develop the Increment peripheral contracts and prepare everything for zkSync mainnet. However, it is important to note that without Chainlink and Curve Cryptoswap on zkSync, the Increment protocol cannot be successfully deployed. Considering that these two dependencies are both currently available on Base, we look forward to them becoming available on zkSync soon.
In this month’s community newsletter, we will focus on the latest updates for Increment peripheral contracts. Big shoutout to Bill (aka WEBthe3rd) for all the hard work on these contracts!
Peripheral Contract Development
The system design of the peripheral contracts and how they will interact with the core Increment protocol is as follows, with each blue box representing a smart contract:
The system design is inspired by Aave’s periphery contracts. It may look a bit intimidating at first with the web of arrows, but the two main mechanisms built in place are straightforward to understand and outlined below.
Token emissions for liquidity providers with early withdrawal penalty: Because liquidity providers are one of the most important actors in the system, it would make sense for them to earn additional rewards on top of the trading fees that they earn.
Taking a look at the right hand side of the diagram, the `PerpRewardDistributor` contract will handle all reward token accrual on zkSync Era, which can include more than one token, and distribute them to liquidity providers in the Perpetual markets. Governance will determine the portion of tokens distributed to each market, relative to the total allocation. Before distribution, the ERC20 tokens will be stored in the EcosystemReserve contract, and will be transferred out when users claim their accrued rewards. It is important to note that these contracts will be deployed on zkSync Era and connected with the core protocol.
The early withdrawal penalty is implemented to ensure that rewards go to contributing liquidity providers rather than players manipulating reward allocations in their favor. In other words, a liquidity provider’s rewards will be deducted if they withdraw their liquidity before a time threshold determined by governance. Note that the trading fees earned will never be deducted, only the additional rewards earned will be deducted.
Safety module with multiplier and auction: Inspired by Aave’s safety module design, Increment implements a similar architecture for handling reward accrual and distribution for staked tokens, and allows governance to auction a percentage of the staked funds in the event of an insolvency in the system. Included on the left hand side of the diagram are a few of the underlying tokens that the `StakedToken` contracts can hold, such as the Balancer pool token and the Increment token. In other words, stakers will secure the protocol in exchange for earning a base APR in reward tokens (e.g. insurance fees, INCR, etc). The multiplier score can increase the base APR gradually and is dependent on the amount deposited as well as the duration of deposit. Note that a cooldown period before withdrawal comes standard with the safety module.
The auction module introduces a mechanism for auctioning off a percentage of staked funds, which can be started by governance. We will explain how the auction works broadly by using an example.
Scenario: In an unlikely event where there is 10,000 USDC worth of bad debt on the protocol (ie. 10,000 USDC should be earned from the auction to make the protocol whole), via governance, the community initiates the auction and decides the following parameters:
There will be 10 lots to auction in total and each lot will have a fixed price of 1000 USDC.
The initial amount of slashed tokens (ie. amount of staked tokens up for auction) to sell per lot will have a market price equivalent to 1000 USDC and then increase by 2% every 10 mins. In other words, the slashed tokens will be sold at a discount, and the discount will increase every 10 mins. In practice, since each lot has a fixed price, this means that the number of tokens per lot will increase over time, not to exceed the maximum percentage of user funds that can be slashed as dictated by governance.
Whoever makes the purchase of the slashed tokens for 1000 USDC first wins the bid.
The auction ends when all lots are sold, the auction’s time limit expires or governance stops it.
Note that the safety module and its surrounding contracts will be deployed on Ethereum mainnet. All peripheral contracts in scope are scheduled for a security audit with Pashov in Q1 of 2024. More documentation regarding the peripheral contracts will be provided soon.
Other Updates
The Emergency Admin multisig has been created on zkSync Era. The multisig is currently made of 7 core contributors and governance delegates of the Increment protocol. More information on the Emergency Admin role can be found in the documentation.
Increment is a decentralized, algorithmic perpetual swaps protocol building on zkSync Era, featuring automatically concentrated liquidity, dynamic fees and parametrizable pools.
To learn more, visit our Docs
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