Nectar Whitepaper

Tuesday, July 28, 2020
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NECTAR 2.0 The Nectar token's purpose is to grow the world's largest community of decentralised exchange users. This document outlines a redesigned set of utilities for Nectar and a new economic model to act as a base for the next stage of its evolution..

Nectar 2.0 Contents 04 Introduction 08 09 Background to Impetus for Change Nectar Token NEC 011 Token Design Goals 2 2

Nectar 2.0 12 Nectar Evolution 13 Token Supply Reduction and Switch from Inflation to Deflation 15 Whitelist Removal and Ecosystem Growth 21 DAO Launch Process 16 DeversiFi: Fee Discounts 17 DeversiFi: Buy & Burn Model 24 DeversiFi 19 necDAO: Decentralised Autonomous Organisation 3 3

Nectar 2.0 Introduction The Nectar Token (NEC) was designed in 2017 and launched at the start of 2018 with the aim of incentivising liquidity on markets traded on the Ethfinex digital- asset exchange platform. Ethfinex's initial vision was to decentralise its platform along two streams in parallel: Technology and Governance. The Nectar Token was the instrument for incentivising and enabling this transitional evolution. This document lays out the launch vision for Nectar 2.0, with a series of fundamental design improvements enabling Nectar to successfully deliver its goals. 4

Nectar 2.0 This document lays out the launch vision for Nectar 2.0, with a series of fundamental design improvements enabling Nectar to successfully deliver its goals. 5

Nectar 2.0 Advanced Centralised January 2018 Ethfinex is born, laying the foundations to start our journey to decentralisation. Technology Governance Voting Tools May 2018 NEC holders directly impact the governance of Ethfinex, proposing ideas to the Nectar community and voting on its future direction. This extends to voting for which tokens will be next listed on the platform. Nectar Token February 2018 The Nectar token is launched to distribute ownership of Ethfinex amongst our traders, providing those that contribute with a stake in the long- term success of the exchange. 6

Nectar 2.0 Trustless September 2018 We launch Trustless, the world’s first trustless exchange interface using the Ethereum blockchain, which can connect directly into a centralised exchange. This allows Ethfinex users to choose between trustless on-chain settlement or high speed execution. Decentralised Coming Soon Governance Experiments October 2018 We host a governance summit featuring academics, projects and innovators from a wide array of disciplines to discuss the implications of distributed governance and how we can ethically lay the groundwork for the future. The summit culminated in the first meeting for Nectar token holders, with future direction and actions established for Ethfinex’s development. 7

Nectar 2.0 Background Under the original model, NEC was inflationary, with new tokens created in proportion to trading volume and distributed to market makers. The Nectar (NEC) token was launched in February The original NEC 1.0 model was inflationary, such 2018 with the primary purpose of incentivising that the amount of NEC issued per USD value of liquidity on the Ethfinex centralised exchange. trading volume on the exchange decreased over Traders who provided liquidity to the order books time. Traders were incentivised to provide liquidity were rewarded with NEC tokens when their limit to the exchange sooner rather than later due to orders were matched. Tokens were issued in the declining issuance schedule. proportion to each trader's share of total exchange maker volume. This was not only a novel concept The token was also used to make governance at the time, paving the way for a host of copycat decisions via a community portal at Nectar. exchange tokens, but also acted as an effective Community. For example, NEC holders were issued mechanism to distribute the token to those who temporary voting tokens which they were then had the greatest involvement with the exchange. able to use to vote new tokens onto the exchange. There were 14 such voting rounds leading to over Furthermore, 50% of Ethfinex exchange trading 40 new tokens being added to Ethfinex. 3 fees were pledged to NEC holders via a set of smart-contracts on the Ethereum blockchain to token holders. As of 20th September 2019, there are 17,807 ETH1 (~4.0 million USD) pledged to holders. 1 address/0xc6cde7c39eb2f0f0095f41570af89efc2c1ea828 2 8 3

Nectar 2.0 Impetus for Change Since the launch of the concept for the Nectar token and the Ethfinex hybrid self-custodial exchange in the first Ethfinex whitepaper, published on 2nd August 2017, our technology has continued to develop. Since the launch of the concept for the Nectar • Single-use, tradable, voting rights, dissociated token and the Ethfinex hybrid self-custodial from the underlying tokens, allowing for exchange in the first Ethfinex whitepaper , 4 complex voting mechanisms (Ethfinex Voting published on 2nd August 2017, our technology Tokens or EVT); has continued to advance and there have been significant developments in the fields of: • The first exchange to make it possible to access order books and trade from a hardware wallet 1. Token economics; with a counterparty which is using a centralised exchange, thereby facilitating secure high- 2. Decentralised exchanges and other scalable volume trading. and/or privacy preserving blockchain-based applications; and These advances have continued to be developed through other projects. 3. Decentralised (community) governance. However, the original vision for Nectar included We believe Ethfinex has played a leading role an acknowledgement that the token must evolve in all three of these fields, contributing novel in-line with advancements in these fields, and the experimentation and many industry firsts, such as: current implementation is now out-of-date. • Trade-mined token distribution to incentivise The previous phase of Nectar’s journey was largely market makers; built around the centralised Ethfinex exchange 4 9

Nectar 2.0 platform, with an inflating supply of tokens earned External factors: continuously by those who traded on the platform. This simulated a mechanism akin to mining in The centralised and decentralised exchange proof-of-work to facilitate the initial distribution industry is changing fast, and there are now several of Nectar tokens to a large number of traders, competitive models for ‘exchange tokens’ which rather than through a sale or other distribution have survived the test of time. These exchange mechanism, and was subsequently dubbed ‘trade- tokens have evolved to not only provide traders mining’ when later adopted by numerous other with real utility and valuable benefits, but also to exchanges. provide a mechanism for traders to tie themselves to the long term future of an exchange that goes However, today, Ethfinex Trustless (now DeversiFi) beyond simply making and taking liquidity. has matured as a decentralised trading platform and has reached a point where its features and user experience can match those available on fully The most popular exchange token business centralised platforms. This growth will be taken models center around trading fees as a percentage one step further with the imminent introduction of trading volume. However, as competitive forces of margin trading and several novel features. At grow, exchanges are required to compete across the same time, tools for decentralised community new dimensions and make money from added governance have also significantly advanced. For value services, such as listings, initial public instance, projects such as Aragon and DAOstack 5 offerings and sale of market data. This is similar to are starting to be used to make and implement the traditional exchange sector6 . decisions for production systems. Nectar is therefore able to take the next step along its journey, moving away from the centralised Ethfinex platform and redefining itself around Ethfinex Trustless, with all future decision making being made by an open and decentralised community. Consequently, Ethfinex Trustless will rebrand and evolve to become DeversiFi. Nectar must react to remain competitive as part of this changing landscape. 5 6 10

Nectar 2.0 Token Design Goals There are many important considerations and modelling involved in token design. Nonetheless, the following two considerations were at the forefront when designing the mechanisms and benefits in the new Nectar 2.0 model. 1 Simplicity 2 Incentive Alignment The design of the token must be simple. A The primary goal of Nectar is to amplify the cryptocurrency token adds new economic network effects which exist around liquidity on incentives onto whichever systems it interacts exchanges by aligning the incentives of traders, with. Ensuring these new incentives are clear (particularly those who contribute liquidity as therefore improves the efficiency of the token at market-makers) with the exchange. achieving its goal. Exchanges in the past were relationship Holders of the token (predominantly traders businesses, with customers choosing to trade at in this case) must be able to understand the the marketplace or venue where they had the best model and calculate its value independently. The relationships and incentives. Blockchain enables token’s design may still contain many facets and these incentives and relationships to be codified, utilities but they should be complementary and transparently and immutably. This results in standalone, rather than interacting in complex benefits from loyal long-term relationships with ways. a particular platform such as DeversiFi. Nectar is the vehicle for representing this loyalty. Thus, it must incentivise behaviour which brings liquidity and trading volume to DeversiFi and must reward long term traders and Nectar token holders when the platform is successful. 11

Nectar 2.0 NECTAR Utilities & Benefits EVOLUTION 12

Nectar 2.0 1 Token Supply Reduction and the Switch from Inflation to Deflation The original Ethfinex whitepaper proposed an Secondly, uncertainty is created by a supply which innovative method for slowly distributing tokens has been inflating in proportion to uncertain every month to ensure that the distribution was trading volume. Calculating the token value aligned with the largest users of the exchange over is therefore challenging for traders who earn time. This method was implemented in February them or for users who buy and sell them. Market 2018, with tokens being earned and distributed makers want to know in advance of trading the ever since. transaction cost and be able to factor this into their trading strategy. The variable ‘rebate’ which As a result, over 20007 accounts are holding Nectar Nectar tokens represented (credited only once tokens, either on their centralised Ethfinex wallet or per month) inhibited these strategies in many in their privately owned Ethereum wallets. As users cases. The clear takeaway is that simplicity is must be trading to earn tokens, the token holders essential, and that the Nectar 1.0 model was are familiar with the industry and are positioned to overly complex. be able to guide the next steps for Nectar in a way which pure speculators would not be. Proposal Challenges The switch to Nectar 2.0 will represent a switch from inflation to deflation, whilst at the same Firslty, a high proportion of tokens are held in time destroying 80% of undistributed tokens, centralised on-exchange wallets. Therefore, the and will involve conducting a ‘staking’ event to visibility of the token distribution and the token result in a further supply reduction. holders has been extremely low. This lack of visibility has inhibited Nectar’s usefulness in the Token holders will stake their Nectar tokens (lock past for several of our governance experiments them into a smart-contract on the Ethereum such as token listings. blockchain) to opt into the changes. As of 19th of September 2019 7 13

Nectar 2.0 An indirect consequence of this 'staking' event will NEC 1.0 Distribution be to make the full distribution of Nectar tokens Community transparent on-chain. Today, more than 90% of 20% tokens appear to be held in the top 5 on-chain addresses, but these addresses actually represents all of the tokens which are held in hot and cold storage on behalf of Ethfinex exchange customers. More details about the implications of this are provided under the DAO Launch section. Total: Customers of Ethfinex Centralised exchange 1.018b will be able to continue trading via DeversiFi by NEC transferring their funds to a wallet which only they Ethfinex control, or alternatively will be able to continue 50% using their account with centralised custody via Bitfinex. Bitfinex Once this migration has been completed, Ethfinex 30% Centralised will slowly be closed down. Issuance of Nectar tokens will cease and the supply will then NEC 2.0 Distribution - after burning event become fixed or deflationary. Community 28% To mark this milestone, Ethfinex will reduce (circulating) the supply by destroying 80% of its remaining undistributed tokens (which represents 400 million Burnt tokens). As a result, Ethfinex will no longer have a (Inactive) voting majority of tokens going into the community governance phase. Tokens held in inactive or lost accounts, or earned but never claimed through Burnt (Ethfinex) verification on Ethfinex, will never be transitioned Total: to Nectar 2.0 and as a consequence the supply will ~570m be further reduced10. NEC DeversiFi 18% (5 year vesting) Bitfinex 54% (5 year vesting) 10 14

Nectar 2.0 2 Whitelist Removal and Ecosystem Growth A whitelist was active at launch, which required users who earned Nectar tokens and transferred them on the Ethereum blockchain to have One of the agreed a set of terms and to have registered changes proposed their identity with Ethfinex. This was seen as a for Nectar 2.0 is the short-term solution and necessary precaution at the start of Nectar’s journey. complete removal of the whitelist, which will New Changes: allow the tokens to be One of the changes proposed for Nectar 2.0 is transferred freely among the complete removal of the whitelist, which will all Ethereum addresses allow the tokens to be transferred freely among all Ethereum addresses. At the same time, this will allow the tokens to interact with the permissionless decentralised finance ecosystem being built on Ethereum. Nectar will be traded more widely on both centralised and decentralised exchanges because trading will no longer be restricted by the need for identity verification to Ethfinex. 15

Nectar 2.0 3 DeversiFi: Fee Discounts The value of Nectar will now be tied to the success of on her first 10 million USD equivalent of 30-day decentralised exchanges, starting with DeversiFi11 trading volume. (previously known as Ethfinex Trustless). This discount structure provides a clear and As a consequence, holding Nectar entitles traders easily calculable value for Nectar, in terms of the to fee discounts based on a linear schedule. The discounts that buying and holding Nectar gives to discounts are based on the average balance in a particular trader using DeversiFi. For example, the user's address over the past 30 days, which if a trader expects to do 10 million USD of trading incentivises holding and reduces circulating volume every 30 days, buying and holding 100,000 supply. Tokens locked in the necDAO will also NEC can give them a saving of 4000 USD per 30 count towards discounts. days. The fee discount is applied on a rolling basis Fee discounts are also available to incentivise based on the user’s reference amount of NEC (the placing larger orders and reaching higher 30-day average balance in the user’s address over the past trading volume thresholds. Each of these three 30 days). If Alice holds 1 NEC she will be eligible for discounts are applied commutitavely to keep the a 20% fee discount on her first 100 USD equivalent calculation simple. e.g. Max discount = 100 x (1 - (1- of 30-day trading volume every period. If she holds 0.3) x (1-0.2) x (1-0.2)) % 100,000 NEC she will be eligible for a 20% discount 20% Discount Volume Order Size on 30-day trading Volume $ Discount Order Size Discount NEC Held volume up to 0 0% $0.00 0.00% 0 $0 $150,000 5% $500.00 15.00% 100 $10,000 $1,000,000 10% $2,000.00 20.00% 1,000 $100,000 $4,000,000 15% 10,000 $1,000,000 $9,000,000 20% 100,000 $10,000,000 $18,000,000 25% 1,000,000 $100,000,000 $30,000,000 30% ∞ $∞ 11 16

Nectar 2.0 4 DeversiFi: Buy & Burn Model The NEC supply will be reduced over time by Advantages of auction system (as opposed to applying a buy & burn model. Once a week, NEC direct market purchases): tokens will be purchased, using up to 50% of • The buying of NEC happens on a known the revenues from DeversiFi trading fees, via an schedule using auctions, and these cannot be open and transparent auction mechanism. The front-run; purchased NEC tokens will then be burnt. • Participation is open to anyone and transparent; • Price discovery of auctions is fair, even during The percentage of revenues used will increase as periods of low volumes, and the price can be the daily trading volume increases, amplifying the arbitraged to the market; effect of these buy-backs. The buy-backs will be • No legal risk of price manipulation from an operated using a smart-contract auction similar entity buying NEC manually on the market; to that developed and deployed by the Melon • Auctions can occur using multiple fee Protocol .12 currencies, removing the need to first convert all collected fee revenues into one currency. Advantages of buy-back on the price of NEC: • Creates a direct link between NEC price and trading volumes on DeversiFi; and • Daily auctions provide continuous buy-side pressure for NEC markets. 24-hour trading volume Percentage of revenue used 0 - 0.1m USD 0% 0.1 - 1m USD 10% 1 - 10m USD 20% 10 -100m USD 30% 100m - 1b USD 40% >1b USD 50% 12 17

Nectar 2.0 Revenues dedicated to NEC buy & burn (full schedule) $300m 50% Daily Buying Power Buy-back Rate $200m 40% 30% $100m 20% 10% $0 $200m $400m $600m 0% Daily Volume $800m $1bn Nec % Burn Buying Power Revenues dedicated to NEC buy & burn (daily volumes up to $10m snapshot) $2.0m 40% $1.5m 30% Daily Buying Power Buy-back Rate $1.0m 20% $0.5m 10% $0.0m 0% $2m $4m $6m $8m $10m Daily Volume Nec % Burn Buying Power 18

Nectar 2.0 5 necDAO: Decentralised Autonomous Organisation A substantial decentralised organisation will thousand person organisations. be launched on behalf of the 2000+ Nectar token holders, with the purpose of growing and Reputation (voting power) in the necDAO will governing the world’s largest decentralised be distributed via two major mechanisms to exchange network, as well as promoting Nectar Nectar token holders, with a final small part of token utility. It will launch as one of the most highly the reputation reserved to be sold (see reputation funded DAOs, owning over 17,000 ETH (if every scheme section for more information). Nectar token holder opts in), with rights to govern aspects of DeversiFi as its initial remit. At launch, the necDAO will be one of the largest DAOs in the industry, with a substantial amount Governance technologies are a rapidly evolving of funding and many participants in the DAO. stack in the blockchain space. For over 12 months The necDAO will also be run by NEC holders who Ethfinex has been contributing to this area are likely to be traders first and foremost with of research, through significant experiments immeasurable experience and knowledge. NEC using a novel token listing process, Kleros , for 13 holders will be able to make proposals, deploy decentralised evaluations of tokens, a 3-day capital and grow the DAO as they see fit. The Governance Summit 14 and the use of DAOstack 15 necDAO will exist independently of DeversiFi, but for allocation of funds for community bounties. given the utility that DeversiFi gives NEC, there should be a close and synergistic relationship. For To leverage the compounding effects of instance, NEC holders may wish to propose and permissionless innovation in this field, we intend fund new features for DeversiFi, agree marketing to build upon and contribute back to the leading & events budgets, or propose additional incentives technologies for community governance. New for traders who contribute to DeversiFi. The models based on prediction markets for decision necDAO places the NEC community in direct making, via DAOstack, are now mature enough control of a substantial amount of ETH and also to be used and make it possible to coordinate puts them at the heart of DeversiFi. 13 14 19 15

Nectar 2.0 5 necDAO: Decentralised Autonomous Organisation continued Scope, Assets and Funding necDAO will have scope to govern: The necDAO will manage: • the "fee pot" (50% of trading fees collected • A whitelisted tokens registry (dictating the so far during the Nectar distribution phase assets which can be traded on DeversiFi) on Ethfinex, around 17k ETH). • The Ethereum Name Service records registered for the DeversiFi smart-contracts When a nectar holder claims their reputation • Ownership of the Nectar ERC20 Token in the new DAO, they are asking for their controller smart-contract for future upgrades proportional share of the “fee pot” to be • The management of the earned exchange transferred to the DAO. fee pot (around 17k ETH) The "fee pot" will begin slowly dripping funds to the DAO via a vesting contract over a 3 year vesting. This allows vesting to be cancelled if vulnerabilities are later found, rather than having the full funds at risk in a complex smart- contract. Future funding may come from other sources which the DAO develops or negotiates. 20

Nectar 2.0 DAO Launch Process In order to provide adequate time for NEC holders to orientate themselves with the intricacies of the necDAO and its processes, the launch will be split into several sections: 1 Education and bug bounty 6 weeks 3 Redeeming phase 2 weeks 20th September 2019 7th December 2019 Begin the education of Nectar token holders During this phase, Nectar token holders can about DAO vision and functionality. Provide claim their Reputation and become familiar with tools and training about the launch process. The the tools for making and voting on proposals. bug bounty runs for 1 month to incentivise the Proposals can be made to the DAO but may discovery of vulnerabilities, alongside multiple not be voted on or accepted. security audits. 2 Reputation bootstrap 4 weeks 4 Governance phase indefinitely 7th November 2019 14th December 2019 During the reputation bootstrap phase, no The perpetual governance phase begins. governance functions are available, but the DAO The vesting of the DAO’s funds, held as Ethereum, is deployed and Nectar token holders can begin begins to become available allowing proposals to earn their Reputation. This ensures that there to request them. will be a wide distribution of Reputation by the time the first proposals are presented. 21

Nectar 2.0 The total Reputation available is 1 million The time that staked tokens are locked for can be (Reputation is not transferable). There will be three increased at any point by the user. For example, if ways of obtaining Reputation. Two of these will a user is already locked for 3 more months, they exist only during the initial bootstrap phase, and may lock from now up to 12 more months, and the third will be perpetual. update their score accordingly. A. Nectar Staking scheme B. Nectar Snapshot scheme Perpetual – 850k Reputation available (Initial – 100k Reputation available if all claimed) Each month there is a new staking period, where The scheme will have a predefined block number users may lock Nectar tokens. (b), which will represent the snapshot of token holders. There will be a total Nectar tokens (T b ) When staking, a user will indicate the number at the snapshot. The current Nectar token smart- of periods (N) he is willing to lock his tokens contract allows balances at a historic block- (maximum of 12 periods). Staking tokens involves number to be queried. transfering them to a smart-contract. During the bootstrap period (4 weeks), an agent Every month there is a Reputation auction. For a that held tb Necar tokens during the snapshot period (n), there is an amount of Reputation (Rn) can claim Reputation. The Reputation received is: available, which is defined by: tb R= 100k rep n Tb Rn = R0 a where a=0.9 and R0 =85 Rep. Reputation will only be redeemable at the end of the bootstrap period. Reputation not claimed The Reputation available in each period is divided will be lost. Note that exchanges must claim pro rata w.r.t a score. The score for each user is: reputation on behalf of customers in order to unfreeze NEC, although it is not transferable. S = NT It is therefore recommended that all holders withdraw from exchanges in advance. where N = remaining periods and T = NEC tokens. C. GEN token Auction (Initial – 50k Reputation available) To avoid programmatic math issues, the number of periods will not continue to infinity, rather, it will There will be 10 auctions lasting 3 days each. be capped at 100 (~8.3 years), at which point the new available Reputation will have already become Reputation in the auctions is bought using negligible. DAOstack GEN tokens. The acquired GEN is then owned by the DAO and used to reward those who make proposals. 22

Nectar 2.0 Reputation distribution schemes C. Gen Auction 5% A. Nectar staking B. Nectar Snapshot 85% 10% Note: All Nectar tokens will be frozen at the start Legal Disclaimer of the transition to NEC 2.0. Once a token holder participates in the DAO, by staking or claiming It is not expected that Ethfinex Inc. or any other during the redeeming phase, their tokens become legal entity will provide any new utilities or transferrable. Nectar token holders opting not to roadmap for Nectar after launching 2.0. participate will be able to destroy their NEC to claim the proportional share of Ethereum held on Once the DAO has launched, it is responsible for their behalf. After 12 months, tokens which have the future roadmap and development of NEC and not been unfrozen or destroyed will be considered owns all of the infrastructure created, proposed inactive and cease to exist. Exchanges should be and launched on its behalf. aware of this in order to un-freeze customer funds. All future decisions and new utilities proposed for Nectar must be decided and implemented Governance schemes by its DAO. Whilst the DAO may make decisions regarding Nectar it cannot bind third parties. There will be 3 schemes available during So, for example, were the DAO to propose to use governance. Each scheme will have different 100% of DeversiFi’s revenues to buy back NEC this parameters, depending on what the aims of the could not be done as it would not be a decision corresponding proposal. For example, a proposal within the DAO’s competence. However the DAO to transfer funds outside the DAO requires a higher may propose an offer to DiversiFi or another level of agreement and requires a longer challenge third party to buy, for example, an additional 10% period before passing compared to a proposal of future revenues for the DAO. The third party which simply signals agreement. would be at liberty to reject this offer as with any commercial transaction. 23

Nectar 2.0 DeversiFi A new company will continue to operate, build, develop, and improve DeversiFi (previously Ethfinex Trustless) and may add new features to it. 24

Nectar 2.0 A new company will continue to operate, build, Conclusion develop, and improve DeversiFi (previously Ethfinex Trustless). It will have no obligations to This paper has detailed the evolution of the Nectar Nectar holders or the necDAO beyond providing (NEC) token since its inception in February 2018, the stated fee discounts and using a specified part the impetus for change and the move to the new of revenues to buy and burn Nectar as outlined NEC 2.0 model. above. However, it may choose to make new features that might benefit the necDAO. DeversiFi will be adding new utility to NEC, for Over the next 24 months of operations, the new instance in the form of large fee discounts and company will focus on achieving the following pledging an escalating share of exchange trading goals and milestones: revenues to buy & burn circulating NEC tokens. NEC 2.0 will move to a deflationary model, instead of • Reaching 10 million USD trading volume per day. the previous inflationary model, and DeversiFi will also burn 80% of its own NEC tokens ($24m USD at • Scaling to achieve average throughput of > 1 current prices) in order to reduce the total supply. transaction per second using Zero Knowledge The 17807 ETH which was pledged to NEC holders proofs for batch settlement. from Ethfinex exchange fees will be deployed into a new necDAO, controlled exclusively by the 2000+ • Adding margin and funding capabilities via integrations with other DeFi systems, such as strong NEC token holder community, in one of the trading of leveraged tokens. world’s largest DAOs. • Growing its cross-chain offering to allow the The above detailed changes have been carefully trading of tokens and currencies which are not put together in consultation with NEC holders and native to the Ethereum blockchain. represent a comprehensive overhaul of the NEC token economics. These changes mark the start of an exciting new chapter for NEC, NEC token holders and DeversiFI. 25