Grant Application: "kHOLE" kETH vault blackhole for discounted swaps

[JohnBrown]

Introduction

This application seeks a grant in the amount of 5 million BSN tokens to build and open-source a contract and dApp that allows LST depositors to swap LST’s to ERC-20 tokens for a large discount to current market price. Users that supply ERC-20 tokens for the swaps are entitled to a share of swap fees, minted kETH, and farmed BSN each epoch (30 days). A Proof-of-Concept smart contract has already been deployed and successfully tested in Goerli testnet.

This application outlines a project scope, predicted impact, timeline, and required resources for the proposal. See the bribe marketplace for Fren Delegation at https://etherstake.house for an example of my previous work.

Background

The kETH vault relies on LST holders to deposit their LSTs into the vault. A smart contract could be deployed to incentivize LST holders to swap their LSTs for an ERC-20 token (such as WETH) for a heavy discount to market price. Such a contract would deposit the LSTs to kETH vault and never redeem the kETH to create a “blackhole” or kHOLE. The kHOLE contract could also stake the kETH to farm BSN rewards from the kETH vault. To take this even further, the kHOLE contract could stake just 25% of the minted kETH, allocate 25% of minted kETH to kHOLE LP stakers, redeem the other 50% of minted kETH for ETH and deposit the ETH proportionally to the MEV and Protected Giant Pools for Stakehouse validators to use.

Potential allocation of minted kETH:
25% - Staked for BSN farming
25% - Allocated for kHOLE LP stakers
50% - Redeemed for ETH and deposited to Giant Pools

kHOLE discounted swaps would rely on ERC-20 token depositors, who would receive kHOLE LP Tokens in return (LP token mint amount is equal to the ERC-20 deposit value in ETH). Staking the kHOLE LP token will entitle the staker to a share of swap fees, minted kETH, and farmed BSN tokens each epoch (30 days).

Swap fees

When an LST holder swaps, for example, 1 rETH for WETH at a 20% discount with a 10% fee, the 10% fee is calculated on the total 1.2 WETH swap amount, so the fee is 0.12 WETH. In this example, the LST swapper receives 1.08 WETH for their 1 rETH deposit. kHOLE LP Stakers may claim a share of the swap fees each epoch proportional to their staked LP balance at the beginning of the epoch.

Minted kETH

25% of minted kETH will be allocated for kHOLE LP stakers to claim each epoch proportional to their staked LP balance at the beginning of the epoch.

Farmed BSN tokens

25% of minted kETH is staked in the kETH Vault to farm BSN rewards for kHOLE LP stakers to claim each epoch proportional to their staked LP balance at the beginning of the epoch.

High-level Overview

Users who hold liquid staking tokens such as dETH, rETH, stETH, etc may use the kHOLE to profit from new arbitrage opportunities spawned by discounted swaps.

ERC-20 holders who wish to earn perpetual swap fees, minted kETH, and farmed BSN rewards may use the kHOLE to deposit their tokens to fund discounted swaps.

Grant Application

Applicant background

JohnBrown has over 5 years of experience in software development, and over 1 year working with Ethereum and DeFi. The applicant has developed and deployed other dApps for token locking and distributions, direct depositing ETH to Stakehouse validators, and has extensive experience with web3 in Python and Javascript. The applicant may be contacted on Discord: JohnBrown#0339.

The applicant recently completed a separate Grant Application to build a bribe marketplace for Fren Delegation.

Project scope

The scope of this grant should be limited to open-source development and testing of the kHOLE contract and swap dApp frontend and backend.

The applicant is not responsible for hosting the dApp or deploying the kHOLE to mainnet. Anyone should be able to host the dApp and deploy the kHOLE since the code will be open source.

Objectives for kHOLE contract:

• Allow LST holders to “blackhole” LSTs in return for discounted swaps
• Automatically stake 25% of minted kETH to kETH vault upon discounted swap
• Allocate 25% of minted kETH to kHOLE LP stakers upon discounted swap
• Automatically redeem 25% of minted kETH and deposit ETH to Stakehouse Giant Pools
• Allow token holders to “blackhole” tokens in return for kHOLE LP tokens
• Allow kHOLE LP holders to stake kHOLE LP tokens (minimum stake time is to be determined)
• Allow kHOLE LP stakers to claim swap fees, minted kETH, and farmed BSN each epoch proportionally to their staked kHOLE LP balance.
  Documentation for deployment and interaction

Objectives for dApp:

• Intuitive and user-friendly UI
• Display token information, discount and fee percentages, and available liquidity for discounted swaps
• Allow LST holders to swap LSTs for discounted tokens
• Allow token holders to swap tokens for kHOLE LP tokens
• Allow kHOLE LP holders to stake their tokens
• Allow kHOLE LP stakers to see and claim their share of swap fees, minted kETH, and farmed BSN rewards
• Documentation for setup and use

Impact

With the kETH vault nearing mainnet launch, we should strive to build infrastructure that incentivizes its use. Discounted swaps will drive much needed LST deposits to the kETH vault and make it stand out among other tokens that market themselves as a basket or index of LSTs.

Timeline

Months since grant accepted - Objective

1

			      kHOLE contract running in Goerli testnet
			      Code for kHOLE contract and dApp open-sourced on Github
			      dApp: Approve & Deposit ERC-20 tokens to kHOLE
		                  dApp: Swap LSTs for discounted tokens
			      Solidity: Allow LST swaps for discounted tokens
			      Solidity: Allow ERC-20 token deposits in exchange for kHOLE LP

2

                  dApp: Allow kHOLE LP staking
		  	  dApp: Allow kHOLE LP Stakers to claim share of swap fees, minted kETH, and farmed BSN
			      Solidity: Allow staking kHOLE LP
			      Solidity: Allow claiming share of swap fees, minted kETH, and farmed BSN for kHOLE LP stakers

3

                  UI/UX enhancements
			      Software quality assurance, stress testing, penetration testing
			      Documentation and deployment instructions for dApp and kHOLE

Conclusion

A kETH blackhole will drive LST deposits to the kETH vault while creating new arbitrage opportunities with discounted swaps and growing the Stakehouse TVL. Such a contract could be exactly what Stakehouse needs to finally see the Giant Pools filling up for new validators. ERC-20 depositors who make this possible will be generously rewarded with perpetual fee and kETH emissions.

I recommend that the Grants Council issue 5 million tokens for the completion and open-sourcing of this project.

[Kentphilly]

This is a terrific product that I would like to help move along the review process for the collective community to give feedback.

This Tweet/X post from Pol highlights the kHOLE product in a diagram.

[Kentphilly]

@JohnBrown - After talking more with the Grants Committee, we’d like to get guidance from the core team on how to move forward here.

Immediate feedback is that we’d like to see the estimated value and number of users/stakeholders who will use this solution. We also think 5M BSN is too much without validation of the impact this will provide.

Also if you’re open to a lower grant amount this could be more applicable along with the additional value to the community information we’re looking for above. These two things along with a positive “yes” from the core team could help the grants council push this forward to approval.

Thank YOU for your ideas, solutions, and energy into the community. We want to reward you while also protecting the treasury to ensure adoption of what we invest in.

[JohnBrown]

Reply to Grants Counil

I’m unable to estimate the potential value or user-base of such a unique dApp.

kHOLE would create a profitable arbitrage opportunity for LST holders looking to maximize their staking yields. If ERC-20 token suppliers can meet the demand, then a powerful flywheel effect may be achieved.

If ERC-20 depositors cannot meet demand, then perhaps the DAO or Councils could deposit BSN or WETH to get things started.

The Bribe marketplace contracts and a frontend UI were completed for 3m BSN. The Liquidity Council has already deployed a 5m BSN bribe to reward validators who join the BLOCK network.

If the BLOCK network brings in 5 validators with the bribe, then the Councils will have paid 8m BSN to attract 160 ETH.

Since the kHOLE contracts and frontend UI will be more complicated and take more time, I am asking for 5m BSN to complete this project.

I am open to counter-offers.

Adding BSN utility in kHOLE

We can implement BSN utility in kHOLE to add more value to this project.

Here are some initial proposals:

• staking a certain amount of BSN is required to use kHOLE discounted swaps
• staking BSN in kHOLE entitles the LST swapper to a larger discount on ERC-20 swaps (up to 100k BSN staked gives 10% larger discount for example)
• each discounted swap requires burning an amount of BSN (either proportional to the trade amount or a flat fee)
• staking BSN in kHOLE entitles the ERC-20 supplier to a larger share of fee emissions and minted kETH
• each claim of fee emissions or kETH requires burning an amount of BSN from claimants wallet

[Kentphilly]

Thank you for the updates, the Grants Committee approves of your updated proposal.

Regarding adding in BSN utility for kHOLE, can we take this conversation to Discord to get community feedback before implementing a solution?

I believe this is 100% necessary but I’m not sure which way is the best to implement and try first. I assume staking a certain amount of BSN is the best, just determining what this then offers (aka the ability to use kHOLE or the ability to get a larger percentage of profits) is up for discussion.

Thank you for your patience and value you bring to the community. We are excited to see this implemented and to help support this infrastructure in the community ahead.

[Kentphilly]

@JohnBrown - Can you please also give the Grants Council / Community an estimated timeline on the project? Specifically, when testing, launch, and marketing support are planned?

With a timeline and confirmed payment address, we can then schedule and plan to pay upon completion of milestones.

This will help us help you make this successful by looping in other community members once kHOLE is ready for use. Thank you.