Recently, Torches Finance, the first lending protocol on KuCoin's public chain project KCC, made an adjustment: the base rate of sKCS has been changed from 3% to 1%.
Many people are puzzled about why Torches made this decision. After conducting some research, I discovered that Torches is cleverly utilizing platforms like KuCoin Spotlight and BurningDrop for its strategic positioning. For KuCoin users, this adjustment by Torches allows them to participate in KuCoin's activities at low cost or even zero cost, while enjoying generous token rewards from BurningDrop.
Next, I will explain the underlying principles and the projects and platforms involved.
Why did Torches reduce the base rate of sKCS?
First, I will introduce some basic background of the involved projects. KuCoin is a globally renowned crypto exchange, and KCC (KuCoin Community Chain) is its public chain. KCS is the platform token of KuCoin and the core fuel of KCC. BurningDrop is an initial token distribution platform provided by KuCoin, where users can lock liquidity to receive token distributions. The commonly used tokens for participation are KCS, ETH, and USDT, with corresponding distribution coefficients of 1.5, 1.2, and 1.
Torches Finance is a lending protocol on the KCC chain, allowing users to borrow tokens through over-collateralization. As Torches is one of the few platforms that allow borrowing of KCS, and with KCS having numerous use cases, Torches' Total Value Locked (TVL) remains relatively stable, and the asset utilization rate is increasing.
sKCS.io is a liquidity staking protocol based on KCS, and sKCS listed on Torches in 2022.
You may have heard about the recent attention-grabbing SUI ecosystem. Several well-known exchanges such as Binance and OKEx have already listed tokens related by the SUI ecosystem, and KuCoin is no exception. One of the key players, BurnDrop, announced on its official announcement on May 5th that it would launch token activities for SUI on the following day (May 6th). Users can obtain SUI tokens by staking KCS. For more details, please refer to the official announcement. Although there have been criticisms about the instability of the token price due to unidentified institutions or individuals selling off after the launch of several projects in the SUI ecosystem, the SUI ecosystem remains popular in the current market without significant hotspots.
With the booming popularity of the SUI ecosystem, there has been a surge in demand for KCS from users. Especially for those who do not want to bear impermanent loss associated with buying KCS, borrowing KCS from Torches has become their preferred choice. However, as a lending protocol, an increase in borrowing volume inevitably leads to an increase in borrowing rates. Therefore, by reducing the base rate of sKCS, Torches brings sKCS back into the spotlight. Users who do not want to pay high borrowing rates can borrow sKCS and then convert it to KCS to participate in KuCoin activities.
Feasibility Analysis of Borrowing sKCS to Participate in KuCoin BurningDrop
Conventional Procedure: To participate in KuCoin BurningDrop by borrowing KCS, users simply need to deposit their assets (BTC, ETH, KCS, USDT, USDC, sKCS, etc.) into Torches Finance and borrow KCS. They can then transfer the borrowed KCS to KuCoin to participate in various activities.
Cost = Transaction gas fees (usually very low, around 0.0003 KCS) + Fees for transferring assets to the KuCoin(usually low, depending on the situation) + Interest.
According to the latest displayed APY for Torches lending, the current APY for KCS is 10.2%. To participate in BurnDrop, the required lock-up period is 20 days, with a personal cap of 350 KCS.
If a user directly borrows 350 KCS on Torches, they would need to pay 1.96 KCS as interest (10.2% * 350 * 20/365 = 1.96). We can roughly estimate the cost of borrowing KCS to participate in KuCoin BurningDrop as 1.96 KCS.
Alternative Options: Borrowing sKCS to Participate in KuCoin BurningDrop
With the increased demand for KCS in KuCoin activities, the borrowing volume of KCS on Torches Finance is relatively high. This may result in KCS on Torches being fully borrowed or an increase in interest rates due to a large number of borrowers. As a result, borrowing sKCS has become a new option.
Currently, there are two ways to convert sKCS to KCS: First, using DEX on the KCC, such as MojitoSwap, to convert sKCS to KCS. The second method is to unstake sKCS into KCS on sKCS.io.
Next, I will explain the processes and costs involved in each of these two operations.
1.Using DEX to Swap sKCS for KCS
Advantages: Immediate swapping of sKCS for KCS without waiting.
Disadvantages: DEX has slippage, which increases the cost.
Suppose a user borrows 200 sKCS from Torches Finance, with an APY of 1.23% for borrowing sKCS. If the user swaps the borrowed sKCS on MojitoSwap, they would receive approximately 204.543 KCS (at the real-time exchange rate, with possible deviations). On sKCS.io, the equivalent amount of sKCS that can be exchanged for KCS is 206.323, resulting in a difference of 1.78 KCS.
Taking into account the lock-up period required for participating in BurnDrop, the user would need to pay 0.134 sKCS as loan interest (1.23% * 200 * 20/365 = 0.134), approximately 0.138 KCS.
Assuming no gas or transfer fees, we can roughly estimate the cost of this operation as 1.78 + 0.138 = 1.918 KCS.
2.Using sKCS.io to Unstake sKCS into KCS
Advantages: No slippage.
Disadvantages: There is a lock-up period, and unstaking sKCS usually takes 3-6 days.
Suppose a user borrows 200 sKCS from Torches Finance, with an APY of 1.23% for borrowing sKCS. If the user unstakes the borrowed sKCS on sKCS.io to exchange for KCS, they can obtain approximately 206.323 KCS but need to bear a lock-up period of 3-6 days. Considering the longest lock-up period, the user would need to borrow sKCS for at least 26 days, resulting in an interest payment of 0.175 sKCS (1.23% * 200 * 26/365 = 0.175), approximately 0.18 KCS.
Assuming no gas or transfer fees, the cost of using this method to participate in KuCoin BurningDrop can be roughly calculated as 0.18 KCS. However, there is a possibility of being unable to successfully participate in the BurningDrop if the lock-up period is too long.
Lowering the base rate of sKCS by Torches Finance is a good attempt. When the expected returns from BurningDrop are significant, users can borrow KCS or sKCS from Torches Finance to avoid impermanent losses. However, it is important to note that investments carry risks, and everyone should make rational decisions based on their own needs. The information I provided is only for reference and does not constitute investment advice. It is also welcome to share investment strategies and engage in rational discussions.
If you frequently participate in KuCoin activities, borrowing sKCS in advance and exchanging it for KCS on sKCS.io is a good option. When there are no ongoing activities, you can enjoy the yield farming incentives on KuCoin, and when there are activities, you can directly participate.
For example, if a user borrows 200 sKCS in advance on Torches before the activity starts and unstakes it into KCS on sKCS.io, and waits for a lock-up period of 6 days (actual lock-up period is 3-6 days, subject to actual operation), they can receive approximately 206.323 KCS (for reference, calculated based on the real-time exchange rate). Assuming there are 15 days remaining until the BurningDrop activity starts, the user can deposit the obtained KCS into KuCoin to enjoy a 1.58% APY yield farming incentive (available with a minimum of 6 KCS, subject to potential fluctuations, based on real-time data), and receive 0.134 KCS (206.323 * 1.58% * 15/365 = 0.134). As participating in BurnDrop requires a 20-day lock-up period, the user would need to borrow sKCS on Torches for a total of 41 days. The interest to be paid in this case would be 0.276 sKCS (1.23% * 200 * 41/365 = 0.276), approximately 0.284 KCS. Ignoring gas and transfer fees, the approximate cost the user would need to pay is 0.142 KCS (0.276 - 0.134 = 0.142).