Inside Local Money’s fee distribution model
How the protocol captures value, rewards stakeholders and secures its sustainability.
With the latest update of our protocol in the Kujira’s Testnet, we started testing our Fee Distribution logic. Every time you complete a trade on Local Money, a few things happens “under the hood”, using the power of the CosmWasm smart contracts and the order-book based dex FIN, the protocol is able to automatize the distribution of fees among its stakeholders. This post aims to clarify this process, demystify the buyback and burn mechanism and lay out the plan for the migration of $LOCAL to the Kujira Blockchain.
Our protocol is agnostic to the payment methods used by the participants of a trade and doesn’t touch the fiat part of the transaction, the token, otherwise is sent to our escrow contract, that acts as a guarantee while the fiat payment is being made. An honest seller (bad actors and disputes will be handled in a different post) will release the amount sent to the escrow contract after verifying the receipt of the fiat funds, usually with a digital bank transfer or wallets like Venmo or PayPal. When the seller releases the token, then the process of fee capture and distribution starts.
The protocol captures 1% of every transaction, this amount is then divided between three final destinations: 40% to the buyback and burn of $LOCAL, 50% for Warchest funding and 10% to $KUJI stakers.
The buyback and burn of $LOCAL happens by converting the token being traded to $LOCAL and burning it, reducing the supply of $LOCAL and benefitting every holder equally. Let’s say you’re buying $100 worth of $KUJI with fiat on Local Money, then $0,40 of $KUJI would be swapped to $LOCAL using the KUJI/LOCAL pair on FIN, then using the Cosmos SDK native module, our contract burns the $LOCAL received from the trade on FIN.
The Warchest will be a contract that holds funds intended to be used for the sustainability and development of the protocol, the control of these funds will happen through governance proposals and will be locked until our governance module is implemented and released. In the scenario of the transaction above, $0,50 of $KUJI would be sent to the Warchest contract address.
Last but not least, in the spirit of #GrownUpDeFi :wink:, we think it’s important to reward the providers of the infrastructure that maintains the availability and decentralization of the protocol, in the same scenario, $0,10 of $KUJI would be sent to $KUJI stakers.
In summary, the protocol captures and distributes the fee in the token being traded, rewarding $KUJI stakers and funding the Local Warchest with a diversified basket of assets. It also buys $LOCAL, generating volume on $LOCAL pairs on FIN and burns it, reducing the total $LOCAL supply. If $LOCAL is the token being traded for fiat, then the conversion step on FIN is skipped.
Hopefully this post brings some clarity about the inner workings of one of the most important pieces of the protocol. Since we’re open source you can always head to our GitHub and see what we’re building in real-time, our devs are glad to answer your questions on our community Discord server. See you next time!