The POSEIDON token is the governance token of the H2O protocol. It has two main functions inside the protocol:
- Ungovernance: once governance minimization is finalized, POSEIDON holders will be able to remove control from any remaining components in H2O or, if needed, continue to manage components that may be challenging to ungovern (such as oracles or any other component interacting with other protocols).
Before the protocol is governance minimized, H2O will be set up so that stability fees (borrow rate charged to Safes that mint H2O) flow in three places:
- The stability fee treasury, which is a smart contract in charge with paying for oracle updates or any other contract meant to automate H2O parameters.
- POSEIDON stakers, which are the first line of defense for the protocol.
- Buyback and burn, is meant to auction H2O in exchange for POSEIDON which is subsequently burned.
In the case of POSEIDON stakers, the H2O that accrues for them is auctioned in exchange for POSEIDON. The POSEIDON proceeds from the auction are then sent to the staking pool.
As for buyback and burn, H2O is first accrued in the protocol's balance sheet. Once there's enough H2O in the balance sheet, the protocol can start to auction some of it in exchange for POSEIDON that is then burned.
To visualize all this, you can check the diagram below:
NOTE: H2O only flows to the stability fee treasury, stakers, and the protocol's balance sheet when the borrowing rate charged to SAFEs is positive. When the borrowing rate is negative, the protocol uses funds from the balance sheet to repay H2O debt from all SAFEs.
- Stakers are in charge of protecting the H2O protocol from insolvency. They stake POSEIDON/OCEAN Uniswap v3 LP tokens in a smart contract that then constantly checks whether H2O is well-capitalized.
- In case the protocol is undercapitalized (has debt that is not backed by collateral), the staking pool will start to auction POSEIDON/OCEAN LP tokens in exchange for H2O that is then used to bring the protocol above water. Stakers will get diluted in this process.
- In exchange for protecting the protocol, stakers receive more POSEIDON.
With respect to depositing OCEAN into SAFEs, there is no lockup period being implemented when depositing OCEAN to mint H2O. However, before the “ungovernance” decentralization minimization process is complete, POSEIDON token holders may vote to change this and other system parameters.
With regards to the staking pool, the following are being considered for the main net:
- Exit delay (thawing period): 21 days
- Reward unlock period: 3 months. Locked rewards are unlocked linearly during a 3 month time period from the moment a staker requests that they claim their rewards
- Percentage of rewards unlocked over 3 months: 75%
- Percentage of rewards that can be claimed right away (no unlock): 25%
- Percentage of LP tokens in the pool that can be slashed/auctioned: 30% (the rest of the pool isn't auctioned/slashed)