- Bancor v2.1 introduces single-sided exposure & impermanent loss protection to AMM pools via elastic BNT supply
- Initially, more than 60 ERC20 tokens will be supported as “protected” pools
- vBNT, Bancor’s new governance token, can be generated by staking in a protected pool
- Stake and earn Liquidity Protection (impermanent loss insurance) + swap fees on app.bancor.network (guide)
The promise of crypto AMMs to enable “passive” market-making for everyday users has proven to be elusive. While the risk of impermanent loss (IL) is increasingly understood among liquidity providers (LPs), the issue is yet to be effectively addressed by any AMM protocol.
Existing AMM pools require LPs to forfeit their long position on their tokens and take on exposure to other assets in the pool. Protocols compensate for these undesirable aspects of liquidity provision by incentivizing LPs with airdrops and liquidity mining rewards. However, these incentives only temporarily mask the issue.
As a result, liquidity provision has progressively turned into a game of “hot money” where short-term LPs hop from pool to pool trying to extract enough rewards to compensate for the cost of IL. This leaves many token holders not wanting to participate in AMMs or limiting their participation to avoid such risks.
Meanwhile, competition for liquidity providers between AMM protocols is fierce. In order to build a sustainable and profitable protocol, Bancor needs to offer something unique and non-replicable that liquidity providers value more than just plain subsidies.
Bancor v2.1 offers two key features to AMMs:
- Liquidity Protection (i.e., Impermanent Loss Insurance)
- Single-sided exposure
For example, if you stake 100 of a given token (“TKN”):
- The protocol will protect the value of your 100 TKN, regardless of their price.
- Meaning, you can enter a pool with TKN worth $100 and withdraw tokens worth $200 if the TKN price has doubled in the market. Plus swap fees.
Liquidity providers accrue Liquidity Protection over time while collecting fees from swaps. The longer you stay in a pool, the more protection you earn against impermanent loss, increasing the ROI of your collected fees.
How it works
Contrary to other AMM protocols, Bancor uses its protocol token, BNT, as the counterpart asset in every pool.
Using an elastic BNT supply, the protocol co-invests in pools alongside LPs and covers the cost of impermanent loss with swap fees earned from its co-investments.
Mechanics of elastic BNT supply to facilitate Liquidity Protection and single-sided exposure.
Let’s consider an example where 1 TKN = 1 BNT:
- A user deposits 100 TKN in a pool
- 100 BNT are minted by the protocol to match the user’s deposit
- From the issued pool tokens, half are associated with the user’s stake and half are associated with the protocol
- Volume goes through the pool
- Protocol pool tokens are now worth 110 BNT (due to fees)
- An outside LP deposits 110 BNT, which are burnt in exchange for the protocol’s pool tokens.
- Note that 100 BNT were originally minted and 110 BNT were burned, providing the protocol an excess of 10 BNT.
- Excess BNT earned by the protocol is burned to offset the cost of impermanent loss (when a future LP withdraws) and to deflate the overall supply of BNT.
The bancor.network front-end displays a user’s “protected” AMM positions.
Stake, protect and vote
BNT holders who provide liquidity to a whitelisted (protected) pool receive vBNT, which represents their protected BNT stake and can be used to vote in Bancor governance. This ensures that LPs and governance participants are one in the same.
Since Bancor v2.1 changes the protocol’s tokenomics, it is necessary to gain community approval in order to push the upgrade live.
BNT holders can immediately start earning Liquidity Protection by providing their tokens to a 50/50 whitelisted pool, protecting their stake and in return getting vBNT, the new Bancor governance token.
If v2.1 is approved, Liquidity Protection will kick in retroactively from the time an LP first deposits and protects their stake.
Note that before the proposed upgrade, LPs can stake with Dual-Sided Protection (i.e., with two tokens), while after the upgrade, LPs will gain the ability to also stake with Single-Sided Protection (i.e., with one token). In both cases, both their TKN or BNT will be protected, and their BNT share of the stake will determine the amount of voting power they receive, with 1 vBNT always equal to 1 BNT.
Supply options in the Liquidity Protection contract.
Below we propose an Initial Whitelist of roughly 60 pools, which can be changed by Bancor governance. In general, it is recommended to only whitelist pools with some amount of liquidity and conversions. While certain pools listed below already have sufficient activity, others still require it. We have indicated in bold which pools are already in the whitelist, meaning they are immediately available for Liquidity Protection. All other tokens below will be included once sufficient liquidity is added.
AAVE, ALEPH, ANT, BAL, BAND, BAT, BNB, BUSD, BZRX, CEL, CHERRY, COMP, CRO, CRV, DAI, DXD, ELF, ENJ, ETH, EWTB, FTT, GNO, gUSD, JRT, KNC, LEND, LINK, LRC, MANA, MATIC, MKR, MLN, MTA, NMR, OCEAN, OMG, pBTC, RARI, REN, renBTC, renZEC, RPL, RSR, SNX, SRM, STAKE, sBTC, sUSD, SUSHI, SWRV, SXP, TRB, TOMOE, UNI, USDC, USDT, WBTC, wNXM, XDCE, YFI, UMA, QNT, ZRX.
**To get most updated list of whitelisted pools, go to https://app.bancor.network/eth/protection/stake/, click “stake” and wait for the full list of pools to load.
The path to approval
Following 48 hours of community discussion, voting on the proposal will occur October 15–18, 2020. A quorum of 20% of staked vBNT is needed to approve the Bancor v2.1 proposal. If approved, the upgrade will be pushed to mainnet in the days after its approval.
In our view, Bancor v2.1’s value proposition to potential liquidity providers can be very powerful (e.g., “stay long on your tokens, while collecting swap fees in an AMM”). The fee-earning-potential that this liquidity generates might very well exceed the cost of providing Liquidity Protection, especially as liquidity providers become acquainted with the system. Contrary to the “we pay you tokens to provide liquidity on our platform” business model so often seen in the AMM market currently, the Bancor protocol is building a defensible moat. Even a developer copying the entire code of the protocol will not have the risk-taking Bancor protocol in the background, and this risk-taking, combined with the BNT community, is the core of Bancor’s unique value proposition.
With this in mind, we are thrilled to finally empower BNT holders to take greater control of the protocol and its future. We hope Bancor governance will be used by the community in a tight, iterative loop: to incorporate collective wisdom, perform actions and monitor outcomes.
In the coming days and weeks, we will publish additional materials and guides on Bancor Governance, Liquidity Protection and monitoring protected positions, as well as updated technical docs in the event that v2.1 is approved.