A repeal of BIP4: Decision to uphold flexible fee structures to optimize market making activities

Summary: Following the launch of V2.1, the community was fervently seeking strategies to drive more activity on the platform. It was noted that swaps on Bancor incurred inconsistent fees, and in selected cases, at a non-competitive rate to its rivals. It was surmised that enforcing mandatory fee structures could create a more compelling case for swappers to use Bancor. BIP4 proposed to price-match Uniswap, and the idea met with very little resistance during discussions with community members on Discord, Telegram, and on gov.bancor.network. The vote to support BIP4 recommendations was unanimous, with a 31.1% quorum.

It wasn’t until after the vote that dissenting opinions began to surface. Importantly, the owner of the USDT pool provided a well-crafted rebuttal to the arguments originally presented in BIP4. Taking these points under advisement, it seems pertinent to offer the community a chance to reconsider their position.

This repeal intends to negate BIP4, and return control of fee setting to the pool owner.

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The USDT pool owner, nikolaalx, provided comments on the BIP4 discussion board on 28/10/2020, two days after the voting had ended:

Rebuttal
Community members are urged to read nikolaalx’s comments in full; however a brief summary of the most important points are provided below:

  • If the fees are enforced at 0.15%, the pools currently under nikolaalx’s control will no longer be profitable.
  • The changes could make Bancor more attactive for swappers in the short term. However, the lack of profitability for liquidity providers will result in shallow pools, and rising slippage costs. The slippage costs are a much greater concern for traders than fees, meaning the overall result is likely to be contrary to what BIP4 asserts.
  • APR alone is what attracts liquidity providers, and in its current state, the V2.1 protocol cannot deliver a compelling incentive with mandatory 0.15% fees across all pools.
  • Responsible liquidity providers can fine-tune their commission using data from public aggregators to manage the finances of the pool.
  • An overwhelming majority of BNT/USDT orders below 4k BNT (80% vs 20% on Uniswap) was captured on the Bancor pool, despite a dramatically higher fee (1.5% vs 0.3%).
  • The outcry from the community regarding apparently toxic influence of the 1.5% fee was therefore unfounded.
  • Comparing Bancor to Uniswap is fundamentally erroneous, as the risk geometry of the two platforms are entirely different.

The rebuttal also provided a counter-proposal: leave the flexible trading fees as they are, and educate pool owners to better utilise them. In particular, using tools such as 1inch.exchange to reverse-engineer, backtest, and fine-tune the pool settings. Nikolaalx asserts that high liquidity and properly configured fees should be able to attarct approximately 50% of organic trading traffic to Bancor.

Nikolaalx also proposed a price discoverability oracle with access to the same tools could provide a dyanmic, automated fee structure. However, discussions with the Bancor team revealed that this represents an overhead expense that well outside of the realm of reasonability.

Closing Remarks
The case argued by nikolalx is that a mandatory 0.15% fee structure is untenable, and highly damaging to liquidity provider APRs. Taken to its logical conclusion, this will create a runaway problem where shallow liquidity pools experience high slippage, thus more than offsetting the intended relief for swappers. Nikolaalx speaks from a claimed position of authority, providing upwards of $300,000 worth of liquidity to the system.

Urgency
The development team is preparing to release an important upgrade to the Bancor V2.1 pools. Nikolaalx’s comments have been prominently displayed on gov.bancor.network, and on Discord, where they have already been subject of discussion between community members and Bancor developers. Therefore this repeal already satisifies the requirements for community engagement as detailed in BIP3, and can be considered ready to begin voting immediately.

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For Clarity:
A ‘FOR’ vote = BIP4 is repealed, and pool owner-controlled flexible fees remain.
A ‘AGAINST’ vote = BIP4 is enacted, and pool fees at 0.15% are mandatory, and fixed by the contract.

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The objective should be to ensure that the overall Bancor protocol is competitive versus other DEXs, not the profit optimisation of individual pools.

High fees encourage short term profits at the expense of long term volume.

This is especially the case when competing DEXs have deeper liquidity AND lower fees.

I strongly believe that pool fees should be standardised in line with competing DEXs.

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At some point the addition of a pool by pool determined LP exit fee, which optimises returns for long term providers at the expense of short term providers, will factor in to all discussion of ROI for LPs and be a source of income other than conversion fees, an advantage for long term providers. When is the best timing for a proposal to introduce an LP exit fee with an introductory default as % similar to conversion fees and among appropriate declarations of all pool parameters?

Started topic: LP exit fee

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Best place to start is in Discord. Thats where most of these ideas get polished before appearing on here.

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Having a high and attractive APR is the driver of liquidity.

Liquidity is the driver of traffic.

Assuming that you can sustain high liquidity without an attractive APR is self contradictive.

Also assuming that liquidity mining will magically solve the problem is again untrue. Liquidity mining means using finite resources owned by the company to subsidize a potentially infinite game.

Liquidity mining also creates a negative pressure on active supply without guaranteeing an outcome.

The risk of decapitalization of the company is substantial and it should only be made if liquidity mining is part of a bigger plan where all details are put in play.

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With respect I note that the highest level of capital in the USDT-BNT fund was $400k versus half a billion of USDT locked into the uniswap protocol.

Therefore, I’m not persuaded that high APY necessarily results in deep liquidity. LPs have other considerations that they balance. One of those is sustainability of the APY they hope to earn at say $10 million or even $100 million.

1.5% fees will immediately condemn the USDT-BNT pool to niche trades as the USDT pools on uniswap are not only cheaper but also much deeper.

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This is an interesting point. The high APY on Bancor has not, as of yet, attracted any additional USDT to the pool.