I’m still working through my mental model, and I think the easiest way is to write about it. Doing so in public allows others to join in / point out my fallacies.
The best way to remove the Ominipool deficit is for BNT to outperform the other tokens.
There are two main mechanisms to do this:
- Fee capture and burning so that we pull BNT out of the pool relative to the other tokens and so pull the price up.
- Get people to buy and stake BNT
I get the impression that most of the work to date has been focused on 1:
- Stopping BNT issue for IL protection - severe brake on withdraws for many pools.
- Optomising pool fees - ongoing work.
- increasing vortex % take to increase BNT
- Other ways to gain income.
However, this is a step hill to climb. $39 M USD deficit on $44 M TLV when we are collecting ~$10,000 per day. And this is a case where BNT having massive liquidity on chain hurts us: it takes a lot of buying to move the BNT price.
I could argue that performance vs stable coins is more related to overall market trends (i.e. if CRYPTO doubles in the next 12 months, and BNT follows the market, we will wipe all the IL on stable coins pools without doing anything…). So ~ $11 M of the problem is dependent on the general market. But we still have $27 M to work on…
So, how do we get people to buy and stake BNT?
Bancor / BNT’s reputation is not great at the moment. Over 12 months we are down 76% vs ETH while DPI is down 52%. So we have dropped 50% relative to ~Defi (lets not get side tracked into how DPI is a poor index for DeFi…)
BNT vs ETH over 12 months
DPI vs ETH over 12 months
However, as far as I know, BNT stakers don’t suffer IL loss when they withdraw BNT. (as BNT has not lost any value compared to BNT). So BNT is actually the safest token to stake in Bancor: you are only exposed to price movements.
For me, this implies that anyone who wanted to sell BNT in June (either to exit the project, or buy back lower when further IL protection was minted ) has done so.
However, I don’t think many people have an appetite to buy BNT at the moment. Personally, I’m letting my BNT stake ride in the hope that we pull off the recovery I think we can. However, I’m not adding any more $ to my BNT position. [Personally, I’m unwinding other positions to get more ETH].
So, how do we encourage others to buy and stake BNT?
- We have to stop the rot in BNT price - largely done.
- We have to offer a BNT yield that becomes attractive.
I do not think that a 0.39% BNT yield is attractive.
I think that if we removed the vortex on B3 BNT so that the yield was ~ 3.9%, then some people would start thinking about buying and staking BNT. Obviously higher fee capture / more market volatility will help.
So what about TKN stakers?
For individual taken stakers, I think the only rational thing to do is withdraw from Bancor as soon as the pool is in surplus.
- If TKN pumps vs BNT, then they get trapped by IL.
- YIelds are pathetic due to a combination of low market volatility and high vortex % take.
So the risk-based return is poor.
I currently have $INDEX in Bancor. Since May $INDEX has actually underperformed BNT . So, the pool is in surplus. However, at times it has been in deficit so I was locked in with a ~10% exit penalty.
In May, I was in the INDEXcoop forum telling people about IL-protected 5% yields on bnINDEX and that they should consider it. I would not recommend that anyone deposits INDEX into BNT at this time.
Note, the economics are different for protocols depositing their governance token, they may well have a longer-term view and be more focused on the benefit of DEX liquidity rather than the ability to exit. (However, they don’t want to see $BNT drop in price as that will effectively dump all their governance tokens onto the open market).
So what happens when $BNT price outperforms TKN’s?
Personally, I think people will withdraw TKN.
Say we x2 vs ETH over the next 6 months. The deficit vanishes. bnETH earns 0.04% and has the risk of IL if BNT drops vs ETH. Meanwhile, AAVE aETH is earning 1% and is always redeemable vs ETH at par?
Where would you put your ETH?
So, if we are successful in building $BNT price, we risk loosing TKN deposits / TLV.
Now a 2x vs ETH may take some time, but 2x vs USD could be achieved by a general bull market for ETH, BTC, LINK and make the stable coin pools IL free while earning ~0.4%.
My concern is that if we lose the ETH, wBTC and stable coin TLV, then our performance as an AMM suffers greatly.
So, what can we do?
Personally, I think the roadmap looks like:
- Stop the rot - Done by stopping IL protection minting BNT.
- Increase income - in progress for % fees optimisation and other methods.
- Strengthen BNT price - this discussion.
- Personally I’m in favour of reducing vortex on BNT so BNT yields increase.
- Maintain TKN balance as BNT value grows and deficits vanish on pools.
- Personally, I think this means we will need to reduce the vortex % on some pools (can we be selective?) so yields increase and build a non-BNT reserve for IL protection to build LP confidence.
A couple of extra points:
- I don’t think minting / using BNT for IL protection is the way forward. It may actually work economically, but will LP’s trust it a second time?
- I don’t see any need to mint BNT for LP rewards, we should be able to generate yield from fees.
Please note, that I’ve not done any number crunching / analysis on this. It’s just how I see the liquidity moving as prices change and pools come out of deficit.
Some additional analytics that could be interesting:
- BNT flows in and out of B3 staking over time - what are BNT holders doing? Are we seeing an accumulation by historic holders, new BNT stakers?
- Are we seeing anyone accumulating BNT?
- TKN flows in and out of bnTKN - do LP’s withdraw from pools when they switch from deficit to surplus?
- Are we seeing much TKN being unstaked under deficit?
Finally, are we doing any market research interviewing BNT and / or TKN stakers?
- What do they think about the current situation?
- Do they plan to unstake TKN? If so, when?
- What would get them to stake more BNT / TKN?