Bancor 3.0 – The Next Frontier: derivatives, margin, and the power of vBNT

Bancor 3.0 – The Next Frontier: Derivatives, margin, and the power of vBNT

The novel design of Bancor 2.0, token elasticity, and the introduction of further utility to vBNT have been an enormous success as demonstrated by the massive rise in liquidity and volume since its introduction. While Vortex is still in its infancy, the possible utilities are numerous, powerful, and central to the success of Bancor’s future. The massive rise in liquidity, effort to incentivize trading, and incoming Layer2 solution in Arbitrum will afford the platform an opportunity to not only become a leader among AMMs but also the decentralized derivatives and futures markets. I want to clarify up-front that I am not a technical expert and will likely need to be corrected on multiple aspects in this proposal. I hope to spur discussion and get feedback on the proposals feasibility (and maybe even unveil hints that this is already on the Team’s mind).

In this proposal, I outline a potential protocol to leverage Bancor’s elastic supply and asset of vBNT to provide massive liquidity and margin respectively. In short, vBNT can be utilized as Multi-collateral debt (MCD) to leverage Bancor into a collateralized lending system allowing for user friendly access to margin to employ in spot and derivative trading.

The Bancor Protocol for Margin Trading

There are at least two options:

  • A single pool of staked assets will service all trading. Users can stake their vBNT and will be able to trade the equivalent value on Bancor’s exchange. This can be used to spot trading or as margin for leveraged trading. With further liquidity, this can be used for more valuable derivatives trades per assessment by the team and risk management. In time, users can stake their other assets (or perhaps even LP tokens from other trusted platforms) to further increase the liquidity of the protocol. The Bancor protocol provides initial and additional liquidity itself by staking its currently unutilized vBNT.
  • A second option is for the Bancor Protocol’s vBNT to serve as a counterparty to all traders on the platform. Especially initially, the protocol to user ratio of funds would be massive which would reduce risk and afford relatively high value leveraged trades by the user. The protocol could even design an option for users to have a choice where to stake their vBNT: Alongside the bancor protocol as the counterparty against users; or in the margin account itself to fund trades.

Utilizing the Protocol’s Untapped vBNT

Approximately half of all BNT in existence is minted by the protocol itself to support single sided liquidity (see Bancor V2.0). To my knowledge, the protocol’s current vBNT serves no purpose. As vBNT is a core to the value proposition of BNT, this serves as an enormous opportunity for the platform to capitalize on its own untapped value. I propose that the platform stake its vBNT (or perhaps some percentage) into the MCD pool which would facilitate the derivatives trades. It should be noted that this does introduce inherent risk into the platform and will need intensive research into its implications. I hypothesize that derivatives market makers are highly profitable and that, through this model, the platform itself would capture the majority of profit as it would represent over half of the MCD pool.

vBNT as MCD

While vBNT is derived staking BNT and may seem like a claim on a single collateral, it’s important to note that all of the BNT minted through the elastic protocol is staked in a respective liquidity pool. Thus, the protocol’s vBNT represents increased exposure beyond the BNT token itself. This may not be the case for individual users as they may only have BNT which may not even be staked on the platform. Yet again, the novel design of Bancor brilliantly allows a multi-collateralized position in vBNT.

Increasing the MCD Pool

In the initial proposed model, only vBNT is used to fund the the MCD pool and trading, however additional methods to leverage Bancor’s liquidity can and likely should be designed. This could take many forms including staking LP tokens from single sided liquidity provisions on Bancor, and, hopefully, the future option to stake LP tokens from outside trusted platforms. This would further increase the stickiness of the Bancor platform and highly increase the liquidity. I expect the design of this would be highly complex as Bancor would need to design smart contracts to perform liquidation of the underlying assets.

Incentivize Trading

The Bancor DAO should consider the addition of incentivized trading to piggy-back on the expected upcoming incentives. This would look like “Trading Mining” as a set amount of BNT could be distributed across the entire trading community over set periods. This could be extended, reduced, or terminated via DAO voting.

Further social incentives should exist including the creation of leaderboards. Fun additions including the minting of NFTs to reward weekly/monthly/yearly winners would provide additional social incentives and stickiness to the platform as competitors will surely emerge.

Profit Distribution

To maximize the value of the platform, the price of the BNT token, and the safety of leveraging vBNT, the vBNT: BNT ratio should be as close to 1:1 as possible. To this end, a significant portion of the trading fees and income earned via liquidation should be used to purchase (and perhaps burn) vBNT. This will be especially important as the vBNT ratio may drop if the platform experiences significant trading losses against a user’s winning derivatives trade.

I anticipate that the profits from the derivatives trading market will exceed the amount needed to maintain a vBNT:BNT peg ratio of 1:1. The remaining profits could be distributed among the contributors to the MCD pool, partially kept in treasury to protect against risk, serve to perform BNT buybacks.

Summary

Trading volume will drive profits and make Bancor a sustainable entity as the platform matures. Liquidity mining incentives will eventually end, and we must begin to capture trading volume to increase dominance in this highly competitive space. We are at a unique crossroads with the massive recent growth, but I believe we have the underlying liquidity, talented team, and passionate user base to excel as we move into the next frontier.

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Agree that Bancor needs to innovate to keep pace, overtake the other crypto teams. This is a good start and topic of conversation.

While the progress is consistent, could we increment it? Is the current dev team incentivised sufficiently enough to think this way, if there are constraints are we thinking outside the box?


For instance, is there any way to trench reward for “guns for hire devs/testers” to put forward working codes that can be accepted (This can work for Ideas, architect roles and PMs too to allow self-organising teams for Bancor modules too)

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Great thought provocative post! I’ve suggested that over time, just like has happened with equity trading, trading fees/commissions in crypto will go to zero; therefore, it makes sense to plan far ahead to leap frog the competition, and to explore how to diversify the protocol’s revenue stream beyond trading fees alone. Lending, both margin and assets, is a massive revenue opportunity, as is offering derivatives.

Agreed! Now that we have ample liquidity, we must succeed at attracting the trading community. The Trader incentives discussion contains some good ideas, as does Valueable NFT lottery to incentivize trading. To achieve a higher probability of successful execution, the idea to formalize marketing efforts discussed in Automatically allocate 2% of fees to marketing would result in Bancor’s sending a consistent and coordinated message to the trading community and the market in general.

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This is a good idea, good thinking. How are we going to do this better than Maker? I think it’s a little bit out of our scope. I think that it would add unnecessary overhead, and that we should let them have the extra work :stuck_out_tongue:. I think we might be better off just integrating their systems for such a function. I think we should do one thing and do it really well, rather than try to reinvent the wheel. I think that we don’t need to be in competition with everyone if we just build them into us as we build up, and we build a stake in the protocols we integrate; DAOs can hold assets on behalf of their members, no? Let’s have our DAO get hold of some MKR, and then use their system to build this functionality into our systems.

Think about it. You could deposit, well, anything into a Maker Vault (a CDP) through our interface; we just automatically swap it to a convenient Maker ilk. And instead of getting Dai out, you could get, well… anything you want. We can even recalculate stability fees in a different currency, either the one they borrowed, deposited, or even BNT. It’s a perfect match, I think.

Which ilk is swapped to can be a function of what their debt ceilings and stability fees look like. One issue I see arising is the dust parameter, which sets the minimum allowable debt, below which a vault may not be opened nor may a vault’s outstanding debt drop unless it is paid off in its entirety. There’s a tradeoff, which is of course why I recommend that we hold a stake in the protocols we use.

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As repeatedly emphasized on the community calls and the April update, Bancor wants to offer a “world class trading” experience. Leveraged and derivatives trading are vital to reach that goal, and Bancor + vBNT allow a unique ability to accomplish this. I encourage you to check out the KINE protocol and look at the trading experience they are able to offer with less than 5% the TVL. Ideally, this would be built to roll out on Arbitrum to accomplish sufficient speed, low cost, and actual decentralization. It is a HUGE build, but trade volume is the future of our ecosystem and we should make every effort to capture marketshare early.

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We’re on the same team there; what I’m suggesting is that we interface with Maker and use them as a ready-made backend for that functionality rather than develop a brand new one in-house. Their system allows you to leverage assets as collateral for borrowing Dai, no? And they’re about to get Real World Assets up and running, which opens up a whole new market that we’d then automatically get access to. As for derivatives, I’ve no suggestions there.

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If the MKR team is down for that im totally good with it but I believe BNT failed to meet their collateral criteria for some reason ? or was that just BNT. I know we had a community onboarding call a while back but never knew what happened with it if you could enlighten me.

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I actually don’t know anything about that, I wasn’t aware we had ever tried to get BNT onboarded.

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just found it, ill be watching it rn but here : Collateral Onboarding Call #29: Bancor - April 7, 2021 - YouTube

did we fail to meet their criteria? Bummer!

This. I think some sort of incentives or grants program like other protocols have would be helpful for innovation.

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Well written and I very much support the direction into this huge market. However, I am still not 100% sure if it’s best to have vBNT for voting and leverage trading at the very same time. But I am happy to see how this goes.

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