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.
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.
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.
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.