Bancor Improvement Proposal: Decrease ETH-BNT Pool Fees to 0.05%

[Funky]

This proposal is expected to appear on Snapshot for voting on Saturday 28th August 2021 at 4:00 pm UTC. Make sure to stake your vBNT for voting BEFORE this date and time to participate in the DAO decision.

Bancor Improvement Proposal ETH/BNT Fee to 0.05%

The effect will be active on 1st September

TL:DR

• Without testing, nobody knows the optimal fee for the ETH/BNT pool.
• The fee has been at 0.1% for a long period of time and data on performance already exists for that time period. A higher fee of 0.15% has been reverted.
• This proposal suggests a fee decrease to 0.05% in order to evaluate any changes in volume, fees generated, vBNT burned and fees/TVL of all pools

Current Fee

The 0.1% fee associated with the ETH/BNT pool has been static for a long period of time. Certainly long enough for a wealth of data on:

• Volume
• Fees
• vBNT
• Fees/TVL

Now that we have a baseline measurement, this proposal suggests that we decrease the fee by a very modest 0.05% in order to monitor the consequences on the measures above.

If this performance of the protocol improves, a future proposal could suggest a further decrease to zero. If performance sufferers, a future proposal could suggest a increase in the fee.

A Philosophical Argument

The Bancor Protocol has many parameters that can be adjusted in order to fine-tune its economics. Another such example would be the Vortex Fee.

This proposal argues that in the rapidly changing world of DeFi and AMMs, we should actively be experimenting with and testing these parameters in order to consistently improve the performance of the protocol over time. This approach is similar to Toyota’s Kaizen philosophy.

To quote the great Mr Dylan, “he who is not busy being born is busy dying”.

A Rational Argument

The BNT / ETH pool has the most volume as shown above. This means most trades are ETH / TKN to enter the bancor ecosystem. Best case would be to attract more volume to bancor by further lowering the fees to 0.05%. If overall volume goes up but the ETH pools performance is worse than before bancor should consider compensating the ETH pool. Basically this means to subsidize the ETH pool in order to gain more volume. If this is succesful zero fees should be considered aswell.

Timing is essential

The increase to 0.15% had a bad timing. It was impl. at the top in May and was rolled back at the bottom in July

Due to bitcoins seasonality, as shown below, the fee should be lowered on September 1st and evaluated on November 1st.

Measure success

There are several ways to measure success but trade count is probably the best we have. A lot of variables affect the total trades, including market volatility, gas fees, news hype, etc.
If we take the weekly moving average of total trades we should be able to calculate if an increase in trades is related to lower fees or overall market conditions.

The proposal is a success if the average weekly trade count goes up more or goes down less than expected. Voting should start on the 29th of August

What happens after November 1st

If it was a success a follow up proposal will be created to set fees to 0% and add permanent BNT rewards for the ETH pool. Aiming for 5-10% APR.

If it failed fees will be reset to 0.1%

Voting Instructions

To support changing the fee to 0.05%, vote FOR

To oppose changing the fee, vote AGAINST

[tenzent]

@Funky

To support changing the fee to 0.05%, vote FOR

I would put a time constraint as was put for the previous since this is an experiment. I’m wondering how we will gauge the effect, it’s important to know what objective measurements we can take or the experiment is a waste. Also would like to see why 0.05% as opposed to 0.10%, does .05% less in slippage really make us any more competitive.

[Funky]

the increase to 0.15% was choosen badly. it was impl. at the top in may and was rolled back at the bottom

would you agree that the proposal is succesful if the number of trades increases? a weekly moving average would be very helpful here but there is no way to get updates to the dune data. we now have both, a full bull and bear period to compare the trade count to.

i think it should start in september and last for 2 month due to bitcoins seasonality.

[satoshi]

In Uniswap V3 they have two USDC/ETH pools. Pool #1 has a 0.3% swap fee, $367M TVL, and $7B in 7-day volume. It appears the daily volume is dropping compared to the other pool. Pool #2 has a 0.05$ swap fee, $144M TVL, and $3B in 7-day volume. The daily volume of pool #2 is 3.4X the daily volume of pool #1.

Trading increases with lower fees. This is a good idea. It will help us stay even more competitive.

[satoshi]

This could even work with WBTC and LINK pools too. What if we undercut the UNI pools?

[Funky]

bancor loses liquidity and LM will stop one day too. ETH pool is special because 2/3 of all volume comes in here. it makes sense to subsidize it to attract more volume

[glenn]

One pool has generated more volume but it hasn’t been more profitable for LPs:

Pool 1: $367M TVL, $7B in 7 Day Volume, 0.3% swap fee
Pool 2: $144M TVL, $3B in 7 Day Volume, 0.05% swap fee

Pool 1: every dollar generates roughly $19.07 worth of volume over the past 7 days
Pool 2: every dollar generates roughly $20.83 worth of volume over the past 7 days

These are both very close and the difference is not that much ($1.76).

Fees Pool 1 per dollar: $19.07 * .3% = $.057
Fees Pool 2 per dollar: $20.83 * .05% = $.010

The fees generated by pool 1 is almost 6x greater.

[glenn]

Proposal has already passed but I will share my thoughts anyway.

I don’t think this is a bad proposal but I don’t think it is worth doing because there is no cycles for a proper analysis to be done (there is another analysis in progress that is important as part of V3). Bancor just hired a data scientist recently that will be able to inform the community about trading fees for pools, co-investments, LM rewards, etc… so that we can have better information available to make an informed decision. We already did two experiments (ETH-BNT .05% fee increase, USDT-BNT .05% reduction) and neither of those have been looked at properly (mark mentioned that the increase in the ETH-BNT pool fee might have actually hurt us) and I think the same will happen here (no cycles for analysis).

In regards to this specific pool, it would be good to know which volume comes strictly from ETH-BNT swaps vs. ETH-BNT-TKN swaps. If a large portion of swaps are for the former then it doesn’t make much sense to have lower fees since we are the deepest pool for this trading pair and we are essentially making it easier for people to arb us:

I also don’t think that a higher fee is beneficial since that will break the .3% total TX fees for the majority of hops. .3% is the sweet spot for trading fees on DEXes unless you are doing like asset swaps in which case a lower fee is beneficial. Higher fees only benefit you if you have a large moat and have cornered the market.