Bancor Vortex part 2: vBNT Whitelist Proposal

TL;DR

  1. The Bancor Vortex gives BNT liquidity providers a way to borrow against their staked capital, for any purpose.
  2. Leveraging staked BNT is achieved via the sale of vBNT on the vBNT/BNT pool. Therefore, the depth of liquidity on the vBNT pool will directly impact how much leverage is available to liquidity providers.
  3. To appropriately manage the risk for vBNT holders to bootstrap the pool with their tokens and allow the pool to flourish, it should be whitelisted. However, the standard whitelist format exposes the protocol to a known exploit.
  4. The exploit can be mitigated with a special whitelist status for vBNT. The v2.1 vBNT pool will not accept BNT deposits from users - the BNT side of the pool will be 100% provided by the protocol.
  5. Liquidity providers wishing to earn yields on the pool may only deposit vBNT, which will be protected against impermanent loss.

Voting Instructions

Vote FOR to implement the proposed special whitelist status for vBNT

Vote AGAINST to have the vBNT pool remain uninsured from IL

The Role of the vBNT Pool in the Bancor Vortex

The Bancor Vortex (BIP9), was submitted to on-chain voting on February 3 2021, and was approved with 28.9% quorum. The decision was unanimously in support of its implementation. The proposal details a new mechanism whereby liquidity providers with vBNT tokens are able to effectively borrow against their staked BNT by selling vBNT, and then buying it back later. The overall process is similar to using vBNT as credit, and the swap has been compared to an interest-free loan, or a liquidation-free leverage position.

The process is powered by a constant-product bonding curve between vBNT and BNT. As LPs swap their vBNT on the pool, the effective price of vBNT depreciates. As a result the incentive to sell vBNT is diminished as debt increases, allowing the pool to automatically regulate the amount of credit that can be bought and sold. The original vortex proposal described a variable fee structure that allocates a small percentage of swap revenue from across the protocol for the purpose of purchasing vBNT debt, and burning it. This creates a positive price pressure on vBNT inside the pool, and should help to maintain a floor value for vBNT.

If the Bancor Vortex becomes an important part of the Bancor ecosystem, then vBNT liquidity providers are even more important. Without vBNT liquidity, the system completely ceases to function. While market participants are expected to create substantial swap volume on the vBNT pool, it stands to reason that the vBNT LPs that support the system should receive the same level of protection afforded to other pools on the v2.1 network.

The Problem with Whitelisting vBNT

Standard v2.1 insurance contracts track impermanent loss on both sides of the pool, allowing the protocol to mint BNT to essentially buy-back the loss and compensate the LP at the time of withdrawal. vBNT is an exceptional case, as it is generated upon staking of BNT. This creates an unacceptable exploit vector in the conventional whitelisting arrangement, as follows:

  1. Deposit BNT and vBNT in the pool.
  2. Wait 100 days for both sides to become 100% covered from IL.
  3. Buy a huge amount of BNT from the pool by cycling vBNT through it.
  4. Withdraw protected BNT deposit.

This allows users with significant capital to force the protocol to mint BNT at will, which cannot be allowed.

The Solution: A Special Type of Whitelist Status

This exploit vector is asymmetric. Staking BNT to generate more vBNT is the source of the issue, whereas staking vBNT does not generate BNT. By prohibiting the deposit of BNT to the pool, the exploit vector is completely neutralized. The contract upgrade to support complete protocol ownership of the BNT side of a v2.1 pool is now completed; therefore the special whitelist status proposed here is ready for deployment, pending the decision by the BancorDAO.

Since the protocol will own 100% of the BNT side, this gives the DAO the ability to set exact limits on the total pool depth, and the availability of single-sided vBNT staking. This is an important consideration, as it effectively creates a debt limit that helps to regulate how much leverage is available to LPs. The BNT minting limit for the pool will be adjustable by the DAO forever, but for the sake of an unambiguous proposal, a rough timeline is suggested.

Progression of the Bancor Vortex and vBNT Pool

The approval of BIP9 by governance is already complete; the approval of this proposal is the final approval step for the envisioned system. The whitelist status of the vBNT pool is ready for deployment already, and will be implemented with a proposed 250,000 BNT minting limit. Thus begins a short period to observe how users interact with the pool, what the leverage appetite is, optimize the front-end and educate the community on responsible use of this novel feature. During this time, the vBNT burning feature will be in its development and auditing process. After the vBNT burn feature begins, the full Bancor Vortex will be in effect. Another short period for testing and observation is then followed by an increase in the minting limit to 1,000,000 BNT. Thereafter, the minting limits are adjustable pending a DAO decision.

5 Likes

What happens with Vortex roadmap if this proposal will not approved?

2 Likes

The vortex will still work without whitelisting. It just means that single-sided deposits and IL protection won’t be supported, and the pool won’t be eligible for LM rewards. But the vBNT burn can still operate, and the ability to access leverage doesn’t change.

Nothing to add, 100% support.

2 Likes

Voting FOR on this BIP and encourage the community to do so as well!

2 Likes

Fully supported the BIP proposal and have done the same with whitelisting one.

Depending on how Vortex will develop, it can pretty much be a serious contender to players like AAVE and Compound.
With the added volume and traffic, we’ll be able to not only have our bnt appreciate in value as the burning mechanism sets in, but we will also get more people who didn’t use bancor as their defacto DEX, to potentially change sides.

I’m excited to see the effects in a few weeks!

3 Likes

I support that idea. Bancor is on the right track to become the #1 amm + lending platform

3 Likes

whys it gotta be white?

1 Like

Blacklist sounds a lot better, not gonna lie.

1 Like

Can we have some kind of announcement and countdown similar to ICOs back in the day, this pool is going to get slammed the second you increase the size. The anticipation for this is going to be huge and if anything it will at least have a positive impact on $BNT with the anticipation of the increase. Maybe even consider limiting the amount that can be staked daily so all shareholders have an opportunity to get in.

3 Likes

That is a really good idea. I will take that on board - thank you for the suggestion!

2 Likes

Thanks MBR, that really should be built in to all new expansions/listings, getting more people the opportunity would really do wonders for the platform.

2 Likes