(BIP) Increase Vortex Burner to 10%

[tfns]

BIP Proposal to increase the Vorter Burner rate to 10%

This proposal is expected to appear on Snapshot for voting on Monday, 31st May at 7:00 PM EST (11:00 PM UTC). Voting will last until: Thursday, 3rd June 7:00 PM EST (11:00 PM UTC). Make sure to stake your vBNT for voting before this date and time to participate in the DAO decision.

Introduction

A discussion was started in (BIP) Increase Vortex Burner to 20% - Active Immediately to debate an increase in the Vorter Burner to 20%. Fair points and analysis from several DAO members were made about, among others, vBNT/BNT rate, vBNT leverage interest, total BNT locked in the protocol, APRs from swap fees and APY from LM rewards, current volume growth and overall health of the protocol.

I’ve included my discussion points, updated after @BurnVictim pointed out that the date to increase the vBNT burn to 10% was counted from the moment the Vortex Burner was live.

I was informed that an agreement was made with @BurnVictim to increase the vBNT burn rate to 10% for now.

Discussion

Trying to methodically and impartially analyse a proposal to potentially increase the current vBNT burn.

Projected volume

vBNT burnt is directly proportional to the protocol volume. I’ve calculated the projected protocol volume from April 2021 vs May 2021, using monthly volume data since December 2021, when it started rising fairly linearly. With this data, we can assess how close we are to the “goal volume” when the vBNT burn rate would be increased to 10% and interpolate from the 5% burn in April to obtain a “fair” burn rate. The vortex was activated on the 2nd of February so that date would fall in the beginning of August.

Figure 1 - Projected volume from April 2021 and May 2021.

Assuming a linear growth in volume, we’re right at the volume where a vBNT burnt to 10% would be implemented. If the vBNT burn rate were to linearly scale with volume, a fair value for it would be 10.11%.

Average APR

One could instead debate that vBNT burn should be analysed against average protocol APR, as to keep it at least steady or slightly increasing. Liquidity-weighted average of the weekly APR of top pools (54% of liquidity on the last day of the week) one week after the vBNT burn started was 4.68%, at a 5% vBNT burn rate. Current liquidity-weighted average of the weekly APR of top pools (41% of liquidity) is 13.58%. If the vBNT burn rate was 10%, this value would be 12.86%; at 15% it would be 12.15%; and at 20% it would be 11.44%.

Figure 2 - Liquidity-weighted average APRs for the top pools with data available on Dune Analytics.

Dynamic fee structure

• Based on the variable swap fee (Table 1), at a vBNT price of 0.2-0.3 BNT, the average swap fee to burn vBNT should be between 21.1% to 32.2%.
• However, since this discussion was started, the price of vBNT has risen to 0.509 BNT, at which the average swap fee should be 10.7%.
• The recent increase in vBNT price demonstrates how volatile it can be given enough speculation. vBNT liquidity in the vBNT/BNT pool is only at 1,952,634 vBNT, 3.13% of total vBNT supply.
• The initially proposed variable fee structure is dynamic and would adjust the burn fees automatically and autonomously. Unfortunately, with a fixed burn schedule, we don’t benefit from such advantages. The burn fees should be set based on the current and expected vBNT price before the next adjustment. However, such a prediction is impossible to make. Hence, we should tread lightly, and increase the vBNT burn rate in a controlled way.

Comments

1. We experienced substantial volatility in the month of May, which may not be observed in the coming months. Therefore, any analysis or conclusions on the increase of the vBNT burn shouldn’t take for granted that volume and especially APRs will keep rising at this month’s pace.
2. Bancor v3 with increased capital efficiency has been announced and should influence the APRs of all pools positively.
3. A low vBNT price isn’t necessarily bad for the protocol as the swap fees accrued will purchase more vBNT and therefore burn it faster.
4. The vBNT burn has only started 1.5 months ago, so we don’t have enough data to make better assessments.
5. vBNT burn was individually activated for all pools, hence data was taken one week after it started. Some pools might not have had the vBNT burn started then. This shouldn’t affect the results, as one can still draw comparisons from the APRs observed for that week vs last week’s.
6. LM reward emission shouldn’t be taken into account when deciding vBNT burn. This is because not all pools benefit from it and the protocol should aim to optimise APRs with the current AMM model.
7. The data was taken from Dune Analytics.

Conclusions

• Top pool APRs have risen in the past week to values that would allow a significant increase in the vBNT burn without compromising swap fee earnings.
• However, an increase in the vBNT burn rate to ultimately increase vBNT price and BNT locked forever in the protocol is too simple of a solution for a non-trivial problem.
• A variable fee structure benefits from advantages that a fixed one doesn’t - the protocol cannot autonomously adjust the vBNT burn based on the vBNT price feedback.
• The analysis of the projected volume shows that a fair vBNT burn rate for the current volume would be 10.11%, assuming an increase to 10% on the 2nd of August.
• The community sentiment is that a 20% increase is too drastic of a change but 10% is an acceptable first step to consecutively gather more data.
• At the current rate of 0.509 BNT, the vBNT burn rate should be 10.7% according to the dynamic fee structure initially delineated.
• Bancor v3 is expected to increase pool APRs. A higher vBNT burn rate can also be discussed after observing the effects of the coming AMM model in LP earnings.
• Around 81% of the capital on Bancor is receiving LM rewards. An argument was made on the reduced impact that a vBNT burn rate increase would have on LP earnings whilst the rewards are active.
• As per protocol design, the vBNT burn rate must be consistent on all pools.

With this data, comments, and conclusions, as well as the input of the DAO members in the original thread, it’s reasonable to propose a Vorter Burner rate increase to 10%.

Vote FOR to:

Increase the Vortex Burner to 10% for all pools.

Vote AGAINST to:

Continue with the plan for the Vortex outlined in the (BIP9 ADDENDUM) The Bancor Vortex vBNT Burner: Proposal to Switch to a Flat Burn Rate
The fee is increased every 6 months in 5% increments from the time of the original Vortex Launch.

[bias]

For those not following along at home, this proposal is a response to this proposal to increase the Burner to 20%.

My argument against the 20% has always been that the original numbers (5% burn, increasing over 18 months) was arbitrary, and for that reason we need to proceed with caution since every change we make is purely experimental. It may be that 20% is the right number… eventually. Going from 5% to 20% at once is a shock to swap APYs and may have unintended consequences. The Burner % is going to have an effect on vBNT/BNT peg, open space in pools, swap APYs, inflation/deflation, and it interacts with LM rewards and LP habits. This amount of complexity means we should be cautious.

10% burn creates all new data sets that we can compare and make better decisions going forward, and 10% burn is in line with what the original variable burn scheme would have been accomplishing these past few months. If, after a few months, LPs and swap APYs hold up well under the new burn, we can think about increasing it again. I will be voting for this proposal.

[sjw]

I feel a lot more comfortable with this proposal. It is measured, only a small acceleration of the existing schedule, and less cavalier. For me, the two things to weigh against one another in the long term is that LM rewards are inflationary, and vBNT burn is deflationary, and in principle should be roughly balanced against one another, unless a particular macroeconomic objective is desired (such as the price of BNT). vBNT burning comes out of the pocket of stakers on both sides of pools but the benefits accrue to BNT holders in particular, whether they are staked or not, through deflation on the protocol and possible a BNT price appreciation. Unless compelling arguments are advanced against in the discussion, I am inclined to vote YES.

[Sjwill]

As a follow up to my earlier post, I think we should have a deeper discussion about what vBNT burn is supposed to achieve and the best way to get there. I believe we burn vBNT to provide upward price pressure on BNT and to support leverage. Thus, I think we should have a variable rate of burn, as originally proposed. And I think we should have a target to get the ratio close to 1 and a means to get there. However, the technical basis of a bond-curve based approach prevented a fully dynamic mechanism. Could we instead have a stepped approach, where the rate is changed weekly and rises by 5% for each 20% below 1. Thus the schedule would be 5% burn for >0.8, 10% for 0.6-0.8, 15% for 0.4-0.6, 20% for 0.2-0.4, and 25% for <0.2. I think would allow the burn to adjust automatically as the ratio changes, in a transparent and automatic way, with hopefully a low overhead for gas and the developer.