(BIP9 ADDENDUM) The Bancor Vortex vBNT Burner: Proposal to Switch to a Flat Burn Rate

TL;DR

  1. The Bancor Vortex is a system that introduces leveraged liquidity provision to the Bancor ecosystem, via the vBNT/BNT liquidity pool.
  2. In its original outline (BIP9), a dynamic fee was envisioned that takes the price of vBNT as an input, and adjusts the protocol’s vBNT burn rate according to a hyperbolic curve.
  3. During development, several problems with the variable burn rate were discovered that make it more difficult and gas-intensive than previously thought.
  4. An alternative vBNT burn mechanism is proposed that would introduce a flat 5% insurance premium on swap revenues from both the TKN, and BNT side of all pools.
  5. The fee is increased every 6 months in 5% increments for 18 months, until a flat 15% fee is attained.
  6. Overall, the anticipated effect of the burn is still intact; the burn rate still supports the price of vBNT, and it still achieves the desired deflationary influence on the token supply.

Voting Instructions

To activate a vBNT burn, funded by 5% of all swap revenue across the protocol, and increasing to 15% during an 18 month period, that is taken equally from BNT and TKN LPs, vote FOR.

To delay the vBNT burner until another model is developed, or until the original variable fee burner becomes feasible, vote AGAINST.

What is the vBNT Burner?

The Bancor Vortex proposal, BIP9, was accepted by the BancorDAO on 6th February 2021. The design included a variable fee applied to both BNT and TKN liquidity providers, in different proportions. The fee is proposed to be taken from swap revenues. For example, if a $10,000 trade is executed on a pool with a 0.2% pool fee, $20 is collected by the LPs as a commission. The vBNT burner takes a small proportion of this $20 and uses it to buy vBNT from the vBNT pool, and burn it. This becomes an important component of Bancor’s token supply management system, and is explained in detail in the original proposal. The vBNT burner is intended to serve in lieu of a formal insurance premium, and helps to offset the cost of impermanent loss protection.

The Original Design

BIP9 specified a hyperbolic curve that gradually increases the fee taken from LPs as the price of vBNT drops. As the protocol’s buying pressure drives the price of vBNT back up, the fee is relaxed. Such a mechanism helps to create a strong stabilizing influence for the vBNT price. The equation and its graphical representation are reproduced below, verbatim from the original proposal.

Figure 2 | Three curves are presented that determine the disbursements on TKN (black) and BNT (blue) swap revenue as a function of vBNT price relative to BNT, and the corresponding total protocol disbursement (grey).

Problems Discovered During Development

To understand how this is difficult to implement, it is important to consider how fees accumulate for liquidity providers. At present, an LP has a ‘share’ of the total value of the pool, denominated in pool tokens, which are staked in the insurance contracts. As swaps are performed on the pool, the fees accumulate inside the pool. As each LP’s position is determined by their share, the revenue is realized through maintaining an unchanging share of a growing pool of value. The fees are accumulated as part of the pool, and in reality, are shared by both sides of the pool equally.

The issue with withdrawing TKN from the pool for the purpose of the vBNT burner is two-fold. Its direct withdrawal would immediately open an arbitrage opportunity, causing BNT to be pulled from the pool by a market maker. Not ideal. Secondly, the handling of the variable fee, and its disproportionate effects on BNT and TKN make for an excruciatingly difficult data management problem regarding protocol performance. The gas considerations are not prohibitive, but still not as low as we would like. There are other minor issues that can be explored in a more comprehensive document later if required.

While it is possible that some of these problems will diminish in time (protocol-wide upgrades are in development, Arbitrum deployment, etc.), we are motivated to get the vBNT burner running immediately.

How to Get the vBNT Burner Running Immediately

In contrast to the complex fee burner setup described in the initial proposal, herein is proposed a simple, flat 5% confiscation of protocol revenues. The fee affects BNT and TKN LPs equally; however, since the mechanism is applied exclusively to Bancor token supply management, the argument that TKN LPs are effectively charged an insurance premium remains valid. Moreover, the implementation is much cleaner on the contract level, and the gas costs are more conservative. From the view of getting a minimum-working product released, we are convinced this is the most fruitful approach.

Proposed Fee Schedule

The fee is a parameter of the vBNT burner that can be adjusted by the DAO at any time. With this proposal, the fee will begin at a flat 5% rate, and increase in 5% increments to 15% over 18 months. This time frame is commensurate with Bancor target milestones over the same period. After a stable multi-billion dollar liquidity base and equivalent volume market share is attained, the increase in the effective confiscation of protocol revenues will be overshadowed by expected increases in APR for liquidity providers. Thereafter, the vBNT burn rate will be actively managed by the BancorDAO in response to the changing market climate.

The overall effect of the depleting vBNT supply relative to the total staked BNT value is a long-term, sustainable incentive for market participants to purchase BNT, and bring it back into the protocol, regardless of their bias or loyalty to Bancor. The vBNT burning mechanism, implemented as proposed here, transforms vBNT into a scarce resource, and creates a new demand for buying and staking BNT.

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I have carefully read through this proposal, which is of extremely high quality.

My takeaways are that a flat fee is actually better than the dynamic fee. This implementation will become such a positive for the Bancor economy, firmly in favour of this proposal, and fantastic work.

5 Likes

I’m in favor of this proposal.

Ideally a variable fee approach is better for keeping the peg in a healthy range, but I don’t think it’s wise to wait until all of the kinks have been worked out. Getting any protocol-supported buying pressure on vBNT is great if it can be implemented quickly, and starting off with a 5% fee is a prudent way to introduce this mechanic.

My only critique is that I’d have a hard time committing to an 18month flat fee schedule given that so much could change over that timeframe. I’m fine with the proposed schedule as long as there’s an expectation that the community can propose adjustments as needed; otherwise I think we should commit to a much shorter timeframe (somewhere between 4-12 weeks).

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As always, great and well thought out proposal @mbr thank you for the continued support towards the bancor community! I’m highly in favour of this proposal

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I’m in favor. I would think this strategy would be easier to adjust (if needed).

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Nothing really to add.
Seems that adjusting to the flat fee could even be better than the dynamic one.

I’ll vote ‘‘For’’

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In full support of this proposal to get the Bancor vortex fully functional. While the dynamic fee mechanism seems better in practice, it appears that we are limited by the underlying blockchain due to the high gas cost.

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I don’t want to sound overly negative, this is a well though out proposal and I see there was a lot of effort put into it, but I want to present a contrary viewpoint.

  • every adjustment to the contract that occur events at each swap increases per swap gas cost, which needs to be as low as possible, even with L2 solutions deployed. Bancor already has relatively gas heavy swaps. IMO this is one of the reasons why small OCEAN trades are routed through UniSwap (Matcha, Paraswap). With the increase of the base gas cost on each swap this could exacerbate the issue on all pools.
  • Swapping vBNT for BNT becomes unbearingly expensive. vBNT will incur interest that the leveraged BNT stakers will pay two fold. Once from the reduced swap APR, and second time when they want to deleverage; they need to buy vBNT to unstake, at a premium.

KISS → I’d consider lobbying to include vBNT into MakerDAO’s collateral list to make the vBNT more usable without burdening the smart contract.

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You are correct, sir.
Research into gas optimization is ongoing. As you point out, our L2 deployment could skirt around some of these issues, but as we are expecting to remain heavily on L1, gas concerns are a constant concern. It is too early to say anything concrete, but the last conversation I had with the dev team was very positive about re: gas increases. It should be fairly minor.
The vBNT/BNT swap strategy is of course something we need to keep discussing. Referring to the swap APR, our targets are still high. The % taken from swap rvenue can be adjusted any time by the DAO; there is no way we will let it become an undue burden on the ecosystem. Remember the goal here is managing the token supply - outsourcing that to the market is a pretty cool way to go about it.
Including vBNT as part of Maker’s accepted collateral is 100% a good idea. I think the token is too young for them to take it seriously right now. Remember, we need to establish a market for it first, and the Vortex and the vBNT fee burner are part of that process. Long-term, I would like to see vBNT accepted at Maker and Aave.

3 Likes