- The Bancor Vortex is a system that introduces leveraged liquidity provision to the Bancor ecosystem, via the vBNT/BNT liquidity pool.
- 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.
- During development, several problems with the variable burn rate were discovered that make it more difficult and gas-intensive than previously thought.
- 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.
- The fee is increased every 6 months in 5% increments for 18 months, until a flat 15% fee is attained.
- 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.
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.
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.
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).
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.
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.
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.