BIP9: Proposing the Bancor Vortex

OLD GOV (LEGACY)
2

Detailed Proposal

Summary

  1. A vBNT/BNT pool, to be bootstrapped by the Bancor community, activates new functions for vBNT, giving those with an active BNT stake on the Bancor network flexible access to new financial strategies.
  2. The vBNT/BNT pool will be eligible for whitelisting, as per the usual channels. However, after whitelist status is obtained, the pool will undergo a unique transformation. User BNT deposits will be returned to them, and only their vBNT balance will remain for protected status. Thereafter, the pool will own 100% of the BNT side, and the pool will persist accepting exclusively protected vBNT deposits. This is to help avoid an obscure exploit vector, that allows for unregulated BNT printing. Therefore, the maximum depth of the pool is determined by the co-investment limit, which will be defined in the future whitelist proposal.
  3. The proposed 'vortex mechanism’ introduces a protocol-wide administration fee that effectively charges liquidity providers an adjustable disbursement on swap fees, representing an insurance premium for impermanent loss underwriting by BNT holders. The fee is determined by a hyperbolic function, and its shape can be adjusted for both TKN and BNT swap revenue by the DAO as required to maintain market demand for BNT.
  4. The fee is swapped for vBNT via the vBNT liquidity pool, and burned. The swap is triggered by users, who are responsible for the gas costs. A similar routine has been implemented at alpha.homora, and will be deployed in a similar fashion.
  5. 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.
  6. The constant purchase of vBNT by the vortex mechanism counteracts selling pressure in the vBNT pool, helping to maintain a stable equilibrium price for vBNT, which in turn supports the new envisioned use cases, while also providing a steady revenue stream for vBNT liquidity providers.

The current use case and function of vBNT

Staking BNT in Bancor Network’s liquidity pools generates vBNT at a rate of 1:1. The vBNT token serves two functions at present.

  1. vBNT is the native governance token, used by the BancorDAO to vote on proposed changes to the protocol.
  2. vBNT is burned in exchange for withdrawing staked BNT. The amount of vBNT required to withdraw from a staked position is determined by the number of BNT tokens initially deposited. The amount of vBNT required to withdraw from a staked position is constant and does not change over time.
  3. Anyone can withdraw their own BNT stake, regardless of the vBNT origins. For example, Alice and Bob each stake 100 BNT, and receive 100 vBNT. They exchange their vBNT with each other. Alice then uses the vBNT she received from Bob to withdraw her own BNT stake and vice-versa.

An alternative to admin fees: the ‘Bancor Vortex’ Mechanism

The BancorDAO has discussed the subject of an admin fee at length. The concept is borrowed from other decentralized exchange projects, but may not be suitable for Bancor as-is. In the outside examples, the admin fee is introduced ad hoc to create a fundamental value for the native token, which otherwise has no direct utility, save for governance in some cases. Bancor’s native token, BNT, is a utility token. As Bancor’s default base token, BNT is already a yield-generating asset; a conventional admin fee is at best slightly inelegant, if not completely redundant. As the fundamental value of BNT to its holders is already sound, our project is in a unique position to innovate its own answer to the concerns raised by its community over the course of the recent admin fee discussions. The most compelling argument can be summarised as follows. As the insurance provider, BNT token owners are exposed to 100% of the insurance liability. While this forms the core of Bancor’s business model (we are a literal insurance company), to an individual investor, the motivation to own and provide liquidity with BNT is obscured. Moreover, the 50/50 split of all swap fees to either side of the pool does not reflect the profound risk asymmetry of TKN and BNT liquidity providers. The best arguments for the introduction of an admin fee are founded on this premise, but no compelling implementations have yet appeared that utilise Bancor’s unique tokenomics.

Here, we propose a vBNT burning scheme, termed the ‘Bancor Vortex’ (BV), designed to create an urgent demand to buy and stake BNT. Before the mechanism becomes operable, the Bancor community is required to bootstrap the vBNT pool. Thereafter, the ‘vortex’ mechanism is initiated by introducing a protocol-wide administration charge on whitelisted pools, obtained predominantly from the TKN side of swap revenue. The specific fee amount is determined directly from the vBNT price in the pool via a hyperbolic function with different exponents for TKN and BNT. The exponents are adjustable by the DAO in future BIPs, and represent important variables in future management of the protocol. The fee is then held by the protocol until a user initiates the swap. The swap purchases vBNT via the vBNT liquidity pool, and the protocol burns it.

Thus, the protocol itself provides a constant buying pressure on the vBNT pool, providing consistent swap volume and associated fees, while supporting the price of vBNT over long time frames. More importantly, vBNT becomes a scarce resource. As the gatekeeper token to BNT deposits, the scarcity of vBNT introduces a new economic paradigm for BNT evaluation. As its price climbs above 1 BNT, an opportunity for immediate profits is realized via market-buying and staking BNT, if only to sell the vBNT it generates. The overall effect of the depleting vBNT supply relative to 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. Alternatively, existing vBNT holders will be presented with an opportunity to sell their vBNT for an over-unity amount of BNT, which upon staking will yield additional vBNT along with an improved BNT stake balance.

It is important to realize that once this mechanism is set in motion, vBNT becomes a coveted asset that will never again exist in sufficient quantities to unlock all BNT stakes on the Bancor pools. At first pass, it may not be obvious why this is desirable. Before arriving at an opinion, the reader is reminded that their personal vBNT balances are not subject to burning, and if they choose to do nothing with their vBNT, they will be able to withdraw their full BNT stake at any point in the future. With this in mind, it is envisioned that many vBNT holders will choose to participate in the newfound leverage capabilities, or extract credit from the vBNT pool, to achieve any number of conceivable financial goals (vide infra). Those who participate may unintentionally, or deliberately, part with their vBNT temporarily, or permanently. The later sections of this document present scenarios where such actions are not just understandable, but could achieve a superb market efficiency that is currently unparalleled by Bancor’s rivals.

This mechanism was conceived in collaboration with Bancor founder Eyal Hertzog, the inventor of the liquidity pool concept, and godfather of automatic market makers (AMMs).

How it works

  1. When a swap is performed on a Bancor liquidity pool, a commission (‘pool fee’) is applied such that a small amount of TKN and BNT is paid to the pool’s liquidity providers. At present, that fee is shared equally by the TKN and BNT sides. This BIP proposes a variable redistribution of swap fees, where a third share is created and held in a ‘Bancor Vortex Reserve’ to support this new scheme.
  2. The reserve is then used to buy vBNT. This action requires user input, after which the protocol performs a swap with the vBNT pool, and burns the vBNT.
  3. The constant buy pressure will help to support the price, and maintain the new utility of vBNT as outlined below. Moreover, the diminished vBNT supply represents a portion of staked BNT value that is unable to be unlocked simultaneously with the rest of the BNT on the protocol.
  4. As the price of vBNT is driven above BNT, there is an immediate opportunity to market-buy BNT and stake it, then sell the generated vBNT for profit. This opportunity is available to anyone, including those with zero interest in the Bancor system and who may abandon their stake permanently if so inclined.
  5. The Bancor Vortex offers a tenable means to create demand for BNT in the minds of individuals who have no interest in automatic market makers, or speculating on BNT price.
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