Discussion: A (less painful) way of solving the deficit for good

I create this thread as way to discuss a plan I thought while discussing with Yuri on Telegram to solve Bancor’s bigger problem: deficit. Because of deficit:

  • We can’t reactivate deposits
  • Current LPs are getting a big haircut to leave (obviou one)
  • We have a constant fear that a bullrun of Link or/and Ethereum would set such a high deficit that the protocol would be set up decades behind. Any bullrun of any of those tokens would be indeed a black swan for Bancor. And that’s without taking into account any other token bullrun during this uncertain time for the protocol

So I propose a way to make LP’s whole and to clean the deficit for good.

  1. Pause swaps for a period of time (to be decided)
  2. Let everyone withdraw with their current tokens + ILP
    Pausing trading will make sure that everyone can get their tokens back and the fastest to withdraw won’t be able to dump their BNT for TKN. So a death spiral of TKN liquidity and BNT is avoided (as the BNT printer will be set in stone and won’t be increasing because there is no BNT dumping in Bancor during that period). Bancor would suffer a dump but will fulfill its obligation to LP’s while dodging the death spiral and a future fatal blow to the protocol if the market conditions are against us. Sells of BNT in other markets won’t affect LP’s in Bancor as swapping is paused. Keep in mind that this solution is possible right now with the current deficit. An ever increasing deficit will make future solutions less and less effective. Take the big bag of stones out of the protocol’s back and make Bancor great again after we say goodbye to the deficit for good

Also forgot to note that taking the deficit out will make bancor development much more effective as they don’t have the never ending thread of TKNs mooning

The main problem I see with this approach is that LPs will still get less and less over time since the BNT tokens they receive as protection compensation will be worth less and less, and the ones who are faster to react will receive more than the slower ones.
And then another main question is what happens once trading is re-enabled - there will be many LPs who were not even aware (there are many that aren’t aware of the situation yet now), and they will most likely lose everything.

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Well they will get the amount of BNT promised during the deposit. No one will be able to say that Bancor didn’t pay. I know saving face is the least of the current problems but that’s not the main objective. The objective is cleaning the deficit. I don’t know if there is any LP that isn’t aware of the current situation but keep in mind that when the deficit is cleaned they will be able to withdraw the full amount of tokens (they would indeed be better off than people withdrawing now)

But there would be a possibility to freeze the withdrawal over time. Let’s say you want to withdraw 100% then you need to stay vested for 300 days, so there won’t be an immediate sell pressure. The longer you stay, the more likely you would get your 100%.

I could also image you have a dynamical vesting. The more who would want to withdraw, the longer the vesting period.

A vesting period is another possibility as long as the deficit is cleaned. The same scenario but making LP’s deposit their BNT received for an amount of time. But the deficit is a priority IMO and as long as is solved then I agree with it

Isn’t a better solution is for the protocol to pay over time, for example?
Or maybe record the amounts and create a payment plan for the future?

We can do that with the same scenario of OP + vesting. The bigger the amount of BNT received with ILP the longer you have to stay in the protocol before selling. It will be indeed like delaying the payment. But as the BNT is staked the payment is done and there is no more deficit is just a matter of vesting. The problem with pure IOU’s is that you still have an ever increasing deficit that’s not solved

This would remove the ability of the protocol to create revenue and would likely increase the deficit

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The deficit is increasing faster than the revenue

The question is if you expect pausing trading will increase or decrease the deficit

It will solve the deficit

Pausing means the deficit stays constant, so it’s not going to be solved, it will just not get worse (but also not better).

I rather it not get worse. Trading needs to be Paused.

The deficit will be solved with pausing + allowing LP’s to withdraw their full position

at this point i’d rather trading be paused and the deficit stay constant on certain pools, and i know i’m not just speaking for myself here. work towards solving it when there are eg essential changes in the situation or meaningful new revenue streams. i know this doesn’t necessarily look good for the protocol functioning, but also see it as a chance to demonstrate the ability to take action in the interest of LPs, as with the things as they are maintaining trading has been demonstrated to hand in hand with a steadily increasing deficit.

The protocol doesn’t have the money needed to cover all the IL. We can’t just “print” more BNT to solve this because those BNT lower the value of all other BNT in proportion.

Think of a pizza. If you have 4 slices and then cut each of those slices in half you don’t have more pizza you just have more slices.

That’s what BNT minting is right now - we don’t have enough pizza to feed everyone and cutting more slices isn’t a solution.

This will be problematic I think to do protocol wide as there are projects that have tokens in Bancor who rely on the liquidity that we are providing to make their tokens viable. Essentially, this will destroy these relationships and destroy the viability of these tokens on the market. The logical follow up is then, what about only on certain pools? The thing is, even if you pause it on certain pools and people from these pools can withdraw with liquidity protection then they can still sell this BNT on the pools that are opened or on outside markets and therefore it will most likely increase the deficits for the remaining pools that are in the protocol.

We should remember that BNT has acted as an index token in the past and to a certain extent these past few weeks as well. The largest pools right now are

ETH: ~$13,121,800.17
LINK: ~$14,991,317.00
wBTC: ~$4,571,035.67

and in v2.1:

ETH: ~$11,092,048
LINK: ~$15,895,214
wBTC: ~$9,447,854

we should keep in mind that this relationship might still hold true.

The other thing to keep in mind is that if we pause trading then the rates in the pool will no longer be accurate. So, if trading is paused and $LINK goes up in price on outside markets (won’t reflect on bancor) then if someone withdraws with liquidity protection enabled then they will be getting a lesser amount of BNT since internally we are calculating the protection using the rate from the pools (they will think that Bancor is cheating them essentially). The opposite is also true, if a token on the outside market goes down then internally we are calculating the protection from when the price was higher which means that they are going to get more BNT then actually are entitled to (this would not be fair to anyone).