So this post is going to have a few parts
- People are “Trapped” in Bancor
- Why would anyone LP on Bancor ever again?
- Future Features
- Final Thoughts
I am going to make a very peculiar argument in this section: I don’t think that that Bancor Vortex has ever truly been active since it was created and launched. It wasn’t able to do its job because it was relegated to counteracting a portion of the BNT emissions from LM. The practical basis for the existence of the vortex is to burn vBNT which is the EXACT same as buying BNT with leverage and then burning that. I made a video about this: Why does Bancor burn vBNT instead of BNT? #Bancor #DeFi #Loans - YouTube
While liquidity mining rewards were active the Bancor burner served as a deflationary mechanism (as it always does), but the protocol wasn’t actually ever net deflationary in any substantive way. In this regard, the Bancor vortex was akin to reducing the LM rewards by “some” amount. With the end of LM rewards and the end of IL insurance the Bancor burner will finally be able to do its job uninhibited. vBNT is DIRT cheap right now and it would be a catastrophic mistake to burn BNT instead of vBNT.
During conversations that I have had with community members of the protocol there has been some reference to the idea that “the market doesn’t understand vBNT” but to this I have a counterpoint: it doesn’t have to. With the removal of LM and IL insurance, the buy pressure created by the vortex, even with anemic fees, would be extremely substantive.
The Bancor Vortex is, essentially, reverse liquidity mining. The Vortex provides TKN to the protocol to reduce deficit (and create surplus) while simultaneously increasing the price of BNT (all while paying users in DAI - which is the model I am in favor of - which requires no liquidity to be removed from the protocol).
- People are ‘Trapped’ in Bancor
Many users feel trapped in the protocol. They risk taking a severe loss in IL of around 40% - a ‘haircut’ is an understatement. These user need something - anything - to help ease the pain. With this in mind, I think the DAI model is the clear winner (and this will be refrained in section 3). Having a payout in DAI will help users in the short term by providing them with capital they need to make ends meet.
Based on community feedback, users who are choosing to take a ‘haircut’ are doing so under financial duress of the bear market. They say they “need” this money in the short term and were “forced” to withdraw at a loss. If users were paid out in DAI while they are ‘stuck’ waiting for a surplus then some of that burden would be alleviated.
This also seems like the best choice for DAOs who will no longer be paid in their native token and will instead be paid in DAI.
- Why would any new LP stake on Bancor?
Question 1: in the protection model, do I have to withdraw to get access to the fees my positioned has earned? Because if so, the fees themselves that I have “earned” are also potentially in deficit and I will take a haircut on that withdraw + 0.25% exit fee. Unless the fees earned are in a separate contract that I have to claim from, in which case wouldn’t it be better if I were just to be paid in DAI or ETH, claim that, and then buy my token of choice?
The protection model covers IL in DAI and ETH which is fine, good, dandy, etc., but it doesn’t really fix the issue of not being able make money without a withdraw. If I deposit TKN_a I don’t get to make any money on that deposit until the protocol is in surplus. This might be fine - in theory - but from a new user perspective “why would I have faith the protocol will ever be in surplus?”
Being able to be paid in DAI on a stake without needing to remove any portion of the stake is very attractive. It is the most approachable model and doesn’t require a withdraw of funds to get paid (no 0.25% exit fee like in the protection model). It also, based on claims made in section 1, supports the vortex in a larger fashion. The dai model also seems more adjustable in the future - it could become a 80-10-10 split with 80 going to the vortex, 10 going to LPs, and 10 going to an eventual BancorDAO treasury.
- Future Features
The protocol is going to survive. There’s a handful of potential features listed at the end of this proposal that would increase volume. These features are pleasant, feasible, reasonable, etc., but they don’t do anything short term and all of the future features seem like they align with both the protection model and the dai model equally well.
The notable exception is that in the protection model the protocol performing an arb to capture value with nearly 100% of the proceeds going to the TKN side is very appealing for DAOs and users alike. Protocols pooling liquidity to perform arbs is not a new idea and being able to facilitate an AMM while performing such an arb would massively increase the value in the protocol. Its also interesting that such an arb could be a payday in DAI under that model.
- Final Thoughts
The DAI model is the clear winner for its short term utility and long term flexibility, it ameliorates the pains of TKN providers, and it creates the most clear “bull thesis” for BNT mooning.
The protection model is great, but the job it performs is not what is needed for the current situation. It fails to provide immediate relief for TKN providers, it has no immediate incentive to attract new LPs because new deposits would immediately be subject to any deficit the protocol has, and it lacks a clear “bull thesis” for the BNT token.
Both of these models are a good way forward and I do have a preference for the dai model, but I would not be upset if another model was accepted - my major area of concern is the Bancor Vortex.
Anyone who says we should be burning BNT over vBNT is objectively, mathematically wrong and I demand proof of the claim that a direct BNT burn would be superior to a vBNT burn. My case is clearly made in this post and in the video I created (above) and I will provide more mathematical evidence if asked.
I think this proposal is a great step forward and burning vBNT will help reduce the deficit by increasing the value of BNT relative to TKN.