re: “Does burning BNT give benefit over burning vBNT?”
This is all my current personal understanding, please correct me if I’m wrong on any points as I believe this is an important question.
Here I will discuss ONLY the B3 vBNT burning, because as per BIP15:
The process on Bancor 3 is significantly changed from that of version 2.1
High level steps from the protocol:
- TKN sold for BNT
- BNT sold for vBNT
- vBNT burn
So there’s an omnipool/vault in v3 with all the BNT in it that everything trades against.
BNT was taken out in step 1. and put back into the same vault in step 2.
In reality it doesn’t even move, as per BIP15:
- The accrued BNT exists inside the vault, and remains there until the Burner is triggered.
- During a burn, the BNT remains where it is, vBNT is burned directly from the vault, and the trading liquidity on the vBNT pool is updated as though a trade was performed.
So assuming you don’t know anything else about B3, there’s two possible ways you could interpret the impact on BNT/TKN price:
A. As the same BNT was taken out of the pool and put back, the net impact to TKN/BNT price is 0
B. There is some internal accounting that treats the withdraw and deposit differently such that the net impact to TKN/BNT price is non-zero
as per BIP15 we see several diagrams showing “trading liquidity” and “vault balance” as totally separate things, e.g.:
So therefore B. is true, in step 1 BNT is taken from the TKN trading liquidity and in step 2 it is added to the vBNT trading liquidity.
This means that after step 2 we have raised the price of BNT relative to TKN and lowered the price of BNT relative to vBNT. Provided the vBNT that was purchased in step 2 is not sold this sets up an arb opportunity for every TKN other than vBNT to “smooth out” the BNT price increase, averaging it across the entire system, reducing deficits.
The BNT that was deposited in step 2 is internally bound to the vBNT trading liquidity, which means the ONLY way it can move to the trading liquidity for ANY other TKN (and therefore decrease BNT price denominated in literally anything) is by redepositing the vBNT that was purchased in step 2 to withdraw the BNT from step 1, then sell that BNT for some TKN. The omnipool/vault never “double spends” a single BNT as trading liquidity for 2 different TKNs, and BNT in the vault is not a “slush fund” available to all TKN at all times.
Clearly once step 3 happens to burn the vBNT it is not possible for the entity performing steps 1-3 to access the BNT from step 1. It’s like burning the keys that hold a token rather than burning the token itself.
So who DOES have access to the BNT from step 1?
The other vBNT holders of course, who are now free to dump their slightly more valuable vBNT for their share of that BNT, which happens when they trade vBNT for any TKN. Note however that because the BNT deposited from step 1 is shared proportionately between vBNT holders, they ALL have to dump ALL their vBNT to unlock ALL of that newly deposited BNT. vBNT holders were already free to dump their claim on BNT that was already available for vBNT trading, we’re only considering the impact of newly deposited BNT here. Meanwhile, new fees would be coming in and burning vBNT at an ever increasing ratio while that mass vBNT dumpage is occuring, so the system trends to either “zero” vBNT having a claim on “infinite” BNT (burning vBNT > burning BNT), or the vBNT dumping stops (vBNT = burning BNT).
OK so what if people front run the above and pump vBNT purchasing it in anticipation of the burn? Well, the moment the buy and burn is no longer leveraged from the perspective of the protocol (burning BNT > burning vBNT) is the moment that people can deposit BNT directly to mint vBNT and dump it for instant profit to bring the price of vBNT down again.
So, given all the above and that:
- vBNT is currently worth significantly less than 1 BNT (e.g. the “leveraged burn” explained by @ZenoBNT )
- vBNT can ONLY be minted by staking BNT
- BNT can ONLY be acquired by purchasing it (as mints are disabled)
- Fees are typically less than deficits caused by IL, therefore a ratio >1 amplifying fees vs. new liabilities per trade is a hard requirement for the system
Where is the benefit to burning BNT vs. vBNT?