I am putting here a proposal that has many objectives:
Reducing the deficit
Offering a way out with some extra benefits for Bancor V2.V3 LPs
Increasing Carbon revenues
Right now a couple of facts start to emerge:
Carbon makes $100 in fees per day and won’t be able to solve the deficit by multiple orders of magnitude. Even adding the fast lane we are topping $300k of annual fees vs a deficit of USD40m.
Carbon has low TVL, and in the meantime TVL is Bancor V2/V3 is quite unproductive
Given the supply dynamics of ETH and BTC, it is likely that the deficit will keep growing on the main pools, hence finding solution out of the box to solve the deficit matters as time plays against us
One way to solve this:
reducing the overall supply in Bancor V2/V3 by migrating TVL to Carbon
AND increasing fees in Carbon by increasing TVL in Carbon
Now the question is “how to incentivize V2/V3 LPs to migrate to Carbon and stay on Carbon”?
The design I am thinking about (but open for discussion) is the following:
Offer the ability for V2/V3 LPs to migrate their position into a single asset position in Carbon for the pair DAI/token, locked for 90days [Note: the user will have to create a range above the current market price to current market price + 20% so that it’s single asset position]
Those locked positions get a 80% APY for 90 days, paid in BNT
Assuming ALL LPs (i.e. USD32m in TKN) decide to migrate, that would mean:
a) USD6m in new mint of BNT and USD32m of BNT burnt, i.e. net burn of circa 26m BNT
b) Deficit fully solved
c) USD32m of TVL moving to Carbon for at least 90 days, generating more fees
For instance if I had originally 1BTC on Bancor V2/V3, which is now 0.4BTC if I exit, this position can migrate to Carbon on a WBTC/DAI position with BTC price range from 62k to 74.4k. This position gets 80% APY on this 0.4BTC, paid in BNT
From the protocol perspective, the truth is probably only part of this USD32m TVL will migrate, but every $ that migrates is a win for the protocol (less BNT in circulation, more TVL in Carbon for at least 90 days), and for the LPs that decide to leave that’s a way to get 20% net return before getting out and potentially generating more fees with Carbon.
Again, time is against us and we need to take action to reduce deficit and get more TVL on Carbon so I hope this can de discussed faithfully.
A) Regarding price swing impact: if at the end of the 90 days, WBTC jumps above 74.4k, then indeed the liquidity provider will be left with DAI. But whether as an LP you have a mix of WBTC and DAI or DAI only or WBTC has no impact on the rewards, which are calculated on the dollar value at migration date. But I agree that by migrating you are taking some form of trading risk (but you are as well if you stay in Bancor V2/V3 as you are getting rekt by IL when WBTC pumps)
B) Regarding rewards: At the end of the 90 days, the liquidity provider can claim the BNT rewards, and then it’s up to him/her to (i) keep it as BNT (ii) sell it for WBTC or any other asset. And I think there’s a good case of keeping BNT because if this migration is successful it’s going to take a lot of BNT out of circulation and increase Carbon fees significantly.
Thanks for the reply. I have a feeling this won’t work. It’s basically ILP activated, but you get your BNT after 90 days. Which will cause massive sell pressure, because everyone would get their BNT at the same time and try to sell it to recover (part of) TKN.
But I don’t quite understand how this reduces the deficit. In fact, unless I am not understanding, which very well may be the case, this would seems likely to increase the deficit.
When someone withdraws TKN from B3, the BNT side of the pair disappears. This impacts liquidity but not the deficit.
In what I understand from your proposal, the concept is to mint BNT and give it to users who migrate. This will of course increase the deficit.
In a way, this trading BNT that is their to be paired with TKN for BNT distributed that will increase the deficit. It is very important to understand how protocol BNT and distributed BNT differ in terms of deficit reduction
Again, my understanding might not be correct as to what you propose.
“But I don’t quite understand how this reduces the deficit. In fact, unless I am not understanding, which very well may be the case, this would seems likely to increase the deficit.” => when a LP decides to migrate from Bancor V2/V3 to Carbon he/she only migrates the withdrawable value at the date of migration, voiding any further claim. So if all LP decide to migrates, the deficit becomes zero. If half of the LP decide to migrate, we’ve reduced deficit by 50%.
“In what I understand from your proposal, the concept is to mint BNT and give it to users who migrate. This will of course increase the deficit.” There is indeed new BNT tokens minted, but the back of the envelope calculation on a 80% APR shows that for every new BNT minted, you take 5 BNT out of circulation (without taking into account incremental Carbon fees). So the trade off is VERY positive.
@Joop to clarify, it’s very different from having ILP activated, because when an LP migrates he/she renounces on any IL protection related to V2/V3
POL is being positioned and championed by contributors purely as a means to reduce BNT supply, not to have any discernible impact on BNT price so as to cause BNT:TKN outperformance (which is the only means of deficit reduction). Surely a massive net BNT reduction works in favour of this theory.
For every dollar that migrates, we burn $5 of BNT for $1 of BNT minted, so the net distribution is -$4 BNT. A BNT minted to match a single side is still on the market, and reducing it is very helpful.
But beyond the BNT supply dynamics, the most important part of this proposal is that for each $1 that migrates, we have circa 60c of deposits (because av. deficit is around 60%) that disappears and $1 additional of TVL on Carbon that can extra fees for the protocol. So we end up with smaller decifit and more fees generated by Carbon.
Every LP in V2/V3 that decide to migrate gets exposure to newly minted rewards but leaves Bancor V2/V3, and renounces any claim associated with ILP in V2/V3.
LP that migrates can migrate only the value as of today, i.e. after IL. Any claims related to LP-ing in V2/V3 dissapears
So for each $1 that migrate, the deficit decreases by $1.
I understand what you are trying to say, i.e. rewards are dumped on markets vs. BNT minted to match liquidity are not dumped. This is debatable frankly (because minted BNT are still liquidity that are included in FDV and weight negatively on price of BNT), but let’s assume you are right on this specific point, my proposal would still massively reduce deficit.
Let’s assume 90% of the LP decide to migrate and you are right, i.e. BNT as rewards have an outstanding negative on price compared to BNT matching liquidity, and people dump aggressively those BNT rewards. That means after migration we would have:
90% of the deficit disappears (i.e .we are left with USD3-4m of deficit) as 90% of the LP in V2/V3 have renounced their rights to ILP
5m new BNT of rewards are dumped on the market, and the price crashes by 80%. A price crash by 80% increases IL by circa 25%
your new deficit ipost-migration is 4m deficit * (1+25%) = USD5m of deficit
That’s roughly USD30m of deficit that disappeared through this migration
I support this proposal. Net burn up to 26m BNT AND a way to help LP’s get out is a no brainer.
I would even argue that the APY should be double. 160% would still mean a net burn of 20M BNT and allow LP’s to get +40% after 3 months, which makes the final amount after 90 more close to the 100% ILP Bancor promised us.
Imo foxsteven has failed to explain how it would increase the deficit and his argument makes no sense. Burning 20m BNT is bullish for BNT and therefore good for the deficit.
Also, I think the price for the DAI/TKN in Carbon should 40-50% above market price rather than +20% to make it more unlikely that it gets sold.
@yudi It has been argued that this take away dev time from FastLane and other stuff. So I would love to hear your opinion about the technical side, how long would it take to implement such proposal?
I think the level of APY which is attractive enough for LPs can indeed be discussed, I don’t have a religion on it. But you’re right, even at 180% over 90 days it would still significantly reduce the deficit.
The range in Carbon can also be set by protocol, or alternatively, if the user can decide for himself. If set for protocol 20% seems OK to me but 40% would also work in particular in a volatile market
From a tech perspective:
The product definitions here aren’t very detailed so I’m doing a bit of guesswork.
I’d say it’s a relatively large project (few months).
The main reasons for it -
Having a rewards program on Carbon - Carbon doesn’t aggregate user positions and the NFT you receive when depositing doesn’t represent an amount, which makes it tricky to create a rewards system. It’s not trivial to identify the value of each position compared to a different position, especially when positions are traded on (with balance shifting from one order in the strategy to the other) throughout the deposit.
New migration mechanism. Plus users can define their price range but there’s no reliable way for the smart contract to know the market price, so this cannot be verified on chain.
Security audit - it’s a fairly complex/sensitive mechanism so I would imagine the audit/fixes process would require at least a month and I’m being optimistic here
Personally I’m not convinced of the practical benefit here (or rather, convinced it will have a net negative), especially given the above.
Thanks for shedding light on the technical part. However a couple of points:
Point 1: the rewards would be calculated on the value you migrated from bancor V2/V3, which is calculated in V2/V3. And calculation of the rewards would be based on this value for the next 90 days. So you don’t need to get the value of the Carbon NFT. With this in mind, I struggle to see why it would be a lot of extra development vs. than rewards issued on Bancor V2/V3.
Point 2: I kind of expected challenges here. The alternative, if it cannot be done through smart contracts, is to do it manually, given that you have a relatively limited number of LPs
On the economics, what convinces you it will have a net negative effect? If a bunch of LPs basically agree to get out of Bancor V2/V3 and renounce their ILP right, how could the conclusion be that “it’s net negative for the deficit?”