Bancor DAO Almanak Proposal #1
Almanak, a revenue - optimization & risk management platform for DeFi & Gaming, has created a Protocol Economy Assessment Report for Bancor DAO.
Almanak would like to propose an ongoing long-term collaboration with the Bancor DAO, where Almanak would deliver regular actionable, data-based recommendations on protocol parameters. Approval of this proposal would grant the Bancor DAO multisig the permissions to implement daily fee and trading liquidity updates recommended by Almanak without a DAO vote.
Implement Almanak’s daily trading fee and trading liquidity recommendations for the ETH, DAI, LINK, and wBTC pools over the course of 3 months (ending December 31st, 2022) without a Bancor DAO vote and to be executed by the Bancor DAO.
Do not implement recommendations from Almanak.
Almanak is an institutional risk management & revenue-optimization platform, engaging in performance-based, long-term partnerships through the provision of data-driven recommendations and C-level intelligence to DAOs and management teams of blockchain-based projects.
Almanak uses agent-based modeling to simulate and optimize decentralized finance protocols towards sustainable growth, competitiveness and innovation. The intelligence it provides delivers economic security, while simultaneously maximizing key profitability metrics.
Almanak proposes a collaboration with Bancor DAO to design, deploy and maintain a customized protocol risk management framework that will ensure the protocol’s sustainable growth and competitiveness. The goal of this proposal is to present Almanak’s engagement offer towards the DAO.
Bancor DAO recently disabled BNT distribution due to an emergency action taken to preserve the health of the protocol and users’ funds. Almanak has looked into the potential optimization levers of the Protocol in order to mitigate the potential risk of realized and unrealized vault deficits, and to maximize the Protocol’s revenues. Such optimization levers are (i) on-curve trading liquidity (TL) size, (ii) dynamic swapping and withdrawal fees, (iii) external liquidity protection pools sizes, and (iv) dynamic cool-down periods, .
Recognizing the changes within the Protocol, Almanak has shifted its focus towards an optimization plan for Bancor V3 to achieve the Protocol sustainability.
The main objective under the current conditions should be to decrease the deficit of the already existing pools. Bearing in mind the recent Protocol update, we have focused on the analysis and optimization of the following elements:
- Maximization of the Protocol’s revenue (protocol capital efficiency).
- Minimization of the Protocol’s exposure to unrealized vault deficits.
- Minimization of the recovery time of the Protocol’s deficit (protocol reactiveness).
- Pool swapping fees - optimization of the fees per pool (dynamic or static) to maximize the Protocol’s revenues from trading.
- Pool depths - optimization of the on-curve trading liquidity, in order to minimize protocol’s exposure to further deficit.
Almanak proposes to execute the recovery efforts, while being mindful about maintaining a secure and stable transition towards the protocol’s new state.
- Provide recommendations on optimizations to the each token pool’s trading fees and available trading liquidity over an initial period of 3 months on four pools : ETH, LINK, WBTC and DAI
- use the legacy split approved Bancor DAO (90:10) between fees used for the Vortex burner and TKN LPs.
We leverage our agent-based simulation platform to identify the best possible sets of parameters to shorten the path to recovery of the protocol. Based on the 24h-volatility, Almanak’s platform simulates 7000 price trajectories to measure how agents behave in each of the scenarios.
We distinguish three relevant types of agents for the Protocol: liquidity providers, traders and arbitrageurs. Prior to an optimization run, simulation agents are being re-trained and adjusted based on the latest data from the past months. We perform overfitting tests to validate the calibration.
To measure the efficacy of the simulation and agent-based modeling solution, we run walk forward optimization and tests which not only validate our approach but help refine hyperparameters.
Finally, we select the optimal pool swapping fees and on-curve trading liquidity that maximize the protocol revenue and minimize pool exposure to deficit. The results are being presented and updated every 24 hours to act re-actively upon market conditions.
Almanak conducted optimization simulations for four main Bancor pools (ETH, LINK, WBTC and DAI). As of the time of simulation (August 2022), these four pools represent an aggregated 67% of USD volume and 45% of transactions for WITH trades, and respectively 43% and 71% for FOR trades.
The scope can be extended to more pools as required by Bancor DAO. For illustration, below are presented the results charts for the ETH pool as well as the Daily Revenue and Burning Ratio comparative analysis for the aggregated four pools.
Chart 1: ETH Pool Unrealized Vault Deficit
Vault deficit and represents the current delta between the value of assets deposited and staked by liquidity providers and the actual value available within the vault. Note that the difference between the two values was compensated via BNT distribution prior to 6/19.
To conclude, reducing the TL of a pool helps to reduce the impact on IL. Transferring funds out of TL into the vault secures LP assets, which in a first instance limits the protocol deficit. Secondly and acting with a bigger impact, these assets were only subtle to market changes as long as they were available within the trading pool. Not being part of TL anymore, LPs will need less compensation, as more assets are available.
Lastly, the following trend can be observed: the smaller the weighted TL size is, the higher the impact on the Protocol’s deficit. To do so, the Protocol would have to limit its TL in a volatile environment drastically to reach a smaller deficit.
Chart 2: ETH Pool Profit (net revenue minus realized vault deficit)
By the shape of the dark coloured cells one can observe a general tendency towards smaller pool depths and higher trading fees.
Extremes observed at the top right and bottom left corners represent highly volatile market scenarios which can be schematically split in two opposite configurations:
- (i) when a market breakdown is imminent: profits can be maintained with high swapping fees and smaller TL.
- (ii) when no crash is present: profits are generated through high TL and low swapping fees.
These configurations being extreme, they are less frequent in the sampled simulation distribution, therefore also indicating less robust optimization solutions. Indeed, sets at the bottom left represent less than 0.01% each on average and the top right is 0.05%. The most common and robust solutions are located in the center of the heatmap, with an average representative share of 1.2%.
Chart 3: Comparison of Daily Protocol Revenue – 5-Day Moving Average
The cumulative Daily Revenues over 30 days is USD 551,552 and USD 469,777 for the Optimized and Non-Optimized solutions respectively.
When moving to a high-level view, revenue on a daily scale is an easier path to compare two different solutions and their impact on a particular metric. In this case, Almanak’s solution outperforms the current Bancor solution on most days. The main reason behind this is the limited TL following a volatile market. While the current Bancor solution has always historically kept all tokens on-curve available for trading , the introduced risk levers help deploy funds tactically based on market conditions and produce lower slippage and better execution in these times.
Chart 4: Comparison of Daily vBNT Burn – 5-Day Moving Average
The cumulative vBNT Burn over 30 days is USD 1,180,113 and USD 1,004,115 for the Optimized and Non-Optimized solutions respectively.
As the vBNT burn is pegged to a fixed split of the incoming revenue (Chart 3), a high correlation of the burn of vBNT tokens with the latter can be observed.
Note that in V3 90% are used to buy BNT but they are not yet swapped for vBNT burning (not implemented at the time of writing. The protocol is currently collecting this “V3 BNT” in a separate wallet. Next chart below is showing the accumulation with and without Almanak optimization.
Chart 5: Accumulated V3 vBNT
The accumulated “V3 vBNT” over 30 days is USD 1,180,113 and USD 1,004,115 for the Optimized and Non-Optimized solutions respectively.
Overall, the current assessment focuses on what parameter combination limits the Protocol deficit, while increasing the profitability over the mentioned observation time. The main result brought forward by the Almanak’s protocol risk management framework is that the protocol profitability is a function of volatility and arbitrage volume, which can be actively managed through concerted tuning of the pools’ dynamic swapping fees and trading liquidity.
In an initial phase, Almanak would provide recommendations for LINK, WBTC, DAI and ETH pools over a 3-month period.
Recommendation would be provided daily on the following parameters:
- Optimal trading fees per pool.
- Optimal on-curve trading liquidity and strategy to shrink/grow the pool.
Almanak will provide recommendations to Bancor DAO on the optimal trading liquidity and swapping fees size on a daily basis. We advocate daily recommendation as it brings better efficiency thanks to reactivity to past 24h market conditions. The main challenge is the implementation of the fee updates through the Bancor DAO’s weekly voting procedure that usually spans over 72h and would therefore significantly tamper the efficiency of the recommendations. We are seeking approval from the Bancor DAO to bypass the required weekly voting procedure and instead implement daily trading fee and trading liquidity recommendations for the ETH, DAI, LINK, and wBTC pools over the course of three months.
Almanak will collaborate with the Bancor Protocol to update swapping fees and trading liquidity on a daily basis. The recommendation will be reported and displayed daily on a bespoke Bancor dashboard (see illustration below), designed by Almanak. The ETA for such a dashboard is 3 months, pending Bancor DAO’s feedback and expectations. In the meantime until the dashboard is ready Almanak will be putting our recommendations in Bancor’s Discourse governance forums for the community to be kept up to date.
After the 3-month initial phase and assuming positive feedback from Bancor DAO, Almanak would provide new proposals extending the services with new features. Almanak envisions a transparent, performance - based, long-term collaboration aimed at supporting Bancor DAO with key governance decisions with regards to protocol economy and profitability improvements.