Implement Swap & Stake Functionality on Bancor 3
By IntoTheBlock Research
TLDR
- This proposal seeks to implement a “swap and stake” function on Bancor 3
- By reducing friction and increasing awareness of Bancor’s impermanent loss protection, swap and stake aims to improve the omni-pool’s liquidity
- This also targets more traders to become liquidity providers, aligning the interests of the two key groups with a positive feedback loop
Abstract
Bancor 3’s instant impermanent loss protection is likely to make it one of the best risk-adjusted returns for liquidity providers. To a certain extent this is already the case in Bancor v2 with its 100-day impermanent loss protection.
Despite the fact that this has led to high liquidity in the protocol, it has not resulted in higher trading volumes. Through the implementation of a “swap and stake” functionality, Bancor 3’s demand-side can benefit from the attractive LP returns and create a positive feedback loop as will be explained shortly.
As the name suggests, the swap and stake functionality would allow anyone trading on Bancor 3 to directly deposit their newly-received assets following a trade. This reduces friction while also creating greater awareness of the returns users can obtain by providing liquidity. This is proposed to be displayed in the front-end along with projected staking APR and a profit calculator after clicking on the button:
Users will be able to see a Swap & Stake button below the regular Swap one, showing projected yields when they scroll over. After clicking the button they can project their profits from providing liquidity.
Source: IntoTheBlock Research Mock-up
Through this simplified user experience, the aim is to increase the amount of users that stake their assets on Bancor 3, leading to greater liquidity and in turn more demand for trading.
Finally, if any gas savings are possible from implementing swap and stake at once as opposed to as separate steps, it would offer a more cost-efficient solution that would be appreciated by retail users.
Motivation
Crypto investors seek yield on their assets, and the growth of DeFi is a testament to this. DeFi’s TVL as a percentage of crypto’s total market cap has grown to 14% from under 5% a year ago.
Sources: DeFi Llama, Coingecko, IntoTheBlock
DeFi users turn their holdings into productive assets in one way or another. Arguably, if users have the option to keep their funds idle or generate interest on top of them sans risk, users should prefer the latter.
Another important indicator to consider is the alignment of swappers and liquidity providers. Over 20% of the addresses that did a trade on Bancor during Q4 2021 also provided liquidity.
Source: IntoTheBlock
There is a relatively high overlap between those swapping and those providing liquidity on Bancor v2. On Bancor 3, this can be improved through the safety of having instant impermanent loss protection and facilitated by having the functionality to immediately stake after swapping an asset.
This aligns the interests of traders and LPs: by seamlessly being able to generate yield on their assets, more traders opt to provide liquidity, this leads to lower slippage, in turn making trading more attractive for traders.
Conclusion
DeFi users seek yield and Bancor 3 offers one of the best risk-adjusted options. Being able to generate yield on assets traded in one step elevates the user experience while aligning liquidity providers’ and traders’ interests. This aims to be a simple, yet powerful solution to help bootstrap Bancor 3 and have it reach its potential.
Unfortunately due to IntoTheBlock’s current engineering bandwidth we are not able to build the “Swap & Stake” functionality ourselves. Despite this, research done above highlights the potential positive impact and feedback loop this could have to stimulate activity on Bancor3. IntoTheBlock believes in the future potential of Bancor, and would be happy to see if a member of the community is willing to build it.
Any feedback is welcome, and happy to discuss details more in depth.