Inflation Control

The Liquidity Mining proposal estimated a 40% inflation rate due to newly minted BNT tokens based on the 70,000,000 BNT available at that time (Nov 2020).

However, with the DAO voting in so many LM rewards the actual inflation rate (not annualized, which would be a lot higher) from Nov 2020 until now (March 9 2021) is 125%. Total BNT supply has increased from 70 million BNT to 157.6 million BNT in 3-4 months.

I have seen some passing comments in other threads about how this is a known issue. However, at this current rate it does not seem sustainable and will hurt the value of BNT and thus the value of the entire project.

I strongly urge users who are taking part in Governance voting to consider this when voting on LM rewards for new pools. Every new LM pool increases the inflation rate even more and may not justify the extra traffic it brings in the long-term.

Please let me know if this seems like an unreasonable stance. I may be missing some piece of data that rationalizes the inflation rate. I imagine most other “outsiders” seeing a “BNT Total Supply” chart like the chart above will be thinking the same things which will degrade their confidence in BNT.

5 Likes

Hi Pilor! This is not realized inflation - the overwhelming majority of these tokens are not in circulation. I will prepare a more detailed response for you soon.

4 Likes

General jist is these extra tokens are actually coming from the bancors elastic token model as volume grows

3 Likes

Correct. Due to the price action on BNT, it is true some of these tokens have ended up on the secondary market, but it also means the protocol is extremely well hedged in stables, LINK, ETH, and BTC, as well as others. This builds-in the dump resistance that BNT has come to be known for.

Eventually this community is going to need to sit down and have a heart-to-heart about inflation mechanics and how it affects us. I think many in the space are convinced that deflation == good and inflation == bad. For better or for worse, we are entering a phase of crypto maturation where this binary view of economics is no longer a helpful way to evaluate things. Of course, we need to keep an eye on things, and I am so glad we have community members like @pilor who are mindful of the supply. We just need to raise the bar with regard to the community understanding of complex monetary systems.

4 Likes

We need a stat on the front page to be able to know how many BNT are being provided as liquidity by the protocol.

1 Like

You can see all of that info on Dune Analytics: https://explore.duneanalytics.com/dashboard/bancor-protected-v2-1-data

2 Likes

Providing LM rewards long term is not sustainable. We need to generate more volume so the liquidity provider will stay when the rewards are over or reduced. Let’s take a look at our competitor Uniswap. We have about 34.5% of their liquidity but only 9.5% of their volume. I think this is due to the swap fee. We have a two-swap model so our feeds are 0.30%-0.40% depending on the token the users are swapping. If we can reduce the total swap fee down to 0.25% or even 0.20%, we may be able to get steal some of the volume from our competitors. Once we have similar volume, we can slowly increase the fee and maybe reduce the rewards.

3 Likes

the swap fee isnt the problem the issue is people are used to going to uni. when trades are routed through aggregators bancor wins out on volume alot of the time, lowering the fees would be counter productive for LPs

2 Likes

Maybe I missed something, but don’t the aggregators find the best rate/fees available? let’s say if someone were to swap USDT/wBTC, we would charge a 0.40% fee whereas Uni would charge only 0.30%. Wouldn’t the aggregators route the transaction over to Uni rather than us?

this assumes that there is a highly liquid USDT / WBTC pool on uniswap. For swaps that involve two pools, Bancor is typically more efficient than other protocols because every pair on Bancor is liquidly traded against BNT. In fact, I just tried to initiate a WBTC → USDT swap on UNI, it routes you via WBTC → ETH → USDT, these two pools on UNI would incur .6% fee (.3% twice) as opposed to Bancor you’d only pay .4% (.2% twice)

4 Likes

This is a misconception - the pool fee is only part of the process. Aggregators use fees, gas, and slippage to calculate the best route. For small trades, the gas is the most significant concern, for medium-size trades, the pool fee becomes more important, and for large trades the slippage is the most important. By and large, aggregators send Bancor the traffic it deserves - it’s the spot traders that are losing money on Uniswap.

2 Likes

How about a proposal to increase the quorum to add LM rewards to 40%. I don’t think it makes sense to have 40% to whitelist and 20% to incentivize. It should be the other way around tbh. This would probably help to reduce inflation.

2 Likes

i think part of the reason is because in order to get LM rewards/co-investment the token has to first be whitelisted

1 Like

It’s not a bad suggestion.

I am with @Asu. We need dedicated DEX-swapping-marketing in order to 10x the trading volume in mid term, in order to reduce the rewards and move the ROI to be created through the actual business model.

A draft proposal I made a few days ago, can be found here.

That said, the rewards and inflation scheme is not per se bad. It allows the expansion of the ecosystem. It’s just to much and takes too much importance. Its a marketing tool to attract LPs, in my eye (could be interpreted as cost, rather than the profit in that sense).

1 Like

Current setup is 30/70 swap fees to the BNT side, how about when ETH/TKN pairs are enabled payout 30/30 and use the remaining 40 fees generated to cover or help subsidize IL protection costs or rewards to the BNT side.

It’s a good idea. I’d be supporting that

Also in agreement with this idea. With gasless voting going live next week:

Gasless Voting: The vote to transition DAO operations to Snapshot was approved, with gasless voting expected to go live next week.

reaching a 40% quorum shouldn’t be as difficult anymore. I think we will see a lot more community participation after the snapshot voting transition.

1 Like

This is a misconception - the 70/30 is only for LM. The swap fees are split 50:50.
The vortex fee burner is part of our inflation management scheme in the long term.

1 Like