In regards to the recent events on the bancor protocol, I came to the conclusion that the main cause of this entire event is the bnt token inflation. Since the BNT token is the core of the bancor network, BNT outside of the bancor network should be made deflantionary by nature.
How can this be achieved?
-vbnt vortex to be increased
-No more LM rewards
-IL protection to be paid out in BNT, which is acquired by a mix of revenue generated tokens converted to BNT, by making a swap on the bancor protocol, similar to how “convert small assets to BNB” works on binance. If the protocol has not generated enough revenue, a “debt” token can be minted, which can be redeemed for the full value at a later stage. (When more protocol fees are generated or partly minted, if the bnt price is over a certain threshold price)
In simple terms, if the BNT outside of the protocol is deflationary by nature → its price should keep going up over time → no more IL for any other tokens in the protocol → in the unlikely event of IL, the user is compensated by bnt bought back from the protocol, or partly minted depending on the price at that particular moment. This BNT should then be staked for a certain amount of time, to provide additional benefits to the protocol & user, giving the user an additional hurdle to dumping the BNT on the market.
That way the BNT tokenomics would be strenghtened. A way for the current situation to be resolved asap, is for the bancor foundation to stimulate people for buying (locked for X amount of time) BNT from the protocol now, by providing a % of cashback in form of btc/eth when buying it in the coming weeks, with the promise of a deflationary BNT model in the future.
Just some thoughts. Open for discussion as we all might get the best outcome if we work together on a resolution.
BNT is already deflationary. Last time I’ve checked, from all the deposited BNT 60%+ is protocol owned. This BNT earns fees and burns them → making the token deflationary i.e. covers IL. On top of this there is 15% global fee on all trades that the protocol uses to burn vBNT.
The problem is that the current Impermanent loss protection mechanism is allowed to print an unlimited amount of BNT, which makes it inflationary. Hence this should be adjusted by providing a combination of BNT printing (above a certain BNT price treshold) + BNT bought from the protocol. If the protocol didn’t generate enough in fees or the BNT price is not suitable, a new “debt” token should be redeemable, which can be converted at a later point, when the BNT price is more suitable or more fees are generated. Hence removing the inflationary part of the ILP. This “debt” token could then be sold to third party individuals who don’t need the liquidity right away, and would like to make a profit by providing instant liquidity to those in need of it.
I’m afraid that would be costly to the system as it would accrue more and more debt in times like this, plus the interest over time to satisfy the risk taken by the third parties. However, it would help with the increasing gap between TKN and BNT and reduce the IL on positions, but the speculators could test the solvency of the protocol by driving the price of the BNT down (shorts).
Whatever the solution is it must be actually be unperturbed by market forces. Think maker/uni/aave.
What happens when there’s a big short on dai, how do they deal with it?
The risk with printing Bnt is that if there’s exist a way to print without limits, we can expect that to be exploited. (Ie. With shorts)
How does bancor limit that, perhaps it has a IL/deficient cover limit correlated to fees earned rather than time.
Because IL and fees are not as correlated with time, which seem to be a wrong anchor to tie compensation to.
The protocol should stop minting if the (fees collected by the protocol) < IL; as this is determined by the BNT supply which is ~100M (without the protocol owned BNT), the protocol should stop minting new BNT when it reaches this limit. Let’s see the solution from the team in the upcoming proposal.