Proposal: Grant Bancor Team Emergency Powers in Event of a Wind Down

[cryptokitty]

Simple Summary:

In the event of a potential wind down, the Bancor Team must have the ability to halt all trading and withdrawals from all liquidity pools to ensure an equitable recovery for all LPs.

This proposal aims to give the team such emergency powers. For those who are legal-minded and familiar with how bankruptcy works, this power functions similarly to an Automatic Stay, which prevents a run on the bank and inequitable distribution to creditors when insolvency is readily apparent.

Rationale:

Nobody likes to hear that their protocol may just completely fail, but I think we have to prepare ourselves for that possibility, and if that happens, we need a solution where everyone gets a fair recovery.

At the end of the day, there’s no path forward until there’s any sort of fee generation that will feed the vBNT/BNT burn so that price appreciation can happen. In my opinion, there’s yet to be any sort of fee generation idea presented that will be value accretive enough to get us out of this deficit. I am not the only one that shares this opinion based on the results of poll taken.

Feedback Request: Potential Direction for Recovery

How confident are you that the current proposals* will generate the fees required to eliminate the protocol deficit in a reasonable amount of time? (Scale of 1-10, with 1 being the least confident and 10 being the most confident) *These include protocol-level arbs, JIT liquidity, Flash Loans, Stablecoin Swaps, Dynamic Fees, and Token Launch Pad poll

Again, this is not saying that the fee generation solutions will fail, but if they fail, we need emergency powers to be enacted immediately to prevent people from withdrawing liquidity and their BNT and selling on the market causing those who are quick, to recover more than those who are not.

Having these emergency powers in place should also give current LPs more comfort knowing that in case the fee generation solutions do not work, there is a path to getting an equitable recovery.

Logistics:

When it becomes readily apparent to the team that the fee generation solutions do not present a viable path forward, the team has the ability to shut off trading and withdrawals instantly and most importantly, without notice to prevent anyone from frontrunning. After, the team will immediately liquidate all BNT in the lowest price impact pools, combine all the assets from all pools and distribute these assets to all LPs in an equitable fashion.

As an aside, to the extent that the Foundation has any remaining funds left, those funds should be part of the recovery pool that gets allocated to all the LPs. Based on the utter rejection of a bailout/buyout and based on the complete lack of transparency by the Foundation, it could very well be the case that there are no remaining funds left.

[Mandalore]

As a final fail safe this seems like a good idea. Would look bad upon Bancor if this continuously hand wave away all proposals to help their LP’s.

[alphavalion]

@cryptokitty

In my opinion, there’s yet to be any sort of fee generation idea presented that will be value accretive enough to get us out of this deficit. I am not the only one that shares this opinion based on the results of poll taken.

Thanks for mentioning this is your opinion which I highly disagree with. Plenty of fee generation ideas have been proposed and I am optimistic about all of them.

I will be voting against this proposal for the sole reason that we should never prevent withdrawals.

@cryptokitty

the team has the ability to shut off trading and withdrawals

Stopping trading should already be an emergency power I think (I could be wrong). TKN LPs should understand that BNT LPs are also TKN LPs. BNT LPs will do what is best for the protocol and ALL its users.

I also wrote about this recently here which seems to be the new narrative cropping up lately, i.e. creating conflict between BNT LPs vs TKN LPs (coincidence? I think not!):

https://twitter.com/alphavalion/status/1548843400006361089

[cryptokitty]

@alphavalion

Thanks for mentioning this is your opinion which I highly disagree with. Plenty of fee generation ideas have been proposed and I am optimistic about all of them.

I will be voting against this proposal for the sole reason that we should never prevent withdrawals.

The vast majority of the vote would disagree with you. 76% rated a confidence score of 5 or lower. And 64% rated a confidence score of 3 or lower. It would be helpful if you explained your reasons for why you believe that all of the proposals will lead to sufficient fee generation to pay off the deficit. Personally, I do not see how stableswap volumes would be achievable at all with a constant product AMM and less liquidity than either Uniswap or Curve that have billions in liquidity and lesser fee tiers. There would have to be a change in the model of the AMM and that would take time, which is a luxury we surely don’t have given the rapidly rising deficit.

Perhaps halting withdrawals may not be necessary. Halting trading may be the only thing needed. Either way, the team should be thinking thru these options as a fail safe. Because this deficit only continues to get worse. The deficit was $29M last week. $37M yesterday. And $38.6M today. All the while, TKN LPs are leaving each day.

[alphavalion]

@cryptokitty

All the while, TKN LPs are leaving each day.

Yes, and that is a choice we all have. If you don’t trust that the protocol will be able to recover then you can make that decision today. I have made the decision to stick with the protocol even though I stand to lose $TKN as well.

I place very little weight on these polls as many of them are susceptible to sybil attacks and obviously does not speak for all holders. People are already voting directly with their liquidity by leaving or staying in the protocol (the metric that matters the most).

@cryptokitty

Personally, I do not see how stableswap volumes would be achievable at all with a constant product AMM and less liquidity than either Uniswap or Curve that have billions in liquidity and lesser fee tiers. There would have to be a change in the model of the AMM and that would take time, which is a luxury we surely don’t have given the rapidly rising deficit.

You are assuming the status quo. Tomorrow the SEC might regulate this space and classify many tokens a security except BNT for which there was a lawsuit alleging:

A lawsuit against on-chain liquidity protocol Bancor alleging unregistered security offerings

which was dismissed. The tide can change at any point in time and resigning to the idea that the protocol is dead and that nothing can be done to make it recover is not something I personally subscribe to.

@cryptokitty

Perhaps halting withdrawals may not be necessary. Halting trading may be the only thing needed.

I don’t disagree and I think this option is already an emergency power. The contributors can confirm if that is the case but note that this only gets exercise if the protocol is on the brink of dying. Emergency powers are not to be used lightly!

[cryptokitty]

@alphavalion

You are assuming the status quo. Tomorrow the SEC might regulate this space and classify many tokens a security except BNT for which there was a lawsuit alleging:

We don’t have much time. I think the conversations in the other “Potential Direction for Recovery” thread should focus more on the actual fee generation aspects. That to me seems severely lacking.

A new AMM not only needs a bonding curve, but it also requires liquidity. Even if we were to fork Dodo, as suggested by Mark Richardson on the community call, it wouldn’t matter unless you have the liquidity. DAI and USDT are both in deficit right now, so there’s no pathway to even getting stablecoin liquidity at the moment. So the stableswap mechanism is pretty far fetched even with the better AMM because you don’t have the liquidity.

The protocol-level arbitrage I guess can work. But that also depends on the liquidity in the Bancor leg of the trade. Yes, you’re saving 1% on the trade fees there, but you can’t ignore that the lack of liquidity will lead to higher price impact which will eat into the arb profits. There likely will be better profit opportunities utilizing Bancor funds but actually conducting the arbs on higher liquidity pools on Uniswap, Curve, Sushi, etc.

But then again, who on our team is known for successful arb trades? These are very difficult to win. We do have the competitive advantage when arbing actual Bancor pools, but the declining liquidity and high price impact on the Bancor pools limits the value that you can derive from them.

So @alphavalion it would be helpful if you could explain more on your reasoning in terms of how much value could be derived from the fee generating ideas and how Bancor could realize them.

[alphavalion]

Again, assumptions are being made based on the current status quo which can change at any point in time. Essentially, resigning to defeat and closing shop because things look bleak at the moment.

What I think will drive value to the protocol (in terms of difficulty):

• Dynamic fees
• Protocol level arbitrage
• Implementing a lending and borrowing market for bn pool tokens (I think this will generate revenue for the protocol but it will take longer time to implement) → has nothing to do with the DEX side and I think Bancor can pull this and other features off (perhaps stuff that hasn’t been announced)

I am optimistic on Bancor delivering on all of the above and then pivoting towards figuring out how to attract more liquidity into the protocol. There are many things that need to happen and not all can happen at the same time (things need to be prioritized) hence why figuring out to attract liquidity is not a priority (deposits are disabled ATM).

An anecdote, AMD was on the red a decade ago (8-10 years back), not profitable, and losing money every quarter. Many called for bankruptcy and the death of the company that would essentially let Intel monopolized the market. It took >=5 years after a change in leadership for AMD to make a come back and be a profitable. I understand that many LPs are looking to be made whole now or tomorrow and the reality is that it won’t happen in a few weeks or months. I estimate at least 6 months to a year for things to start turning around.

[cryptokitty]

@alphavalion

Dynamic fees

How does dynamics fees help when the due to the lack of liquidity in your pools you have the highest price impact? You’ll still not be able to compete against other AMMs who either have a lot more liquidity or have concentrated AMMs that are able to amplify the effect of their liquidity in terms of lowering price impact.

@alphavalion

Implementing a lending and borrowing market for bn pool tokens (I think this will generate revenue for the protocol but it will take longer time to implement) → has nothing to do with the DEX side and I think Bancor can pull this and other features off (perhaps stuff that hasn’t been announced)

First of all, time is not a luxury you have when the protocol deficit is increasing by the millions every day. Borrowing and lending markets are outside of the core expertise of the team. Additionally, anything unique will involve additional coding, audits, and implementation which take significant time and resources.

@alphavalion

I am optimistic on Bancor delivering on all of the above and then pivoting towards figuring out how to attract more liquidity into the protocol.

Look, I can tell that you are an ardent supporter of Bancor, but you also have to look at the numbers regarding fee generation, liquidity, trade volume, and protocol deficit. These are not good numbers. In fact they’re horrible numbers, and the solutions provided either (1) require lots of liquidity to be effective or (2) require overhead, coding, audits, and most importantly TIME to implement. Time is just something we don’t have right now given the deficit situation.

@alphavalion

An anecdote, AMD was on the red a decade ago (8-10 years back), not profitable, and losing money every quarter. Many called for bankruptcy and the death of the company that would essentially let Intel monopolized the market. It took >=5 years after a change in leadership for AMD to make a come back and be a profitable.

The thing is AMD didn’t have a situation where it faced a death spiral and the wrath of a community who feel like they were duped into depositing their money. I get that you chalk it up to “it’s just DeFi, and they should have known that they could lose everything,” but people lost real trust in Bancor, the team, and the Foundation. So that’s a handicap that I don’t think AMD went thru.