Hi Bancorians!
As ALMANAK is currently involved in one part of the innovative ideas @foxsteven proposed (Almanak ongoing recommendations), we would like to highlight some important considerations in terms of risks and opportunities:
- Technicity of arbitrage could be a limiting factor to community usage
Even though Bancor should incentivize users to interact with the protocol and are keen to reduce the deficit, relying on the userbase to find profitable transactions can be cumbersome and does require additional knowledge on how to make the most profitable call with multiple external sources.
- Potential negative externalities to Bancor users
- Arbitrageurs exploit of the Fast Lane bot
An additional source of risk of less benefits would be the integration of auto-calling this function by arbitrageurs, seeking to extract value, as the risk-reward is high enough. In fact, since any user can interact with the contract once they identified an arbitrage, professional arbitrageurs can exploit it really easily, given they already have all the tech stack in place and their game scales with volume and number of arb transactions… It is not bad in itself, but to be considered.
- Profit cap too high to prevent from arbitrageurs exploit
Little to no arbitrage is more profitable than the maximum 100 BNT proposed as reward (source). We see a risk of too high an incentive for professional arbitrageurs leaving this contract as a source of more profits for those already in the game (market makers) rather than the interested and active Bancor user. By lowering the cap, this would help discourage those players.
- Moating strategy
What is the moating strategy for the new smart contract? A potential downside would be the open source of this contract and therefore an expected behaviour to be exploited by arbitrageurs
- Flash loan cost coverage
An additional problem could be a potential loss happening through the flashtrade: who will cover for potential costs of missed arbitrage & gas usage and is there a fail-safe to avoid it happening in the first place? Defining a detailed specification to ensure a robust usage is already part of this proposal and we suggest considering this outcome for any further development.
- Opportunity for inter-pool rebalancing
Lastly, an aspect to be covered when considering protocol-owned arbitrage is the opportunity of rebalancing pools with triangular trades. Triangular trades include passing through (at least) three different pools to gain a profit over all transactions. The Fast Lane bot could be a lever for Bancor to rebalance its pools and adjust for better trade execution. This does need further consideration how these strategies could be incorporated but would open up a path for more user-friendly trades along the way.
Almanak Team.
@Michael_Almanak @Nano @almanak-philipp 55-Stephan