Hi Bancor community!
The ICHI team recently approached Almanak team to assess the opportunity of including the ICHI pool within the current scope of Fee/TL recommendations to boost minimization of the ICHI pool deficit on Bancor v3.
Almanak would like to propose a partnership with the ICHI DAO, where Almanak would deliver risk parameters updates for the swapping fee and the trading liquidity of the ICHI pool on Bancor v3. Approval of this proposal would result in the weekly update of these parameters with the other 4 pools currently serviced by Almanak (ETH, LINK, DAI, WBTC). The cost of that service would be supported entirely by ICHI DAO, no additional cost for Bancor except the gas fees of the weekly update deployment.
EXPECTED VOTE DATE: before Jan 8th, 2023.
Implement Almanak’s weekly trading fee and trading liquidity recommendations for the ICHI pool on Bancor v3 for a specified trial period.
Do not implement recommendations from Almanak for the ICHI pool on Bancor v3.
History & Context
Almanak is currently collaborating with the Bancor DAO to reduce the deficit of the v3 protocol. The current approach focuses on the four biggest pools on Bancor (ETH, LINK, DAI, WBTC), where both the swapping fee & the trading liquidity are managed by Almanak. Since the start on November 14th, fees per volume have doubled across these pools whilst holding the same volume as comparable pools in the same period.
Over the first month of implementation, Almanak was able to contribute to the following results (first monthly report here):
- Protocol Deficit: 1-month decrease of 16%, circa $5M
- Swapping Fee: Overall increase of the fees to support the revenue while striking the balance with required arbitrage volume
- Almanak Pools Performance: Ratio Fee/Volume is above non-Almanak pools despite observed decrease in volume across the market
ICHI has been part of the Bancor journey since whitelisting ICHI Legacy on Bancor v2.1 (followed by co-investment), followed by the migration of the liquidity onto v3 and transferring to ICHI.farm. Both proposals have been voted for with a large majority, cementing the partnership between the two protocols and led to the ICHI <> BNT pool on ICHI with additional xICHI incentives.
Fig. 1: Historical deficit of ICHI pool on Bancor v3
With the stop of impermanent loss protection on Bancor v3 right after the approval of the ICHI liquidity pool, an imminent deficit took over the pool. The current deficit compared to staked funds stands at 35.79% (December 16th 2022).
The foundation to reduce the deficit over time is twofold and follows the outline currently executed for the other pools on Bancor:
- Change and monitor the swapping fees to attract volume without extracting value from the pool from arbitrage
- Reduce the trading liquidity (deposits being available on-chain and prone to value extraction) if necessary to shield current funds from further deficit.
Especially in a volatile market environment with changing directions, Almanak provided a solid foundation to its controlled pools, lifting fees collected by trades without butchering volume on pools. Especially taking on an additional pool such as ICHI will contribute to the closing deficit and validate the current track record.
Methodology & Outline
A detailed overview of the methodology how fees and trading liquidity are optimized can be found here (as a governance post) or here (as a report). Only an abstract will be made available in this forum.
Fig. 2: Flowchart of a simulation run
We leverage our agent-based simulation platform to identify the best possible sets of parameters to shorten the path to recovery of the protocol. We distinguish three relevant types of agents for the Protocol: liquidity providers, traders and arbitrageurs. Prior to an optimization run, simulation agents are being re-trained and adjusted based on the latest data from the past months. We perform overfitting tests to validate the calibration.
To measure the efficacy of the simulation and agent-based modeling solution, we run walk forward optimization and tests which not only validate our approach but help refine hyperparameters.
Finally, we select the optimal pool swapping fees and on-curve trading liquidity that maximize the pool revenue and minimize pool exposure to deficit.
As for the other assets within Bancor, this will also apply to the pool containing ICHI tokens. We include the pool with its LPs and traders & arbitrageurs to interact with the pool throughout the simulation. Note that due to the smaller size and the limited volume, the ICHI pool is optimized separately from the larger pools to avoid any suboptimal solution-finding for the smaller pool. The update frequency stays the same as for the current pools.
Note that the reporting can be posted on the Bancor governance, yet we are open to transfer reporting onto any platform the ICHI DAO is most comfortable with. An example report currently published on the Bancor governance forum can be found here.
The battle-tested methodology developed by Almanak focuses on state-of-the-art concepts and tools to explore the open solution space and extract the optimal solution to each individual pool. By tailoring the different components of the simulation environment and the optimization to the risk profile of each asset, the proposed parameter set is adjusted to reflect the current state of the market as well as the future risk borne by the pool.
Based on the parameter set available for the other assets on managed Bancor v3 pools, Almanak optimizes the mentioned risk parameters within the same optimization environment, yet changing the agent behavior to adjust the actions and respective reaction of the pool in regards to any potential market scenario.
Fig. 3: Asset correlation within the Bancor protocol covered by Almanak & ICHI
As a first iteration, we execute a first iteration of optimizations to check all parameter sets and their performance on a plethora of price trajectories. Note that for the sake of simplicity, we focus on profitability only, which is seen as the main driver to reduce a pool deficit. We additionally highlight the deficit saved from the different protocol recommendations.
Fig. 4: Heatmap of monthly ICHI pool profits of averaged parameter sets
The initial observation coming from the optimization is to initially reduce the trading liquidity by a bigger margin compared to the other pools. A potential reason for this is the strong correlation between ICHI and BNT, leading to an even more impactful deficit growth once the asset price decreases. “Storing” that share of the trading liquidity helps to limit the impact on the pool deficit.
Trading fees are also impacted by the optimization, where trading fees are slightly higher compared to the swapping fee currently on-chain. This is mainly driven by getting higher value extraction from each trade, as those are limited on the platform. The combination of reducing the amplitude of potential asset value decline and raising the fees per volume unit as a pair are the plan to reduce the deficit over time.
To conclude, Almanak opts to reduce the trading liquidity of the ICHI pool on Bancor to limit the impact of further declines in token value and therefore the additional deficit. Additionally, swapping fees will be slightly increased to bring additional revenue to further minimize the current deficit of the pool.
Implementation & Conclusion
Implementation of the recommendations are upheld by the multi-signatories of the Bancor protocol. Since the recommendations are pushed at the same time as for the other pools serviced, implementation time stays the same. Gas costs for changes in swapping fees and/or trading liquidity needs to be covered by the ICHI DAO.
Weekly updated recommendations can help to stimulate trade volume and incrementally accrue more profits over an expected volume to limit the deficit on a respective pool. As the current results of the other main pools covered by Almanak have positive outlook, we highlighted a similar, yet constrained impact on the ICHI pool on Bancor v3.