TLDR: We should add front end support for the Liquity protocol to expand borrowing opportunities for our ETH holders. The Liquity protocol allows for interest free loans, only 110% collateralization, already has 4.5 billion in ETH and 1.5 billion in its native stablecoin. It is an established protocol which is censorship resistant and governance free. Even if we decided to develop our own borrowing protocol eventually, this would attract users now, increase TVL now, and free up capital for trading. It would take minimal work to employ as it is an already developed protocol which has front end support tools.
Proposal to greatly expand access to borrowing by integrating front end support for the Liquity protocol
In this proposal, I describe the Liquity protocol and the benefits of Bancor offering front-end support. Bancor can attract additional users and Total Value Locked (TVL) with the addition of a decentralized, censorship resistant, and governance free lending protocol to the platform. There is significant demand for borrowing which has been discovered and only partially met by introduction of the Bancor Vortex. The addition of the Liquity protocol would provide additional revenue to the Bancor platform which can be used to purchase and burn vBNT, driving the peg closer to 1:1, increasing the price of BNT, better meeting the borrowing demand of the Bancor users, and increasing the platform’s TVL.
The State of Borrowing on Bancor
The addition of vBNT and the Bancor Vortex added an opportunity for leveraged exposure and essential lending for BNT stakers. Bancor users demonstrated significant demand as evidenced by the consistent sell pressure on vBNT with the current vBNT:BNT peg of 0.35:1. We have identified a large potential lending market within our own user base which can be at least partially met by the Liquity protocol if employed properly. Moreover, there is significant risk in “borrowing” with vBNT as it is a derivative of BNT still going through price discovery with poor general liquidity. Borrowing in a denomination of a volatile asset is one of the riskiest aspects of the Bancor platform (and the general DeFi lending market) which can be ameliorated by alternative lending tools for our users. At the time of this proposal, staked ETH represents 29% of all TVL on Bancor for which the respective stakers cannot borrow against. A wide variety of financial tools will assist Bancor in capturing market share, add stickiness to the platform, decrease capital risk for our users, and, potentially, attract new users to the platform.
Interaction and Interoperation with Outside Protocols
As the DeFi space matures, we can anticipate cooperation between platforms and protocols to best serve their users needs and create new value— capturing the essence of decentralization. One example of a synergistic partnership in the Automated Market Maker (AMM) space is that between Balancer and Aave in debuting asset management which promises to improve capital efficiency. I believe integrating Liquity will have minimal barriers as there is no opposite DAO or governance structure with which to align. I anticipate we will see more collaborations as the DeFi space and protocols mature, and I hope to see Bancor to identify and enable these mutually beneficial relationships.
Future Opportunities
The Liquity protocol is currently built for ETH use only. Given the significant overlap of the Bancor and Chainlink communities, perhaps there would be an opportunity for a fork of Liquity to provide interest free borrowing opportunities against LINK. I am admittedly not a developer, however it should be noted that forks of the protocol are currently being developed to use on other blockchains (Fluity on BSC). If Bancor users were able to borrow against BNT through the Vortex, ETH through Liquity, and LINK through a Liquity fork, that would unlock ~69% of all staked value on Bancor for borrowing opportunities – nice.
Customized borrowing and lending on our platform can unlock additional opportunities to integrate outside protocols or develop a similar, customized protocol. An example: Alchemix allows users to take loans against their collateral which are paid off by future interest earned. A customized version of this protocol would allow a user to take a loan, purchase and stake BNT, and have the rewards/earning from their staked BNT pay off the loan. Imagine Mike has $50,000 worth of LINK that he would like to stake on the platform, but the pool is full. If he could take out a loan on Bancor to buy BNT, he could stake it and create space for himself to stake a portion of his LINK. His earnings from his staked assets could be used to pay off his debt affording him access to capital now. This would increase TVL, increase purchase pressure on BNT, and provide additional utility on the platform. The possible integrations and partnerships are numerous given the rapid growth and ingenuity in the space.
The Liquity Protocol
The Liquity protocol is a censorship resistant, governance free protocol that allows for interest free borrowing against ETH with a minimum 110% collateral ratio.
The two tokens issued by the platform are LUSD and LQTY. LUSD is an algorithmic stablecoin which can be redeemed via the protocol for $1 worth of ETH at any time which creates a highly efficient 1:1 USD peg maintained by arbitrageurs. LQTY is the secondary token issued by the protocol capturing fees generated by minting LUSD (taking a loan) and redeeming LUSD for ETH.
Brief Stats On Liquity
1 million ETH deposited in the protocol (~$4.6 billion)
$1.5 billion worth of LUSD has been minted (loans taken)
Less than 100 liquidations total since inception on 4/5
Current collateral ratio ~290%
The Liquity protocol has additional nuances and safety features including a recovery mode where the collateral ratio requirement is increased to 150%. Also, LUSD redemptions occur by paying down the debt of the least collateralized trove to obtain an equal dollar amount of their ETH. The economic build and incentives are fascinating and are at the very least worth a read for those interested in the DeFi space. If there was significant interest in integrating Liquity, I can prepare a second post listing out necessary steps that Bancor should take to have a successful rollout. This would include various educational schemes and notifications to protect our users. Below, I have attached additional informational links to learn more about the protocol.
Github link: GitHub - liquity/dev: Liquity monorepo containing the contracts, SDK and Dev UI frontend.
General documents: https://docs.liquity.org/
Analytics site: https://duneanalytics.com/dani/Liquity
Front End list: Liquity | Frontends List - Use Liquity
How it would look on Bancor
I know we have an incoming update to our UI, but I envision a new “Borrow” tab on the left banner. Under borrow, the core features of the Liquity application would be selectable which include the following:
Troves (could rename if we want)- Allows for the deposit of ETH and the borrowing of LUSD
Stability Pools- Allows for deposition of LUSD as a lender of last resort which is currently incentivized with LQTY at an APY of 28% in addition to the fees garnered through liquidations. The fees earned through the stability pools would be those captured by Bancor’s kickback to buy and burn vBNT.
Stake- Allows for staking of LQTY (APY determined by capturing fees from loans taken and redemptions)
Liquidation- Lists all borrowers including their collateral ratio. Borrowers that fall under 110% collateral ratio can be liquidated by anyone in the protocol (or bots eventually).
While there are numerous current front-end integrations, I anticipate the brand of Bancor and its status in the cryptocurrency community would funnel new Liquity users to Bancor even if the Kickback (fees kept by the front-end) were less competitive than other front-ends employing Liquity. With successful execution and a thoughtful UI/UX, I expect this integration to increase our userbase.
Another potential opportunity would be to fork Liquity completely. The protocol could be modified so that all revenue streams from the lending/borrowing protocol are funneled directly to purchasing vBNT instead of to the LQTY token. This would keep 100% of the profits within the Bancor ecosystem but would require a comprehensive build, audit, and economic analysis.
Potential benefits and cons to integrating Liquity:
Benefits of integrating Liquity:
Adds additional financial tools to the Bancor platform to address the wide needs of users
Would increase TVL on the Bancor platform by capturing more ETH, minted LUSD, and staked LQTY
The Liquity platform provides a launch kit and SDK to minimize the work of creating the front end application
Reduces selling pressure on vBNT by addressing ETH owners’ demand for loans and leverage
Increases vBNT purchase pressure by purchasing vBNT with the revenue produced as a front end
Potentially attracts new users
Decreases borrowing risk for current users in comparison to borrowing with vBNT
Potential cons of integrating Liquity:
May reduce the amount of ETH staked in theETH-BNT liquidity pool which may make the ETH-BNT LP less competitive due to increased slippage
May add increased risk for our Bancor users should they over-leveraged
Adds a second layer risk of contract failure
Would require UI/UX update and integration
Would take up developer bandwidth
In summary, we can best serve our users and gain market share in the DeFi space by offering additional financial products. Integrating existing, functioning, and high value protocols will maximize synergy and usage. Governance free, censorship resistant, audited protocols are the ideal fit for integration. Successful integration, adoption, and use of the protocol would increase the value of vBNT, BNT and of the platform as a whole. I am very interested in feedback from the community and the thoughtful Bancor team itself. Thanks all!