Proposal: Tokenize the Deficit

There is a growing deficit that needs to be dealt with. While new revenue generation methods are great, they do not outweigh the potential for a massive increase in deficit in the short term. Larger and more substantial solutions need to be discussed. One of those potential solutions is to tokenize the deficit.

While I am no developer, and do not have all of the technical details, the rough idea is as follows:

  • Establish a stable “safe” ratio at which the deficit can assumed to be in order for the protocol to function as intended. This ratio may increase or decrease in the future due to new features and revenue streams.

  • Establish an “unsafe” ratio at which the deficit can be assumed to be too low in order for the protocol to function as intended.

  • Create a deficit/debt token. For the purpose of this discussion, we will call this “dBNT”.

  • Mint this token only when the deficit is below the stable safe ratio.

  • While minting is enabled, sell this token directly to the public at a stable price. Lets say 5 DAI each.

  • Allow the staking of dBNT. dBNT is not staked with any other pairs and is not traded. Staking simply implies there is a method for which dBNT holders can deposit their asset on to the platform to accrue fees, as outlined under this section.

  • Establish a dBNT Buyback pool, and a cap to that pool equal to the amount of dBNT sold multipled by it’s price (The price at which it is sold on Bancor), multiplied by a number above 100%. For this discussion we will use 120%. If there is a total of 1,000 dBNT sold at 5 DAI each, we’re looking at a pool total of 6,000 DAI. Buyback Pool = Total dBNT x dBNT price x 120%

  • Direct all revenue streams to dBNT stakers while the deficit remains under the unsafe ratio.

  • Direct “a portion” of revenue to dBNT stakers while the deficit remains between the safe and unsafe ratios, relative to the difference between those two deficit ratios. (As the deficit is lowered, the revenue for dBNT stakers is lowered)

  • While the deficit is above the safe ratio, that surplus is deposited in to the Buyback pool.

  • While the deficit is above the safe ratio, revenue to dBNT stakers is lowered substantially or removed altogether.

  • Once the buyback pool is full, stop revenue to dBNT stakers and stop revenue deposits to the Buyback pool.

  • Bancor buys back and burns dBNT at ANY TIME for a price relative to the buyback pool. If we use the same 120% model and assume the buyback pool as been filled, then all dBNT stakers will be selling their dBNT at a 20% profit. This doesn’t include any fees they may have accrued along that way while the protocol remained under the safe deficit level. If the buyback pool is not filled, then dBNT stakers may sell their position for a portion of the cost relative to size of the buyback pool.

This is a rough idea, but it allows those that believe in a Bancor recovery to be directly exposed to that recovery, while profiting from it substantially. This model shifts the current deficit issue away from existing liquidity providers who may or may not desire to remain in the pools to those that see a recovery in the future and want to be rewarded for their investment in the health of the protocol. The worse the protocol deficit, the more potential reward for dBNT stakers. Not only can this proposal help to decrease the current deficit, but also maintain the deficit at a safe level in the future. As the deficit grows, there is more incentive to purchase dBNT due to increased fees.

There are many variables that I have probably missed, and I definitely know the exact numbers that the many ratios I have mentioned should be maintained at. Thanks.

Added image to clarify


This is actually an interesting way to deal with it.
I’d like to think about it a bit before providing more feedback.

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I’d like to see further development on this idea and get it to a vote.

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I think the consensus is, at least on Discord, is that none of the yield-generating features are going to create an environment that closes the deficit in, at a minimum, years. I think the fact that nothing has been developed or demonstrated to have any real merit in nearly sixty days now is a testament to this.

If no entity is going to issue a loan to cover the deficit, we need to crowd-fund it and slowly begin to build confidence in the brand again. I’m aligned with Mike.


I would be happy to buy tokenized debt. I just don’t know how much of the debt needs to be erased to have a significant impact; maybe no one knows. At any rate, if a purchase of tokenized debt had a long term return of some magical magnitude, I would be happy to wait years to get my investment back; kind of like maturing Treasury bonds. I think the best plan would be to get a smart contract going that allows people to volunteer for whatever about of debt is appropriate to each individual, but NOT commit. Once everyone has signaled how much debt they want to buy, we will have a good estimate of a minimum total. If it reaches some threshold then it would autocommit everyone at the same time. Higher thresholds could promise better long-term returns to entice high participation. This is only the essence of the idea. I’m sure there would be many details to work out. With thousands of people committing, no one would be taking hardly any risk they didn’t want to take. This is kind of like a charity drive, but with an eventual payout. Maybe you could even have different payouts for different levels of participation, or different time horizons for receiving your rewards. This whole tokenization idea is a good one, I think. If I had to guess, I also think this is the sort of thing that could be executed quickly, both through the governance process and the actual coding.


fully support this idea, benefits both LPs as well as those who believe in recovery (and additionaly potential investors who would essentially be extending loans), so it would be great to see it worked out more in detail. for example what happens to the bought up debt, does it go straight to covering all TKNs deficits proportionally to the total deficit? what can we even think of as being a “safe ratio” given that any deficit currently means a haircut, and any prospect of a haircut equals unsafe in my perspective?

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When considering how much haircut is acceptable, one would do well to remember the daily volatility of crypto. It is NOTHING for a coin to rise or fall 10% in a day. I think if we got into the 15-20% haircut realm quickly, people would have more patience to wait for an eventual 0% haircut. ANY substantial improvement is going to raise people’s spirits, get people to stop whining so much, renew LP faith in the protocol, etc. We could achieve a virtuous circle. I sure wish the whiners would either help or get out of the way.

It is time for some team feedback in this discussion. Is this a viable solution that they feel good about?

i just want to reiterate that ZERO eventual haircut is acceptable, volatility is unrelated. otherwise yes, some development/improvement regarding LP positions is very much needed.

If ILP is reintroduced as intended, we can operate at a deficit. If ILP can never be turned back on, then we shouldnt even be here discussing solutions because the protocol has already died. So this model assumes that ILP can be turned back on in the future. And I would hope that is the plan considering that is the entire point of single sided staking.

The bought up debt goes to the deficit and can eieither be distributed to all pools evenly or to the pools with the highest deficit first.

So @yudi did you think about it? And what about LPs who already left?

Let’s face reality: without foundation or someone else injecting 40M$ in the protocol, we all know it will take years to recover the entire protocol’ deficit. Having a deficit token would allow liquidity providers to breathe waiting for the team to implement the solutions that will make Bancor recover on the long run…

Ok, so yes I have and I think it’s a good idea.

I want to share some general thoughts that are relevant to any feature -

  • it should be as simple as possible in terms of implementation
  • it should have minimal friction so that the community can get behind it
  • the ROI should be obvious

In regards to this solution, what can be done to simplify it?
For example, would a DAO commitment (vote) to cover the debt based on future protocol revenue, instead of an actual token, be an acceptable compromise?
The exact mechanism doesn’t have to be defined right now if in general the DAO commits to it, no?
This will reduce the implementation to practically 0 right now and still give people some confidence.
In the future, a token can be created, or an airdrop, or different conditions etc. based on whatever the community thinks makes sense.

Do you guys think something like that makes sense or that a token is absolutely critical from the get go?

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As long as there is a way that allows people to directly invest in to the future of Bancor with short term incentive via fees and long term incentive via guaranteed profit after recovery, then we’re still in the same ball park.

However i do believe a buyback pool is a necessity, and Bancor purchasing these hypothetical tokens back at any time relative to the current levels of the buyback pool is required.

Regarding a vote that commits to the debt in the future would *not, be satisfactory, as trust is already nonexistent and you’d see a much much much smaller turn-out in terms of dBNT buyers. Whatever the solution, its must be automated.

Yudi, have you ever heard of the idea that when purchasing a vehicle, it can be fast, cheap, and reliable, and you can only choose two of the three? Much like the three things you consider when implementeing a feature, the protocol is only in a position to implement two of your three factors. We can definitely guarantee an obvious ROI with a dBNT buyback, and I believe there is exremely low friction to an idea that responsibly relieves the deficit. However, as for simplicity, there exists no simple solution for the current deficit or future large deficits that allows ILP to be given to liquidity providers.

I want to introduce the idea that the original proposal is good, but too complicated. It is a dynamic solution where I think a static solution might be better because it is simpler. Using the treasury bond model, you would sell dBNT as long as there is debt, but allowing the staking of dBNT for immediate rewards from a majority or all of revenue is no better than what we are trying to do now: using fees to pay off the debt. The other dynamics of dBNT staking pool would require a lot of modeling and there may be hidden implications. We need time to pay off the debt while the market recovers and liquidity increases. It can’t continue to be a major drain on our revenues or we will have nothing to use to buy and burn vBNT or use for other solution strategies. We have to treat this like a 2-year or 10-year T-Bill. It has a maturation date and a maximum redemption value.

For buying debt, a DAO commitment is simple, but probably not sufficient, as it can be reversed or altered by the DAO in the future. We have to have a rock-solid commitment here so that the enticement is guaranteed. The protocol’s brand is already tarnished from the ILP freeze. This effort must have all the trustworthiness that we can give to it. It must also be substantial enough to engender a quick and sufficient remedy.

Possible parameters
Target commitment
What is the minimum amount X% of debt that has the biggest impact. 50%, 60%, more?
The entire debt does not need to be erased immediately, but a big portion needs to be erased quickly.

Threshold for participatory commitment.
If fundraising does not hit X% tier of target commitment, all individuals are uncommitted.
This erases risk for early participants, encouraging early momentum.
If fundraising passes higher thresholds (80%, 90%, 100%), ROI is increased slightly for all participants at each new threshold. The more people participate, the better it gets.

Multiple ROIs using tiers and time locks (Both of these imitate the variables of a bank CD.)
Bigger donation gets better ROI: $1 gets 1%, $1000, gets 2%, $100,000 gets 4%, etc.
Longer time horizon gets better ROI: 1 month gets additional 0.5%, 1 year gets additional 1%, etc. A variety of time horizons would also keep the dBNT from all being redeemed at once.

This is already complicated enough. When the rate of pool additions slows to rate X after some minimum time (a month?) the pool can be activated to repay LPs. Thresholds would continue to be satisfied for further commitment to the pool until all debt is satisfied.

I think my comments here are enough to prompt further conversation on how complicated we want to make this. I welcome amendments and suggestions to this simpler plan.

As with every proposal about the deficit and potential solutions, there is one major point that no one seems to account for:

*** How long does this solution take to develop on a math/coding level? ***

I think that this idea is… fine. It’s okay, but it isn’t great. It might address some short term problems reasonably well, but it will certainly take months to implement. I don’t want that time or mental energy spent on anything other than income generators for the protocol and the TKN and BNT lps.

And I think that @Numiasma makes a really good point:

The protocol can’t afford the debt. It doesn’t matter if we turn the 45 million dollar debt in “100 easy payments of 450k!” - the protocol doesn’t have the cash either way.

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This does seem to be a longer road that mirrors the objective of what we are currently doing/working on. I agree with Zeno here, we have limited bandwidth and I would rather focus efforts on revenue generation than shifting liabilities into a different vehicle.

The short way to personally accomplish all of this, it seems to me, would be to buy BNT, especially if you’re in the camp that you would buy the tokenized debt. You benefit from the protocol improving, help remove marginal supply from the market, and while you wait the protocol is using a vast majority of the revenues to buy supply around your position. Your ROI is reflected in the price increase of BNT, while any new debt vehicle costs the protocol fees to service, and ultimately weighs down recovery efforts in my mind.

This proposal allows for an injection of capital to the protocol that it so badly needs. Using only revenue generation, here are the likely scenarios given that trust in Bancor is essentially nonexistent.

  1. The deficit continues to drastically increase. No one is going to buy BNT.
  2. The protocol dies from LPs withdrawing.

Revenue generation is necessary and encouraged, but a larger and more substantial approach needs to be taken. You are going to lose all of your liquidity as time goes on if nothing is done. No amount of revenue generation is going to offset the increasing deficit.

With tokenizing the debt, you start paying it down when you are in a position to do so. I agree with Numiasma that rewarding purchases instantly may not be the best approach. Remove that aspect and you still have a token that allows for the purchase of debt, with a guaranteed profit after the deficit is removed. The purchase of dBNT goes straight to the deficit. Pair that with revenue generation methods, it allows for Bancor to start earning the trust back from every single person in the crypto community. A trustless payback method that can’t be backed out of like ILP.

As for coding/dev time, you can spend time creating ways to make another $200 in fees per day while the deficit grows another $10 million, or that time can be spent on something that may not only decrease the deficit more rapid than any other solution, but putting trust back in the Bancor name. This proposal would allow the deficit to be pushed to a time where you the protocol could afford 100 easy payments of 450k

You are failing to realize that everyone who is making proposals to deal with the deficit also wants revenue generation. Revenue generation = good. It’s great. Personally, I like money, so why would revenue generation be a bad idea? The fact is that if this deficit is not dealt with and trust isn’t built, Bancor will die. It’s not a question of if, it’s a question of when. Funding for developers and community members will run dry before the deficit is ever paid off.

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With liquidity leaving the protocol and the deficit increasing, there won’t be a protocol to recover soon. A proposal like this will start the repair process. Without something substantial like tokenizing of the deficit, small increases of revenue generation are not going to be enough to drive people to provide liquidity. There is no trust.

Yea I just don’t think the proposal is worth the dev time.

So a dead protocol with a lending platform is more valuable than an alive protocol that releases it’s features slightly later? Understood.

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