Strategic Co-investment Increases in Key Assets
- The trial increase in single-sided capacity on ETH and LINK has proven highly profitable for liquidity providers, and the overall influence on the BNT supply has been deflationary.
- With this in mind, we propose expanding the strategy to other assets on the Bancor Network.
- The expected outcome is a profound increase in total liquidity, which should attract more frequent, higher-value swaps, driving increased fees and accelerating Bancor’s rise to market prominence.
This proposal seeks to increase single-sided capacity in the WBTC, ETH, LINK, YFI, REN, renBTC, OCEAN, AAVE, and SNX liquidity pools.
To support this change, vote FOR to enable this change,
To oppose this change, or vote AGAINST to not enable it.
The passing of this proposal by governance will allow for adjustment of the co-investment limits within the strategic range, contingent on prudent monitoring of its effects on the system.
Single-sided exposure is an untapped goldmine.
Following the examination of the LINK and ETH pools, we have an improved understanding of the effects of increased co-investment limits. The results are overwhelmingly positive, and the path to leading the AMM space is clear.
Trade volume increases with single-sided TKN capacity. The increase in single-sided TKN capacity is filled almost immediately, thus allowing the pool to support larger transactions at a lower cost to swappers.
Increased trade volumes drive profitability. More frequent, larger transactions on the pool produce higher revenue for liquidity providers.
Staggered growth alleviates insurance risk. If the co-investment caps are increased incrementally it creates diversity in TKN deposit events at different price points, and distributes impermanent losses over a more sustainable timeframe.
Increased co-investment limits stimulate Bancor visibility and grow the total market share. Additional space attracts new TKN liquidity providers and accelerates word-of-mouth marketing. Increased awareness of our unique single-sided exposure and impermanent loss solution helps to position Bancor as the preeminent automated market maker protocol.
The proposal suggests to slowly increase co-investment limits on the following pools:
Proposed restrictions :
Single-sided capacity will increase in 2m BNT increments.
Increased co-investment is contingent on:
Zero available space for TKN deposits at the time of the increase.
No less than 5 days between increments.
An increased share of total market volume
The total protocol co-investment cannot exceed 30m BNT per pool from pre-existing co-investment limits (e.g., if the previous limit was 5m BNT, the total limit cannot exceed 25m BNT).
Following the approval of BIP8 by governance on 11th December 2020, the protocol co-investment caps were raised in the LINK and ETH pools. The experiment has yielded valuable insight into improving the health and profitability of the network. This proposal represents a natural continuation of the same process, and generalizes the approach to include other, similarly strategic pools in this scheme, with a view to improving the Bancor ecosystem.
Growth of the liquidity providers annual percentage yield
The chart below compares the weekly average APY with the increased BNT co-investment on the LINK pool, and the apparent positive correlation is depicted with a straight line super imposed over the two traces. The increased co-investment in the LINK pool coincides with its increased profitability. A credible causal relationship is proposed, where the associated increase in pool depth results in lower slippage, and captures a greater share of the total market.
Track Bancor’s market share of total LINK volume here: Dune Analytics
The ETH pool also has recorded significant growth followed by a pullback to previous levels, owing to the market hangover after a period of high volatility. However, the overall trendline indicates continued growth in APY for liquidity providers, and serves as a second body of evidence in support of the central tenet of this proposal - increasing the protocol co-investment on strategic pools is positive for the health and profitability of the system.
The high growth of the network volume and protocol revenue
The LINK and ETH pools have recorded a spike in volume together with the increase in liquidity caused by the caps limits increase.
Moreover, both ETH and LINK pools have recorded significant growth of protocol revenue. Increasing caps on additional pools diversifies the risk by further staggering the protected stakes both in time and relative price points while attracting larger transactions. The result is a highly reduced insurance liability, and an increased cover competency.
If these trends continue, and are generalizable, increasing the co-investment limits on all volatile asset pools could further offset the impermanent losses and drive deflation of the BNT supply.
High demand for single- asset exposure with a lack of space
There is a high demand for single asset exposure on all pools; most are at maximum capacity, and TKN holders are unable to contribute further liquidity. The single-sided ceiling is reached quickly, as demonstrated in the chart below. The two exceptions are LINK and ETH - for which the caps have been increased.
The data suggests increasing the protocol co-investment caps will lead to a commensurate rise in TVL, pool depth, total and individual transaction sizes, and decreased slippage. These are the properties that will help to position the Bancor network among market leaders in the immediate term.
Deflation on BNT
The protocol’s co-invested BNT has remained within the protocol, and has not appeared on external markets. Therefore the direct price impact of BIP8 due to co-investment of the BNT supply has been negligible, as expected.
The charts above show the liquidity contributed is highly correlated with the current balance, with a small deviation around the 15th of December 2020. Current realized inflation from LINK oscillates around 0 whereas ETH recent positive rate change, has traded approximately 2.3M BNT into the pool (i.e., the protocol is absorbing BNT and increasing BNT scarcity on external markets).
- This proposal asks for increases to protocol co-investment, between 1,000,000 and 20,000,000 BNT, exclusive to selected volatile assets (WBTC, LINK, YFI, REN, OCEAN, SNX, AAVE).
- The limits will be increased gradually on separate pools, and adjust to the current market and network conditions, as was the case for ETH and LINK.
- The limits will be strategically implemented so as to maximize for protocol earnings, and minimize the risk of BNT emission through arbitrage effects.
- Incremental increases in the co-investment in any of the proposed pools are held to conservative performance indicators, designed to provide the highest possible assurance that profitability for liquidity providers is increased, and that any unproductive capital is inhibited from entering the system.
Strategically increasing the co-investment limits was explored via the ETH and LINK liquidity pools, following the acceptance of BIP8 by governance. This exercise produced important foundational data about the performance of the Bancor Network. These trailblazing experiments now provide fertile ground on which to apply the developing financial theory. Based on the ETH and LINK pool performances, it is reasonable to assume that a similar approach to other volatile assets could have a similar positive influence on the health of the Bancor Network. Therefore, incremental protocol co-investment in WBTC, LINK, YFI, REN, OCEAN, SNX, AAVE represents an effective and risk-averse means to advance the Bancor Network.