System to begin phase out of vBNT

[mbr]

I want to share some of my thoughts here, with a view to establishing at least a minimal structure to this conversation, so that we have a scaffold for addressing the main talking points and eventually composing everything into a proposal, or series of proposals. For better or for worse, this requires some historical context, as vBNT has a complex past.

The Background on vBNT

1. At present, vBNT is the de facto governance token of Bancor. This token was introduced with the original v2.1 proposal:

@nhindman

Governance power: BNT holders who provide liquidity to a whitelisted (protected) pool receive vBNT, which represents their protected BNT stake and can be used to vote on upgrades to the protocol. This ensures that LPs and governance participants are one in the same.

2. The vBNT token was initially conceived as a means to ensure that decision makers are necessarily part of the system being governed. This served as a critical aspect to maintaining good-faith governance, as the mechanisms (whitelisting, rewards, etc.) available to the BancorDAO during v2.1 and v3 were implicitly abusable. Forcing DAO participants to “have skin in the game” was a considered precaution against deliberate subversion of DAO processes and other malicious attempts to poison the protocol.

3. Importantly, vBNT was issued as a receipt of BNT contribution to these legacy protocols. In essence, it was always the case that BNT was the parent token from which all governance authority was derived; vBNT was only a convenient wrapper for staked BNT that could be separated from other contract processes.

4. It became immediately clear that vBNT would become a liquid token in its own right, although this was never part of its intended use case. A vBNT/BNT liquidity pool was quickly established, liquidity was added, and the pair was actively traded long before the advent of the Vortex, or whitelisting status of vBNT. I was personally engaged in conversations with an individual known only as XaH4uK, who identified themselves as the sole liquidity provider to this pool.

5. The existence of a vBNT/BNT trading pair was potentially but not necessarily problematic. At the time it was worth giving some serious attention, as it added a somewhat random element to the system that would exist entirely outside of the DAO’s purview; trading pairs with vBNT can exist in any composition, and on any protocol that supports it. For a fledgling DAO, this concerned me. New liquidity products were arriving every other day in 2020 and 2021, most of which were nefarious Uniswap V2 clones offering incentive mechanisms to provide tokens of any type. The attack vector was clear:

   • Create a malicious Uniswap V2 clone.
   • Offer 123456789% “APY” for vBNT and other governance tokens.
   • Transfer all tokens to the admin wallet.
   • Become a dictator on essentially every DAO for which you now hold voting majority.

6. Take a minute to appreciate the existential nature of such a threat in the context of a DAO that is still getting acquainted with its role and responsibilities. The culture at the time was also to find literally any excuse to put tokens somewhere and receive other tokens. You may think my impressions of the state of affairs back then to be overly cynical - and you may be right. However, the idiom that it is not paranoia if someone is out to get you should ring with a profound credibility in light of the plethora of governance attacks we have witnessed in the years since.

7. These deliberations were coincident with another topic of discussion at the time: how to better monetize the system. A BNT buy-and-burn mechanism was among the more popular talking points, and therein lay a potential synergy that eventually grew into the Bancor Vortex.

@mbr

An alternative to admin fees: the ‘Bancor Vortex’ Mechanism

The BancorDAO has discussed the subject of an admin fee at length. The concept is borrowed from other decentralized exchange projects, but may not be suitable for Bancor as-is. In the outside examples, the admin fee is introduced ad hoc to create a fundamental value for the native token, which otherwise has no direct utility, save for governance in some cases. Bancor’s native token, BNT, is a utility token. As Bancor’s default base token, BNT is already a yield-generating asset; a conventional admin fee is at best slightly inelegant, if not completely redundant. As the fundamental value of BNT to its holders is already sound, our project is in a unique position to innovate its own answer to the concerns raised by its community over the course of the recent admin fee discussions. The most compelling argument can be summarised as follows. As the insurance provider, BNT token owners are exposed to 100% of the insurance liability. While this forms the core of Bancor’s business model (we are a literal insurance company), to an individual investor, the motivation to own and provide liquidity with BNT is obscured. Moreover, the 50/50 split of all swap fees to either side of the pool does not reflect the profound risk asymmetry of TKN and BNT liquidity providers. The best arguments for the introduction of an admin fee are founded on this premise, but no compelling implementations have yet appeared that utilise Bancor’s unique tokenomics.

Here, we propose a vBNT burning scheme, termed the ‘Bancor Vortex’ (BV), designed to create an urgent demand to buy and stake BNT. Before the mechanism becomes operable, the Bancor community is required to bootstrap the vBNT pool. Thereafter, the ‘vortex’ mechanism is initiated by introducing a protocol-wide administration charge on whitelisted pools, obtained predominantly from the TKN side of swap revenue. The specific fee amount is determined directly from the vBNT price in the pool via a hyperbolic function with different exponents for TKN and BNT. The exponents are adjustable by the DAO in future BIPs, and represent important variables in future management of the protocol. The fee is then held by the protocol until a user initiates the swap. The swap purchases vBNT via the vBNT liquidity pool, and the protocol burns it.

Thus, the protocol itself provides a constant buying pressure on the vBNT pool, providing consistent swap volume and associated fees, while supporting the price of vBNT over long time frames. More importantly, vBNT becomes a scarce resource. As the gatekeeper token to BNT deposits, the scarcity of vBNT introduces a new economic paradigm for BNT evaluation. As its price climbs above 1 BNT, an opportunity for immediate profits is realized via market-buying and staking BNT, if only to sell the vBNT it generates. The overall effect of the depleting vBNT supply relative to staked BNT value is a long-term, sustainable incentive for market participants to purchase BNT, and bring it back into the protocol, regardless of their bias or loyalty to Bancor. Alternatively, existing vBNT holders will be presented with an opportunity to sell their vBNT for an over-unity amount of BNT, which upon staking will yield additional vBNT along with an improved BNT stake balance.

It is important to realize that once this mechanism is set in motion, vBNT becomes a coveted asset that will never again exist in sufficient quantities to unlock all BNT stakes on the Bancor pools. At first pass, it may not be obvious why this is desirable. Before arriving at an opinion, the reader is reminded that their personal vBNT balances are not subject to burning, and if they choose to do nothing with their vBNT, they will be able to withdraw their full BNT stake at any point in the future. With this in mind, it is envisioned that many vBNT holders will choose to participate in the newfound leverage capabilities, or extract credit from the vBNT pool, to achieve any number of conceivable financial goals (vide infra). Those who participate may unintentionally, or deliberately, part with their vBNT temporarily, or permanently. The later sections of this document present scenarios where such actions are not just understandable, but could achieve a superb market efficiency that is currently unparalleled by Bancor’s rivals.

This mechanism was conceived in collaboration with Bancor founder Eyal Hertzog, the inventor of the liquidity pool concept, and godfather of automatic market makers (AMMs).

8. It is important to note that using vBNT here hit multiple targets. In early 2021, discovering ways to bring more BNT into the protocol was a desperate priority. It also front-ran the perceived threat of a nefarious 3rd party utility for voting power. Moreover, it brought vBNT resources in-house, where the DAO could monitor and govern it, while also affording a new and interesting use case for the token.