Turn the Deficit into tokenized - Vested ILP, claimable based on Time and Protocol Health

This proposal is founded on the belief that you can't remove your liquidity (the protocol's only way to fund ILP) while also expecting to be made whole at a future date. This proposal draws on Leigh's proposal which aims to bring back LPs who withdrew and received no ILP. This proposal will force a choice. Numbers and timeframe are arbitrary - feedback needed and welcomed. 


This proposal involves launching new V3 pools where upon deposit, users are given a tokenized version of their ILP (based on address deficit) which can be claimed for BNT. This would apply to present and past LPs who exited after the pause. This claim function should be based on time and protocol health. However, since the vested ILP is tokenized, we should create a high fee (No ILP) pool on Bancor that allows users to trade it immediately. 

Receiving the vested ILP token should be time incentivized. This is where we are forcing past and present members to make a choice to migrate or deposit to the new pool. We give users a *month to decide. After the month the amount of vested ILP token received (based on individual address deficit) should decrease by a percentage over time. 


A Basic Example:

  • A User has 100 ETH in Bancor. If they withdraw they get only 55 ETH due to deficit. In this scenario, the user will receive 45 ETH equivalent of vested ILP TKN upon depositing into a new ETH pool proposed above.
  • The users CAN exchange their vested ILP for BNT immediately if they choose. However, the vesting mechanism is based on time and protocol health. So exchanging vested ILP for BNT on day one would yield almost no BNT -Because almost no time has passed and protocol health is poor.
  • Assume the user exchanges their vested ILP for BNT immediately This would yield an incredibly small amount of BNT (almost none). What happens to that ILP VEST? The user gets a small amount of BNT. The contract could then burn a large portion of the vested ILP that wasn’t able to be redeemed (due to time and protocol health) while depositing some back into a new pool that is claimable by ETH LPs who are still LPing in the pool. This creates a scenario where the protocol is reducing its ILP deficit, while also providing for a scenario where long-term LPs will get more ILP than owed. This is bullish for BNT.

Why this is a game-changer?

Protocol deficit reduction could drive new BNT investment, but this is probably unlikely due to current conditions... the real value proposition is buying vested ILP. Upon deficit reduction the value proposition of buying vested ILP creates a tremendous upside for longer-term investors or LPs,. This is something we don't have currently, is hard to create, and no current plan is seeking. 

This also creates an environment where new LPs can enter Bancor without direct exposure to the deficit. 


The claiming function of vested ILP needs to be researched. I suggest a time and protocol health component. This could possibly be combined or tied to the newly prosed Dai or protection proposal. 

A very rough idea: 

Time component: Let time allow for 25% of the vested ILP claim feature and protocol health account for 75% of the claim calculation (Based on deficit reduction). Give Bancor a one-year runway, where time is not used in the vested ILP calculation claim feature. 



Interesting idea @JBsmood

What determine the ratio of ILP to BNT?

Where does this BNT come from? Is it minted to be given to TKN LPs?


(I had to correct my basic math above)

I think the easiest way to link the vested ILP is to issue it in TKN ILP. So in the scenario above the user would receive 45 vested bnETH (VbnETH).

I understand the protocol wants to move away from minting BNT to cover IL. However, this mint would be to cover vested ILP, so it wouldn’t contradict any new ILP mechanism. Reasons why minting BNT to cover vested ILP is beneficial:

  • This monetizes ILP deficit in several ways:
    • Protocol can make high fees off pools of vested ILP TKN
    • Protocol could also buy ILP TKN deficit at a HUGE discount using a vortex method.
  • The risk to any BNT inflation with this method is incredibly small as the mechanics that allow for BNT printing are structured to implement based on time and protocol health. Essentially, protocol health may dictate that almost no BNT can be minted. I don’t think this should ever be zero, but it could be close to zero. Having time as a component forces Bancor to make progress (and LPs to engage the claim function) in debt reduction, but the weight “time” carries can be small. It can also be structured to give the protocol and long runway where it has no impact at all.

Overall, I believe this separates the current deficit from the protocol. This could help drive new BNT investment.

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I love the idea. It should be further developed!

These vested ILP tokens would be the guarantee for those who stay and support the protocol to get their entire stack back someday. This can therefore help reassure users.

Also, maybe there could be a mechanism where the amount of BNT you can claim at a time T also depends on the amount of vested ILP tokens you have, by making it degressive. For instance, someone who is 1000 ETH in deficit because of IL and so has 1000 VbnETH, could use only X% of its VbnETH at a time T, and uses the rest later (it would then still have (100 - X) * 1000 VbnETH). In this way, the amount of available BNT at a time T would be more evenly distributed among users, both large and small fish. It is important that no one is left out in this process, no matter the value of their portfolio.

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This is a cool idea; however, it’s important to note that this tokenized ILP is really tokenized rebalancing from the sale of their TKN in the bancor pool. It is essentially a wrapped vesting schedule token of the BNT already owed to the LP from rebalancing of their TKN.

The immediate issue that pops up in my head is how do you incentive that LP who already left to redeposit into the pool. Building off your scenario:

  • Previous user had 100 ETH in bancor and only receive 55 ETH at withdrawal during pause
  • The user redeposits their 55 ETH to receive their tokenized rebalancing of 45 ETH from previous withdrawal
  • If the deficit is the same at time of redeposit, the 55 ETH deposited becomes 30.25 ETH and an additional 24.75 ETH in tokenized rebalancing get claimed.

The end state of the LP in this scenario is 30.25 ETH and 69.75 ETH in tokenized rebalancing.

The LP in some sense has to pay 24.75ETH to receive their tokenized rebalancing, which becomes a long time horizon vesting schedule w/ considerable risk if the protocol does not return to health.

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Good points @infoparity

So, this is would involve new V3 pools. In order to prevent Arb’ing between the old pool, we’d need to discontinue trading on Deficit pools. This is also how you incentivize old LPs to come back. Not only is the old pool now stagnate…but we could also incentivize the vested ILP based on time.

Transfer in the first 2 months, get 100% vested ILP (of your original)… 3 months 90% …4 months 80%…etc

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