Summary: This BIP proposes to create an option where large quantities of BNT can be deposited into the protocol, even in the absence of available space. The protocol will then distribute the deposit into pools as space becomes available.
The Problem: At present, the process of adding liquidity to the Bancor V2.1 can be done in one of two ways: 1) Double-sided liquidity via the creation of pool tokens via a simultaneous deposit of BNT and erc20 in 1:1 value, and 2) Single-sided liquidity via the deposit of BNT or erc20 alone, to one of the existing liquidity pools.
For people with very large collections of BNT tokens (“whales” in the common vernacular), neither of these options are practicable. In the first case, the creation of dual-sided pool tokens can require erc20 assets to be removed from other financial instruments, resulting in an opportunity cost on scales that regular cryptocurrency patrons do not have to contend with. In the second case, the rate at which pool capacities ratchet forward in their available space is unpredictable, slow, and only occurs in small increments. If the pattern continues, BNT whales are expected to engage with the contract many thousands of times before their holdings can be completely absorbed. These are serious issues and are actively inhibiting the protocol from achieving what it was designed for. Moreover, this gives the protocol an exclusivity for small BNT providers, thus forcing the whales into a position that makes everyone uncomfortable.
BNT whales are left with two choices. Either they continue holding BNT in their wallets, where it is of no use to anyone (including and especially the protocol), or they dump it on the open market, resulting in a supply shock, and a sharp decrease in the the spot value of BNT. The same issue exists on the erc20 side of the pool. Whales hoarding other assets, such as ETH, LINK, and other community favourites, cannot easily participate at-scale while maintaining single-asset exposure. For many whales, buying an equal value of BNT for a dual-sided deposit could represent a non-trivial amount of the total market cap of Bancor, which is completely unreasonable. Single-sided deposits are also inhibited, for the same reason as discussed above.
In short, people that control large sums of wealth, and who have expressed an interest in participating in the Bancor v2.1 protocol (e.g. @rektducre), are effectively being denied. This hurts the growth of the protocol, it hurts the BNT whales, and will hurt the BNT community if nothing is done about it. Unfortunately, the protocol mechanism is partly to blame. As erc20 tokens and BNT must be provided in equal weights, single-sided exposure availability will always appear in an incremental, jolting manner. BIP5 has made some strides towards alleviating these pains by introducing higher co-investment limits for selected pools, but this alone will not solve the issue.
The Proposed Solution: This BIP seeks to introduce a second layer utility above the smart contract that interacts with a decentralised database. This second layer would serve as a reservoir into which whales can deposit BNT and erc20 tokens en masse.
Tokens from the reservoir are then distributed to the liquidity pools as space becomes available. BNT distribution would be over all available pools, whereas erc20 token distribution would, of course, only be to their cognate pools. This allows for bulk liquidity to be organized and funnelled into the Bancor v2.1 protocol in a time- and cost-efficient manner. This benefits everyone. Liquidity pools sequestered in this way are expected deepen very quickly, providing low slippage for token swaps. This is the missing element to our current competitive position against similar decentralized exchanges, such as Uniswap, and synergises with the reduced trading fees introduced in BIP4. This should drive greater adoption, resulting in higher returns for liquidity providers, and increased speculative appeal for the BNT token, raising it’s market price.
There is a possible downside. With an effective queue of BNT waiting to be deposited to the protocol form the second layer, it is possible that regular BNT participants will find it increasingly difficult to find available space on their favourite pools. This is an important acknowledgement; this BIP cannot create a situation that caters exclusively to the most wealthy individuals. To avoid this scenario from coming to fruition, this BIP proposes that transfers from the second layer reservoir must leave at least 2,500 BNT of available space for small deposits. This is give-and-take. By using the reservoir, the whales lose the ability to choose certain pools, but gain the ability to fill available space very quickly. Small BNT liquidity providers keep their right to refuse liquidity to certain assets, but may be limited in how much they can deposit at once. Any inconvenience incurred by small BNT providers is expected to be minor, and temporary.
Closing Remarks: The matching of BNT and erc20 token weights for single-sided liquidity provision is chaotic, and restricts the growth of the protocol. While the experience for regular users has improved markedly since launch, there is currently no end in sight for those with more substantial BNT holdings. Providing BNT whales with a mechanism to participate is critical, as they have the greatest capacity to inject value into the system, improve liquidity depth, attract trading volumes to the platform and improve Bancor’s visibility. The proposed system also provides for erc20 whales, who may want to queue very large deposits of tokens they wish to receive a steady revenue from, without risking impermanent loss. erc20 Whales fit the profile almost exactly, for the type of liquidity provider V2.1 is designed to service; failing to service the needs of these individuals is absurd, and benefits no one.
–end of proposal–
From the discord group, our resident BNT whale has contributed the following comment for this draft:
"Just to add, to the elegantly expressed problem, I and many in this position still support Bancor, we just need to find a solution that allows us to engage in this technology.
Another concern I have (though not related to Bancor V2.1), is the issue if something were to occur to me (i get hit by a cow or something), with the pool side, i’d be forced to move a large amount of wealth into Bancor, not just BNT (riskier asset) but the opposite side (say ETH) which would introduce a whole host of issues in the wife/accounting trying to find my funds, they could write of the BNT, if I am to give the single sided option a miss, and forced to take the double sided approach.
Whilst also losing out on a lot of opportunity that say my ETH holdings afford me to make money in the various trading opportunities that arrise in the various mini-cycles during the 3 month periods.
In a nut shell, double sided does not work for me, and single sided which really interests me, is too much of a pain to adopt, or unviable because of the issues of onboarding."
The draft has been updated to reflect suggested changes by @yudi
The New Proposed Solution: This BIP seeks to increase the protocol co-investment parameter on all white-listed pools to 1,000,000 BNT. The current implementation is based on the current protocol holdings. This will be changed to a new system based on the total amount of BNT minted for specific pools. This arrangement affords better access for BNT and erc20 whales to engage with the protocol, while effectively managing abuse risks. Moreover, this solution is uncomplicated and can be actualized without profound code revisions. Its feasibility should be conducive to immediate use (as opposed to a long development process), after governance approval.