Summary: This proposal supersedes “BIP-6: A Liquidity Backlog Scheme to Accommodate Large BNT and erc20 Deposits”. In this revised draft, the protocol co-investment limits are proposed to increase to 1,000,000 BNT on all whitelisted pools.
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 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 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.
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.
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This proposal is undergoing modeling prior to moving forward with discussions, so community members can have a better idea of the potential implications on BNT. The models will be shared here, stay tuned!
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Awesome. We will wait to see what the models look like before moving it to a vote.