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I've spent the last couple weeks trying to understand the Bancor ( $BNT ) system and distilled some of my insights into a research note here.
https://medium.com/smart-money-defi-studio/the-bull-case-for-bancor-c9eed0c5336f
The TLDR Thread
https://medium.com/smart-money-defi-studio/the-bull-case-for-bancor-c9eed0c5336f
The TLDR Thread
1/
The team originally set out to create local currencies, but realized there would need to be a marketplace to exchange them, leading to the idea of an AMM, or automated market maker.
The team originally set out to create local currencies, but realized there would need to be a marketplace to exchange them, leading to the idea of an AMM, or automated market maker.
2/
Bancor is a reference to the supranational currency of the same name proposed by Keynes at the Bretton Woods conference as a means to stimulate international trade.
Bancor is a reference to the supranational currency of the same name proposed by Keynes at the Bretton Woods conference as a means to stimulate international trade.
3/
Bancor initially struggled given that the liquidity providers were required to seed both sides of a pool with equal parts ERC-20 and $BNT. Given that the value accrual to $BNT was unclear at the time, the system largely failed. Nobody wanted to exchange for $BNT.
Bancor initially struggled given that the liquidity providers were required to seed both sides of a pool with equal parts ERC-20 and $BNT. Given that the value accrual to $BNT was unclear at the time, the system largely failed. Nobody wanted to exchange for $BNT.
4/
Uniswap was able to initially solve this issue by making $ETH the common denominator in the pools, an asset that most people had in their wallets already.
Uniswap was able to initially solve this issue by making $ETH the common denominator in the pools, an asset that most people had in their wallets already.
5/
However, a 50 / 50 split might require you to sell off more $ETH or ERC-20 than you might otherwise want to and both sides are exposed to impermanent loss regardless.
However, a 50 / 50 split might require you to sell off more $ETH or ERC-20 than you might otherwise want to and both sides are exposed to impermanent loss regardless.
6/
When you provide liquidity to a pool, the assets are no longer under your control. As a result of pool rebalances, you may withdraw less $ETH or ERC-20 than you initially put in, a net loss if your swap fees or liquidity mining rewards don't cover the difference.
When you provide liquidity to a pool, the assets are no longer under your control. As a result of pool rebalances, you may withdraw less $ETH or ERC-20 than you initially put in, a net loss if your swap fees or liquidity mining rewards don't cover the difference.
7/
Bancor has attempted to solve both problems by requiring LPs to seed just one side of the pool (single-sided liquidity) and providing asset insurance to LPs (impermanent loss protection).
Bancor has attempted to solve both problems by requiring LPs to seed just one side of the pool (single-sided liquidity) and providing asset insurance to LPs (impermanent loss protection).
8/
Both features are enabled under the hood by "elastic supply", meaning the protocol can mint new supply to seed the other side of the pair to match incoming ERC-20 liquidity or to cover impermanent less with new $BNT.
Both features are enabled under the hood by "elastic supply", meaning the protocol can mint new supply to seed the other side of the pair to match incoming ERC-20 liquidity or to cover impermanent less with new $BNT.
9/
Sounds inflationary right? Not necessarily.
Protocol minted $BNT actually comes into existence to provide a match for the ERC-20 liquidity and burns when new $BNT LPs come. If any trades happened in between, the fees accrued to protocol BNT are burned = deflationary.
Sounds inflationary right? Not necessarily.
Protocol minted $BNT actually comes into existence to provide a match for the ERC-20 liquidity and burns when new $BNT LPs come. If any trades happened in between, the fees accrued to protocol BNT are burned = deflationary.
10/
While protocol minted $BNT is printed to compensate for IL, the risk is mutualized across all pools. Some will experience IL, others will be more than covered by fees.
While protocol minted $BNT is printed to compensate for IL, the risk is mutualized across all pools. Some will experience IL, others will be more than covered by fees.
11/
The structure of IL protection + liquidity mining rewards makes payout by fees more likely.
LPs must be in a pool for 100 days for FULL IL insurance and LM rewards jump from 1x to 2x after 2 weeks and reset across ALL pools if any funds are pulled.
The structure of IL protection + liquidity mining rewards makes payout by fees more likely.
LPs must be in a pool for 100 days for FULL IL insurance and LM rewards jump from 1x to 2x after 2 weeks and reset across ALL pools if any funds are pulled.
12 /
Sites like Coingecko are counting protocol minted $BNT for opening up SS liquidity space as supply even though it never touches the open market.
Only .07 per $1 of IL payout has needed to be minted thus far.
Sites like Coingecko are counting protocol minted $BNT for opening up SS liquidity space as supply even though it never touches the open market.
Only .07 per $1 of IL payout has needed to be minted thus far.
13/
As a result, I expect that the deflationary burning feedback loop will come to dominate the issuance feedback loop and supply will contract as revenues increase.
As a result, I expect that the deflationary burning feedback loop will come to dominate the issuance feedback loop and supply will contract as revenues increase.
14 /
Enter the Bancor Vortex.
For each $BNT staked, you get 1 vBNT (currently valued at about .5 BNT)
Enter the Bancor Vortex.
For each $BNT staked, you get 1 vBNT (currently valued at about .5 BNT)
15 /
vBNT can be used In governance, swapped in vBNT / BNT pool for more BNT (1x lev) or sold for another ERC-20 - borrow against staked BNT without cost of liquidation.
Regardless of what you do, the same amount of vBNT is required as the "key" to unlock staked BNT.
vBNT can be used In governance, swapped in vBNT / BNT pool for more BNT (1x lev) or sold for another ERC-20 - borrow against staked BNT without cost of liquidation.
Regardless of what you do, the same amount of vBNT is required as the "key" to unlock staked BNT.
15 /
Last week Full Vortex began.
5% (increasing to 15% over time) of swap fees from the ERC-20 side of pools will be taken and swapped for vBNT and burned.
As vBNT is the key and there is more BNT than vBNT, that BNT is essentially locked in the vortex forever.
Last week Full Vortex began.
5% (increasing to 15% over time) of swap fees from the ERC-20 side of pools will be taken and swapped for vBNT and burned.
As vBNT is the key and there is more BNT than vBNT, that BNT is essentially locked in the vortex forever.
16 /
The BNT that the protocol is now in possession of (PCV) can be used for IL payout or to increase single sided liquidity space.
The BNT that the protocol is now in possession of (PCV) can be used for IL payout or to increase single sided liquidity space.
17 /
You can see some clear feedback loops developing here
SS Liquidity + IL Insurance --> more LPs --> more liquidity --> less slippage ---> better prices --> more traders --> more volume ---> more fees burnt --> higher BNT price --> More LPs and so forth
You can see some clear feedback loops developing here
SS Liquidity + IL Insurance --> more LPs --> more liquidity --> less slippage ---> better prices --> more traders --> more volume ---> more fees burnt --> higher BNT price --> More LPs and so forth
18 /
Bancor has succeeded thus far by constructing their tokenomics in a way that incentivizes early LPs to bootstrap early liquidity and retains those LPs by integrating the native token throughout the protocol in a way that increases its utility and in turn its value.
Bancor has succeeded thus far by constructing their tokenomics in a way that incentivizes early LPs to bootstrap early liquidity and retains those LPs by integrating the native token throughout the protocol in a way that increases its utility and in turn its value.
19 /
With L2 on Arbitrum upcoming, a new trader centric interface launching, limit orders and new trader incentives, Origin pools for ETH bootstrapped early stage projects etc, I'm really bullish on the future of Bancor.
With L2 on Arbitrum upcoming, a new trader centric interface launching, limit orders and new trader incentives, Origin pools for ETH bootstrapped early stage projects etc, I'm really bullish on the future of Bancor.
For the rest of my analysis, please check out my piece on Medium. I'd love to get your feedback and figure out what I missed or could improve. https://medium.com/smart-money-defi-studio/the-bull-case-for-bancor-c9eed0c5336f
I just wanted to thank a few people that I learned a ton from including the Bancor team especially @MBRichardson87 and @NateHindman . I also learned a great deal from the threads of @Rewkang @Wangarian1 @mrjasonchoi and many others.
As a shameless plug, I recently joined @Smart_Money__ as an Analyst for our Yield Farming Fund and Head of Community for an asset management protocol @_SmartFunds_ that we're building. Come join us on discord for investment related discussions. https://discord.gg/a2zHVvUh
If you enjoyed my analysis, you can check out my other threads on @saffronfinance_ $SFI and @RariCapital $RGT here
https://twitter.com/patfitzgerald01/status/1361839140774567940?s=20 https://twitter.com/patfitzgerald01/status/1360082980589490177?s=20
https://twitter.com/patfitzgerald01/status/1361839140774567940?s=20 https://twitter.com/patfitzgerald01/status/1360082980589490177?s=20
Disclaimer: None of this is financial advice. The @Smart_Money__ Yield Farming Fund and I both have positions in Bancor. Please DYOR.
