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Understand the core functions of Bancor v2.1: liquidity protection and single asset market making.
Original title: ” Bancor v2.1 intends to solve the AMM problem through flexible BNT supply and will initially support 60 ERC20 assets “
Written by: Bancor
Translation: Porridge Overnight
- Bancor v2.1 introduces unilateral asset market making and impermanent loss (IL) protection for the AMM asset pool through flexible BNT supply;
- Initially, the agreement will support more than 60 ERC20 assets as a “protected” pool;
- The new Bancor governance token vBNT can be generated by staking in a protected asset pool;
- Users can pledge and obtain impermanent loss insurance (guide) at app.bancor.network;
Facts have proved that it is difficult for the encryption automated market maker (AMM) to realize the promise of “passive” market making for ordinary users. Although the liquidity provider (LP) is more and more aware of the risk of impermanent loss (IL), as of At present, no AMM agreement has effectively solved this problem.
The existing AMM pool requires liquidity providers to abandon their long positions in tokens and assume exposure to other assets in the pool. The agreement incentivizes LPs through airdrops and liquidity mining rewards, thereby making up for the impermanent losses suffered by liquidity providers. However, these incentives only temporarily cover up the problem.
Therefore, liquidity supply has gradually become a “hot money” game. Short-term LP jumps from one asset pool to another, trying to obtain sufficient returns to make up for impermanent losses. This forces many token holders to be reluctant to participate in AMM or restrict their participation to avoid such risks.
At the same time, the competition between AMM agreements for LPs is also fierce. In order to establish a sustainable and profitable agreement, Bancor needs to provide something unique and unrepeatable. We believe that liquidity providers value more than just subsidies.
To this end, Bancor v2.1 provides two core functions for AMM:
- Liquidity protection (ie impermanent loss insurance);
- Single asset market making;
For example, suppose you hold 100 given tokens (e.g. “TKN”):
- This agreement will protect your 100TKN tokens, no matter how their price changes;
- In other words, if you pledge 100 US dollars of TKN tokens and the price of TKN tokens doubles during the period, then these tokens will become 200 US dollars when you withdraw them, in addition to transaction fee rewards;
Liquidity providers collect fees from SWAP transactions while accumulating liquidity protection over time. The longer you stay in the pool, the more you can avoid impermanence losses, thereby increasing the return on investment you charge for.
How the protocol works
Compared to other AMM protocols, Bancor uses its protocol token BNT as the matching asset in each asset pool.
The agreement uses an elastic BNT supply, co-invests in the asset pool with the LP, and uses the transaction fees obtained from the co-investment to cover the cost of impermanent losses.
Figure: Flexible BNT supply mechanism to promote liquidity protection and unilateral asset exposure
Let us consider an example where 1 TKN = 1 BNT:
- A user deposits 100 TKN in an asset pool;
- The agreement generates 100 BNT to match the user’s deposit;
- Half of the released asset pool tokens are related to the user’s pledge deposit, and the other half are related to the agreement;
- A transaction occurred in this pool;
- Protocol asset pool tokens are now worth 110 BNT (due to fees);
- An external LP deposits 110 BNT and burns them to exchange tokens in the protocol asset pool;
- Please note that 100 BNT was initially minted and 110 BNT was burned, thus destroying 10 BNT;
- When a future LP exits and spreads its profits to all BNT holders, this burning BNT will offset the cost of impermanence;
The “protected” AMM pool of the bancor.network front-end protocol
Staking, protection and voting
BNT holders who provide liquidity to the whitelisted (i.e. protected) asset pool will receive vBNT, which represents their protected BNT pledge and can be used for protocol upgrade voting. This ensures that the LP and governance participants are a whole.
Since Bancor v2.1 changes the token economics of the protocol, it is necessary to obtain community approval through Bancor governance to promote the upgrade .
BNT holders can protect their pledge by providing tokens to the 50/50 whitelisted asset pool and generate a new Bancor governance token vBNT, thereby immediately starting to obtain liquidity protection.
- Bancor v2.1 Staking Guide;
- Bancor v2.1 technical details;
- Bancor v2.1 economic analysis;
- Smart contract Github code (liquidity protection);
If v2.1 is approved, liquidity protection will take effect retrospectively from the LP’s first deposit and the protection of its pledge.
Please note that before this proposed upgrade, LP can use bilateral protection (that is, using two tokens) to pledge, and after the upgrade, LP will obtain the ability to protect unilateral asset pledges.
In both cases, the amount of BNT they pledged will determine the voting rights they obtain, where 1 vBNT is always equal to 1 BNT.
Figure: Supply options in liquidity protection contracts
Below is the initial whitelist of approximately 60 asset pools officially listed by Bancor. The subsequent lists can be changed through Bancor governance. The general recommendation is to whitelist asset pools with a certain amount of liquidity and trading volume. As of press time, the assets in bold in the following list are already on the whitelist, which means they can be used for liquidity protection immediately. Once sufficient liquidity is increased, all the tokens mentioned below will be included in the whitelist.
Draft a whitelist:
AAVE, ALEPH, ANT, BAL, BAND, BAT, BNB, BUSD, BZRX, CEL, CHERRY, COMP, CRO, CRV, DAI, DXD, ELF, ENJ, ETH, EWTB, FTT, GNO, gUSD, JRT, KNC, LEND, LINK, LRC, MANA , MATIC, MKR, MLN , MTA, NMR , OCEAN, OMG, pBTC , RARI, RCN, REN , renBTC, renZEC, RPL , RSR, SNX, SRM, STAKE, sBTC, sUSD, SUSHI, SWRV, SXP, TRB , TOMOE, UNI, USDC , USDT, WBTC, wNXM, XDCE , YFI, UMA, QNT, ZRX.
About upgrade voting
It is reported that Bancor officials have invited the community to discuss the Bancor v2.1 proposal on gov.bancor.network and the new Discord governance channel and existing telegram groups.
After 48 hours of community discussion, the proposal will be voted on from October 14th to 17th, 2020 . In addition, approval of the Bancor v2.1 proposal requires a 20% pledge of vBNT approval. If the proposal is approved, the upgrade will be pushed to the mainnet a few days after approval.
In the next few days and weeks, Bancor will officially release more materials and guidelines on Bancor governance and staking, as well as the latest technical documents after v2.1 is approved.