Since Bancor released its unilateral impermanent loss protection solution four months ago, its lock-up volume has increased by 70 times and transaction volume has increased by 55 times.
Written by: Wangarian, working for DeFi Investment Fund DeFiance Capital
Translation: Lu Jiangfei
Today, I want to put some new wine in the old bottle of Decentralized Exchange (DEX), and share with you some new ideas about Bancor’s native token BNT.
Four months ago, Bancor released its highly anticipated Impermanent Loss protection solution for liquidity providers (LP). Since then, the lock-up volume has increased by 70 times and the transaction volume has increased by 55 times. For Bancor, a DEX that may have been forgotten by everyone, I hope to do some in-depth discussions: this may be the dark horse with the greatest potential in 2021.
Bancor is a decentralized exchange launched in 2018, and it is also an “old gun” in this field. However, Bancor has been troubled by an overly complex token model for a long time. Despite the high promise, it lacks obvious market appeal.
After that, Bancor spent two years on product iteration and leadership reorganization. Bancor’s original vision has been realized one by one, and therefore, the “Bancorian” community today is stronger than ever. Some of the core figures in the community include: Yudi Levi, Nate Hindman and Mark Richardson.
Not much nonsense, let me directly talk about Bancor’s investment themes that I have seen. To put it simply, we hope to describe the current Bancor with “crazy token economic model to create highly expected products”. This is something that the market did not notice in the past, specifically including the following highlights:
- Unilateral impermanent loss insurance;
- Token economics that can bring huge liquidity “sinkholes”;
- Compared with other DEX, the price of BNT is underestimated.
Impermanent loss insurance
Since the birth of Automated Market Makers (AMM), impermanence has been the main pain point of liquidity providers. With Bancor V2.1, liquidity providers can now mortgage unilateral assets and earn 60-100% of income while obtaining complete impermanent loss protection.
Bancor’s move has achieved substantial results because all liquidity providers can obtain the Pareto Optimal option. (Chain note: Pareto optimality, also known as Pareto efficiency, refers to an ideal state of resource allocation, assuming an inherent group of people and allocatable resources, from one state of allocation to another state In change, at least one person becomes better without making anyone worse off. This is Pareto improvement or Pareto optimization.)
So, how does Bancor Impermanent Loss Insurance work?
Bancor uses part of the swap fees generated in all liquidity pools to pay for the impermanent losses that have occurred within the scope of the agreement. Of all the earned token exchange fee income, 28% will be used to pay for the impermanent losses suffered by the liquidity provider, and this process will not mint or issue BNT tokens to subsidize this.
You will find that in order to solve the problem of impermanence loss, Bancor has actually created a self-sustaining, non-subsidy solution. However, it should be noted that the premise is that you must deposit tokens for at least 100 days. But even so, for unlocking capital that lowers the risk curve, Bancor’s impermanent loss solution is still very good, because the current Bancor risk curve can only cover unilateral impermanent loss exposure.
BNT sinkhole: crazy token model
Bancor’s token model can be said to be the most elegant token model in the DEX field so far (only SNX is comparable to it). By integrating BNT as the basic asset, liquidity providers and token holders have the same vested Benefit, because BNT token holders will also become unilateral pledged liquidity providers, and impermanent losses will therefore become a thing of the past.
As a BNT token holder, you can earn an annualized rate of return of up to 50-100% without impermanence. Therefore, people have great incentives to pledge their BNT tokens.
Starting from the V2.1 version, the BNT funds pledged on the Bancor platform have soared, and currently account for 61% of the total pledged tokens.
Bancor Vortex
There is another part of Bancor’s “sink hole” token model that deserves attention. Let’s take a look at the Bancor Vortex mechanism, which can expand the capital efficiency of BNT tokens by providing no more than 1.0 times interest-free leverage.
So, how does the Bancor Vortex mechanism work?
Through the Bancor Vortex mechanism, you can:
- Stake BNT tokens to earn exchange fees and liquidity mining token rewards;
- Obtain vBNT tokens, and then deposit them into Vortex, so that you can borrow more BNT (and get mining token rewards at the same time);
- Use the borrowed BNT tokens to purchase any assets without interest or liquidation risk.
Advantages of the BNT model
Based on the above token model, BNT pledgers can obtain the highest exchange fee income among all DEXs. Compare each transaction of different DEX:
- Bancor: 8bps
- Sushiswap: 5bps
- Uniswap: 5bps (including fee switch)
Therefore, the net profit margin of BNT token holders can be effectively improved.
Market Competitiveness
Thanks to a series of innovations, Bancor has found more and more opportunities in the market. Let us compare the current data with the data in October 2020:
Valuation
Although the price of BNT tokens has risen, the transaction price of BNT is still relatively low compared to other DEX.
According to the analysis of conventional indicators in the crypto industry, BNT and SUSHI seem to be the two most undervalued tokens.
Valuation comparison is very important. Through comparison, we can see that Bancor’s past and future growth opportunities are seriously underestimated. As shown in the figure below, in recent weeks, Bancor and DODO have occupied most of the DEX market share. I think Bancor’s growth trend will not stop there.
The road to the future
After two years of hard work, Bancor V2.1 has brought excellent products with high market fit. With the impermanent loss insurance solution during the period, Bancor’s unique BNT token model gives full play to the synergy, and Vortex has also further improved capital efficiency.
to sum up
Bancor’s design method and the “only” $1 billion lock-up amount are just the beginning. It is expected that in the near future, we will see billions of dollars of liquidity begin to seek solutions without impermanence.
2021 is likely to be a crucial year for Bancor to become a dark horse in the DEX industry.
Information disclosure: The author of this article currently holds a position in BNT tokens. Please note: What everyone is doing does not mean that you should do the same. Please decide whether to invest based on your own research and analysis.
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