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I’ve been digging into Bancor’s V3 design and I felt it deserved a write up. Let’s go.
Bancor V3 might be a great next step for DeFi. I say this when I think about the experience for the average DeFi user.
If you are a seasoned DeFi/crypto user you might see the word Bancor and think "I'm not reading this article", but give me a chance, anon.
Some of you may have written off Bancor because they have taken a long time to ship V3.
The pressure to ship quickly in the crypto/DeFi space is real. I don’t know about you, but I’m personally fed up of new ponzi-esque designs that simply create another race for people to dump on each other. Or designs that simply try and create the best system to artificially coerce everyone into agreeing that the price of a token should go up.
It’s not just me, I’ve seen a lot of people who have been around the space a long time asking “where’s the innovation right now?”.
I think you will be pleasantly surprised by Bancor V3 if you keep reading.
What’s to come?
Who’s Bancor? TLDR version
Current DeFi problems
Bancor V3: Dawn Phase
What’s the play?
A quick TLDR on Bancor for those that have never heard of the protocol.
The Bancor ICO went on record as being one of the most successful ever. The Bancor ICO Raised $153 million in less than 3 hours back in 2017.
You could argue that Bancor invented DeFi. I mean, they were the first to invent liquidity pools.
The pool token, the DEX mechanism and the bonding curve concept was all a Bancor innovation. Both Uniswap and Sushiswap leverage the AMM (Automated Market Maker) model pioneered by Bancor.
They really are the DeFi OGs.
Current DeFi Problems
Bancor have been pretty loud about all of the things they think are wrong with DeFi:
Forced exposure - being forced to hold another token in a pool to earn yield
Impermanent loss (IL)
IL is a huge problem in DeFi.
In a study of Uniswap V3 back in November, of the ~17,000 addresses studied, 49.5% lost out when compared to simply holding the assets.
And in 80% of pools analysed, impermanent loss outweighed the trading fee income received by liquidity providers (LPs).
Uniswap is the biggest DEX in DeFi, but being a Uniswap V3 LP is way too difficult and not profitable for most users.
Ultimately, users shouldn't have to know about IL. It's a very difficult subject to comprehend, and in a fast moving crypto world it is challenging for even the most qualified to get right.
It's a product problem.
Bancor V2 (technically v2.1) looked to solve some of these problems.
Single-sided staking made Bancor unique.
You could hold whatever percentage of tokens you wanted and earn yield.
And you were guaranteed IL protection after 100 days, so you were assured to leave with at least the money you put in.
Whilst these were great features, Bancor V2 had issues.
I used Bancor V2. I am fully aware of the memes and problems that existed with the protocol:
• Very high (!) gas fees to deposit, withdraw or claim rewards
• No space in the pools for people to enter, due to the way the insurance worked
So, after aeons of research, gathering feedback and assessing product market fit, Bancor V3 has just launched in beta.
This is called the Dawn Phase and will be followed by two subsequent phases.
Here are the innovations which have launched in the Dawn Phase:
Instant IL Protection
100% protection from day 1. No insurance schedule.
Obviously this is much better for the user, but it's cheaper for the protocol too. There is a clever algorithm working in the background with the sole priority of managing the protocol's liquidity.
Protocol-owned liquidity associated with one pool can be used to compensate users whose staked tokens are associated with another pool.
The benefits of this are two-fold:
1. It is less likely the protocol will need to mint new BNT to compensate for a user’s IL.
2. It is more likely a user will receive their IL compensation entirely in the token they’ve staked, instead of partly in BNT.
BNT has been taken out of the pools and amassed into one location.
The pools then become, in Mark Richardson’s (Head of research at Bancor) words:
"An orbit around the BNT rather than a collection of buckets of different tokens."
The Omnipool is a central pool and contains all of the tokens of the Bancor Network, including BNT.
This is in contrast to discreet liquidity pools that contain their own token.
And here comes a significant gas saving!
Previously, if you wanted to buy LINK with ETH, this was the process:
Send ETH into the ETH pool
ETH pool would send a BNT token to the LINK pool
The LINK pool would then send that LINK token to your wallet
Two hops. No bueno for gas.
In V3, all trades now occur in a single transaction.
With single-hop trades, Bancor can:
• Attract more trading fees with the same level of liquidity
• Make the protocol more capital efficient
• Reduce staking costs
This is a much better user experience and makes Bancor a more competitive DEX.
In V3 you can contribute as much capital as you want to the protocol.
In V2 there was a limited capacity for single-sided staking because of the way the insurance worked. It created a big bottleneck for how much TVL the protocol could lock up. There was a huge demand and users were always waiting to get in.
This pissed people off.
This bottleneck is now a thing of the past with V3. Lots of people don't want IL and I would expect there to be a huge swell in TVL as a result.
Infinity pools also introduces the concept of “Superfluid Liquidity”.
Superfluid Liquidity can be used simultaneously for market-making and other fee-earning strategies that are native and external to the protocol (e.g. “superlinear” staking of LINK tokens, ETH validator staking on Beacon chain, and so on).
That more than one activity can be concurrently represented in the APY garnered on a pool token is termed “superfluid liquidity”.
There is also now a cooling period, where LPs will have to wait seven days before withdrawing their funds. This reduces the amount of wait-time by 93% compared to V2.
V3 introduces auto-compounding rewards at the hardware level. Now, both fees and liquidity mining rewards are auto-compounding.
This means earnings are instantly re-added to the pool, improving the network’s liquidity and increasing your potential to earn more fees and rewards, with no user action required.
It's completely set and forget.
This is a huge improvement and innovation, as previously you had to spend crazy gas fees to manually re-add your rewards.
Other DeFi auto-compounders like YieldYak don't work this way. This is a new invention.
In Bancor V2, only Bancor could incentivize its liquidity pools with BNT rewards.
In V3, third-party protocols can now also offer rewards on their pools, so depositors can benefit from dual-sided rewards, earning more BNT and more of the token they staked.
This will be another way to collaborate with token projects, growing the Bancor TVL. If you were a DAO why wouldn’t you want protection from IL, whilst leveraging the technology to bootstrap your liquidity?
These are the current DAO treasuries on Bancor.
V3 may cause many more DAOs to move their treasuries to Bancor. There are currently 35 DAOs who want to onboard having learnt about features of V3.
V3 is sufficiently lightweight so the contracts can be moved between blockchains relaltively easily.
This will be a DAO decision, but Bancor V3 will end up on an Alt L1 or/and L2.
My money is on Avalanche having seen Mark Richardson choose to give a presentation at the Avax Summit.
There's no doubt that this will be huge for Bancor, as L1 gas costs have stopped many using the protocol. I’m expecting this to grow the Bancor community.
The DAO can now vote to shrink the protocol-owned BNT in any pool if the pool is under-performing, and direct the BNT liquidity to more profitable pools.
By directing BNT towards the most performant pools in the network, the DAO can more effectively manage risk and optimize fees earned by the protocol, BNT holders and LPs.
BNT is a true utility token and is essential to the way the protocol functions. You can read about the Bancor Vortex here and the changes with V3.
glenn (B, 3) (🏦, 🥩) @PrimalGlenn🎉🎊🥳 Congrats to @bancor and fellow #bancorians. We have just hit 2M $vBNT burned by the Vortex 🌪🔥 🎉🎊🥳 Here is to the next 100+♾ 😉🍻 A short thread about the history of the vortex🧵👇 https://t.co/lgfWd116dB
An important component of V3 is how they are addressing inflation. Bancor were forced to adopt liquidity mining with V2 as a necessary marketing expense. But, Bancor will now be weaning themselves off liquidity mining and will be “getting back to more sensible fiscal policy.”
In V3, a maximum of 40,000,000 BNT will be distributed over an infinite time period. The distribution rate follows an exponential decay curve. BNT will remain inflationary, but the emission rate is guaranteed to drop off over time. It will be an aggressive tapering off of inflation.
A quote from Mark:
“Bancor does not seek to be deflationary. Too much inflation is dangerous. Unchecked inflation is as dangerous as unchecked deflation. Consistency is important.”
If you are still reading, I just want to say I appreciate you! This is getting a tad long now, but I’m going to wrap up shortly.
Additional features in V3:
• Third-party impermanent loss protection
• Integration of Chainlink Keepers to facilitate more efficient token burning
• A revamped front-end and single-click migration from Bancor V2 and other DeFi protocols
Everything described above is just the DAWN phase.
According to Mark, these new features “just drop out of the contracts with the new architecture design.”
But, the reasons those features exist is for yet to be announced products.
Bancor clearly has a lot more up their sleeves.
Mark did suggest to me that there is nothing currently in the industry like what Bancor has planned.
What’s the play?
Once Bancor V3 comes out of beta, I believe it could be the best place for the average DeFi user to park their idle assets and earn yield without the risk of IL.
The features in V3 are unique to Bancor and genuine innovations.
Obviously, there will always be smart contract risk with any new major upgrade. If you are concerned about this, you can wait a period of time until it is more battle-tested, or seek insurance options once they are available.
In terms of the BNT token, I am not going to speculate on what happens with the price. But, I think we should see Bancor’s TVL swell, liquidity deepen and trading fees increase.
The ability to collaborate with other projects and DAOs is quite unique to Bancor and it’s clear that the protocol will become the home for many DAO treasuries.
Bancor getting an extensive UI/UX overhaul also can’t be underestimated. In a rational world you would assume traders always use aggregators to get the best price for their trades. This is not what the on-chain data shows. It’s much more likely that good UI/UX that makes people feel comfortable and happy overrides the need to seek the best price for a trade. Humans are lazy.
I want to be balanced here as well. The DEX space is one of the most competitive verticals in crypto. It is very hard to predict who the long term winners will be. We have so many players across many chains now, and accurately predicting who is still going to be here in five years is very, very difficult.
It’s entirely possible that Bancor still doesn’t manage to meaningfully chip away at Uniswap despite these upgrades.
I will let you decide whether you think buying BNT is a good move.
It’s hard not to admire the Bancor team. They are the OGs of the DeFi space and they are still grinding away innovating and pushing the industry forward.
You can literally visualise a year’s worth of work in this video.
Bancor @BancorAnnouncing the Bancor 3 Bug Bounty Program! 📢 Calling all smart contract developers & whitehat hackers 🔎 Hunt for bugs in the newly released #Bancor3 code: https://t.co/4Oak8rm4NF 💰 Up to $1 Million Bug Bounty Details: https://t.co/J8iL8W8dUK
Bancor want to be a stabilising infrastructure for the cryptocurrency industry. They are not a rent extractor. Contrary to the designs of some other DeFi protocols (governance hacks as a service), Bancor want to be the protocol that helps crypto projects bootstrap their own liquidity in a more mature way.
“A rising tide lifts all boats.”
This exchange of Bancor’s platform/tech for crypto projects’ TVL is entirely synergistic. It is no longer the sole responsibility of the Bancor network to incentivise TVL, which in my opinion is a significant change.
I am hopeful Bancor V3 is going to be a leap forward for all DeFi users no matter the size of their capital.
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