DeFi Insight — Bancor V3 released
by Valentin Kalinov on Jun 2, 2022 3:34:00 PM
Bancor was the very first automated market maker (AMM) and holds a special place in crypto history, having attracted $153 million in what was then the largest Initial Coin Offering (ICO) in 2017. After slipping off the radar when it lost market share to rival AMMs like Uniswap and Sushiswap, the protocol is back, launching Bancor 3 with major upgrades. The main new feature could be something called Omnipool, which promises to halve gas costs for traders. Bancor shipped an upgrade in October 2020 that allowed users to provide liquidity in the form of single tokens, as opposed to the pairs required by AMMs like Uniswap. While mitigating this volatile loss (IL), the old design required the pairing of all assets with BNT, Bancor’s native token. This meant trades had to be routed through two pairs. For example, a switch from ETH to WBTC would go from ETH to BNT and then from BNT to WBTC, doubling gas costs. Bancor V3 addresses the routing problem with single-hop trades via the new Omnipool (instead of the double hop in V2.1).
Authors: Christian Viehof, Valentin Kalinov
The main goal of Bancor 3 is to create sustainable on-chain liquidity for token projects. The idea is to give participants enough incentives to use the protocol, including auto-compound earnings, dual rewards, and the ability to instantly receive 100% impermanent loss protection. In the world of DeFi, impermanent loss happens when a user provides liquidity to a liquidity pool, and the ratio of their deposited assets changes at a later point potentially leaving investors with more of the lower value token. This can be a rather painful experience as the bigger this change is, the more users are exposed to impermanent loss. The problem, according to Bancor, is that many DeFi projects seem to ignore the issue. Ultimately, this results in inaccurate APR (annual rate of return expressed in percentages) numbers reported by some protocols. To get true APR you must take transaction fees, minus impermanent loss over liquidity. To build truly sustainable decentralized liquidity markets, a broad, sustainable involvement in liquidity pools, with a diversity of participants is needed.
How Impermanent Loss Protection works
The implemented Impermanent Loss Protection (ILP) features imposes a cost on the protocol, similar to the insurance cost incurred by an insurance company. This cost is offset in two ways.
First, ILP is funded by Bancor’s protocol-owned liquidity: the protocol stakes its native token BNT in its pools and uses the earned fees to compensate users for any impermanent loss. When earned trading fees are greater than the cost of impermanent loss on a given stake, the protocol is effectively burning excess BNT. The other mechanism for funding Bancor’s ILP is a protocol-wide fee that “confiscates” 15% of all trade revenue on the network and uses the collected fees to buy and burn vBNT, Bancor’s governance token, which is generated whenever BNT is deposited in the system by a user. Bancor released its first version of ILP in 2020 and claims to be the only protocol to date that protects liquidity providers (LPs) from these losses. The mechanism was further improved in Bancor V2, but V3 has introduced additional refinements. While Bancor version 2.1 also offered impermanent loss protection, it was vested over a 100-day period meaning an LP needed to be in the pool for 100 days in order to receive 100% protection. On Bancor 3, LPs get 100% impermanent loss protection instantaneously, from the moment they deposit their tokens.
More perks for Bancor 3 users
Other incentives for Bancor 3 users include a single-sided auto-compounding model and unlimited single-sided staking. Single-sided auto-compounding stands in contrast to traditional yield farming programs where rewards must be staked in a separate rewards contract and manually re-staked by a third-party auto-compounder or by the individual LP. Meanwhile, single-sided staking means that users can provide liquidity and earn yield in a single token, without the need to pair 50/50 or buy another asset.
“Bancor has spent the past several years creating the equivalent of a high-yield savings account for DeFi: deposit your assets, sit back and earn. By helping token projects and their users safely and simply tap into DeFi yields, Bancor 3 creates robust and resilient on-chain liquidity markets that drive healthy token economies.” Mark Richardson (Core developer Bancor)
According to the team, the launch of Bancor 3 has already attracted more than 30 token projects and DAOs including Polygon (MATIC), Synthetix (SNX), Brave (BAT), Flexa (AMP), Yearn (YFI), Enjin (ENJ), WOO Network (WOO) and Nexus Mutual (wNXM). Each project is either providing seed liquidity on the network or offering liquidity incentives via Bancor’s new auto-compounding rewards system.
The classification of Bancor (BNT) according to the ITC
Economic Purpose (EEP): BNT is listed as a Settlement and Governance Token (EEP22TU03) due to its design as a means of collateral combined with governance functionality.
Industry Type (EIN): The issuer of BNT is active in the field of Decentralized Exchanges, Markets and Market Making (EIN06DF01).
Technological Setup (TTS): BNT runs under the Ethereum ERC-20 Standard (TTS42ET01) as an application layer token on top of the Ethereum blockchain.
Legal Clam (LLC): BNT does not entitle its holder to any legal claim or rights against the issuing organization; therefore, it is listed as a No-Claim Token (LLC31).
Issuer Type (LIT): The dimension “Issuer Type” provides information on the nature of the issuer of the token. BNT’s platform is built by a Decentralized Autonomous Organization (DAO). Its Issuer Type is an Entity without Legal Personality (LIT62AL).
Regulatory Framework (EU) (REU): The dimension “Regulatory Status EU” provides information on the potential classification of a token according to the European Commission’s proposal for a Regulation on Markets in Crypto Assets (MiCA, Regulation Proposal COM/2020/593 final). BNT qualifies as a Utility Token (REU52) according to the definition provided in Article 3 (5) of Regulation Proposal COM/2020/593 final.
The International Token Standardization Association (ITSA) e.V.
The International Token Standardization Association (ITSA) e.V. is a not-for-profit association of German law that aims at promoting the development and implementation of comprehensive market standards for the identification, classification, and analysis of DLT- and blockchain-based cryptographic tokens. As an independent industry membership body, ITSA unites over 100 international associated founding members from various interest groups. In order to increase transparency and safety on global token markets, ITSA currently develops and implements the International Token Identification Number (ITIN) as a market standard for the identification of cryptographic tokens, the International Token Classification (ITC) as a standard framework for the classification of cryptographic tokens according to their inherent characteristics. ITSA then adds the identified and classified token to the world’s largest register for tokens in our Tokenbase.
- The International Token Identification Number (ITIN) is a 9-digit alphanumeric technical identifier for both fungible and non-fungible DLT-based tokens. Thanks to its underlying Uniform Token Locator (UTL), ITIN presents a unique and fork-resilient identification of tokens. The ITIN also allows for the connecting and matching of other media and data to the token, such as legal contracts or price data, and increases safety and operational transparency when handling these tokens.
- The International Token Classification (ITC) is a multi-dimensional, expandable framework for the classification of tokens. Current dimensions include technological, economic, legal, and regulatory dimensions with multiple sub-dimensions. By mid-2021, there will be at least two new dimensions added, including a tax dimension. So far, our classification framework has been applied to 99% of the token market according to market capitalization of classified tokens.
- ITSA’s Tokenbase currently holds data on over 21000 tokens. Tokenbase is a holistic database for the analysis of tokens and combines our identification and classification data with market and blockchain data from external providers. Third-party data of several partners is already integrated, and API access is also in development.
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Christian Viehof is an Executive Director at the International Token Standardization Association (ITSA) e.V. and Chief Research Officer of Rudy Capital. He completed his Bachelor in Economics at the University of Bonn, the Hong Kong University and the London School of Economics and Political Science with a focus on Behavioral Economics and Finance. Currently pursuing his Master of Finance at the Frankfurt School of Finance and Management, you can contact him via email@example.com and connect with him on Linkedin, if you would like to further discuss ITSA e.V. or have any open questions.
Valentin Kalinov is an Executive Director at International Token Standardization Association (ITSA) e.V., working to create the world’s largest token database, including a classification framework and unique token identifiers and locators. He has over five years of experience working at BlockchainHub Berlin in content creation and token analysis, as a project manager at the Research Institute for Cryptoeconomics at the Vienna University of Economics and token analyst at Token Kitchen. You can contact Valentin via firstname.lastname@example.org and connect on Linkedin if you would like to further discuss ITSA e.V. or have any other open questions.