Update: See the next iteration of Bancor — Bancor v2.1 — which offers similar features, including single-asset exposure and impermanent loss mitigation.
Bancor V2 features:
- A new automated market maker (AMM) liquidity pool integrated with Chainlink price oracles that mitigates the risk of impermanent loss for both stable and volatile tokens.
- Provide liquidity with 100% exposure to a single token
- A more efficient bonding curve that reduces slippage
- Support for lending protocols
These features address four key issues commonly cited as obstacles to the widespread adoption of AMMs:
- Exposure to “impermanent loss”
- Exposure to multiple assets
- Capital inefficiency (i.e., high slippage)
- Opportunity cost of providing liquidity
Mitigating Impermanent Loss
AMM technology has taken off in spite of one of DeFi’s dirty secrets: Users who provide liquidity to AMMs (“liquidity providers”) can see their “staked” tokens lose value compared to simply holding the tokens on their own.
This risk, known as “impermanent loss”, has prevented many mainstream and institutional users from providing liquidity, since unlike most staking products, AMMs run the risk of under-performing a basic buy-and-hold strategy.
Bancor V2 mitigates the risk of impermanent loss for any ERC20 token, including volatile tokens, so long as the token doesn’t fail. Bancor V2 does this by enabling the creation of AMMs with pegged liquidity reserves. This type of AMM holds the relative value of its reserves constant using prices from Chainlink’s secure and reliable oracles.
Current approaches to building AMMs with pegged reserves have proven successful, such as Curve’s stablecoin pools or Uniswap’s sETH/ETH pool. However, these approaches are limited to stablecoins or wrapped and synthetic tokens. Bancor V2 expands the solution to volatile assets and does not require liquidity providers to hold an additional wrapped or synthetic asset — just the token they’re providing liquidity to.
By eliminating impermanent loss arising from normal market conditions, users and token teams can feel more confident about their staked liquidity generating profits from trading fees.
Single Token Exposure
Until now, AMMs have required liquidity providers to maintain exposure to every token in an AMM’s reserves.
Bancor V2 gives users the option to provide liquidity with 100% exposure to a single ERC20 token. Liquidity providers no longer need to hold a separate reserve token. They can select their exposure to any token in the AMM, from 0–100%.
This industry-first feature allows liquidity providers to maintain their long position while earning trading fees and other rewards.
Changing the Curve to Reduce Slippage
AMMs have been criticized for requiring large amounts of liquidity in order to compete for volume with order-book based exchanges.
Bancor V2 offers customizable bonding curve logic to amplify the capital efficiency of Bancor AMMs. By utilizing more pooled capital within a given range of conversion prices, Bancor’s new curve vastly reduces slippage and facilitates better prices.
This means liquidity providers can collectively fund AMMs that attract more volume with less capital.
Lending Interest Decreases Opportunity Cost
Bancor V2 enables the creation of AMMs that are integrated with lending protocols. This allows liquidity providers to generate lending interest on top of trading fees.
Users can add and remove liquidity with regular ERC20 tokens. In order to process trades, the AMM utilizes gas-efficient wrappers to “lend” and “unlend” the tokens.
AMMs integrated with lending protocols are designed to maximize profitability for liquidity providers.
Summary
Bancor V2 features will be opt-in upon creation of a new AMM. Depending on a user’s preferences, they can choose to create and fund AMMs with all, some or none of the new features.
We look forward to sharing technical details on Bancor V2 leading up to its scheduled release in July 2020, along with documentation and the open source code.
Bancor disrupted order-book trading in 2017 with the first widely used AMMs. Our goal now is to solve the key problems preventing algorithmic, autonomous liquidity from achieving even greater adoption among DeFi users and beyond.
Thank you for your continued support & feedback. To get involved and stay up to date:
- Join the Bancor Dev community on Telegram
- Follow Bancor on Twitter
- Dive into the Bancor Developer Docs
- Subscribe to the Bancor blog
Many thanks to Caleb Sheridan, Michael Cohen and Jason Lasky (Local Tokens) for their feedback on this piece.
Further Reading:
About Bancor
Bancor is an on-chain liquidity protocol that enables automated, decentralized exchange on Ethereum and across blockchains. The protocol is made up of a series of smart contracts designed to pool liquidity and perform peer-to-contract trades in a single transaction with no counter-party. Users add liquidity to automated market makers in exchange for trading fees, staking rewards and voting rights in the Bancor DAO. Since 2017, Bancor has been used to process billions in trade volume across thousands of tokens, with thousands of users participating as liquidity providers.
