On April 29, the Bancor Project (BNT) announced its plans to update its platform. The review addresses some of the key usability issues that have plagued the project since it started in 2018.
With Bancor V2, the launch of which is planned for the second quarter of 2020, the team believes that it has resolved various risks that arise for the liquidity providers of its platform. Bancor works through automated market makers. This eliminates the need to keep an order book. Instead, it relies on liquidity funds and a price slip mechanism to mimic natural price fluctuations.
Liquidity providers earn transaction fees, but in many cases suffer a “temporary loss” that reduces the value of their liquidity.
Nate Hindman, head of growth at Bancor, told Cointelegraph that this happens when the relative prices of two tokens change. He explained it with an example:
“If the price of ETH rises compared to the DAI, it essentially offers an arbitrage opportunity to balance the pool. This can lead to a temporary loss.”
As the relative value of each side of the pool changes, it is possible that a user’s initial participation would make up a different percentage of the total pool, especially if it was originally a stable coin. Thus the user would withdraw less money than he wagers.
Another issue that limited Bancor’s acceptance was the need for projects to purchase its network token. Many users faced a dilemma, as Hindman noted:
“Many liquidity providers do not want to lose their long position or token projects that are very rich in their own tokens do not necessarily want to convert some of these tokens into BNT.”
The Chainlink solution
The solution to both problems was to use a Chainlink (LINK) price oracle. The oracle can be described as a crutch that Bancor relies on to balance the relative liquidity between the different tokens.
As Hindman explained, “Bancor allows those linked reserve pools to be built where the relative reserve values do not change.” In these linked pools, each conversion triggers an oracle call. These will “balance the liquidity funds” according to the relative contribution of each user.
The inconsistent loss problem does not consist of “stable” pairs, such as B. Conversions between different stable currencies or packaged and unpacked versions of the same token. Chainlink integration therefore reduces the risk for liquidity providers who could otherwise lose money through the use.
Oracle is included in many decentralized financial products or DeFi. However, many of these projects have created their own proprietary versions. Asaf Shachaf, Bancor’s product manager, explained why the team chose to use a third party, Chainlink:
“We are experts in liquidity funds. This is where we concentrate and what we do best. Chainlink are experts in oracles. You know how to make oracles […] are more resistant to market changes. “
Facilitate the emergence of an automated exchange
Hindman called the permanent loss problem “DeFi’s dirty little secret”. He claimed that Bancor’s competitors, like Uniswap, also suffer from the same problems.
According to the team, three main functions of Bancor V2 will help make this type of exchange more popular. While elimination of inconsistent loss and multiple token exposure has been mentioned, a third problem is the excessive slip that users experience.
Using Chainlink also allows Bancor to solve this problem by adding a gain coefficient. This reduces the slippage in relation to the total liquidity value of the group.
However, this approach carries its own risks as it can cause the pool’s liquidity to run out. Therefore, it is only used in stable funds, as Shachaf explained:
“This risk is eliminated if you get to ‘stable to stable’ pools because you know that the token’s price is always the same. The goal is always to return to the same value.”
As Hindman revealed, the market response among users or institutions was not very positive due to these “secret” problems. He concluded:
“We hope and wish that [actualización de la V2] Put tons of more liquidity in the log. And that we don’t have to have these conversations about permanent loss or provision of liquidity, nor about celebrating another token. “
In the future, Bancor will also be integrated into credit protocols to provide liquidity and increase profits. This would eliminate the opportunity cost of investing in Bancor, Hindman said.