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Bring It On, Bancor 3!

by Khor Win Win

But first, here’s a little introduction about Bancor. Much like Uniswap and Sushiswap, Bancor is a decentralized exchange (DEX) that allows users to swap between different tokens in a permissionless manner. Using automated market-maker (AMM) liquidity pools, liquidity pools are paired with Bancor’s governance token, BNT, allowing users to deposit only one asset, as opposed to most liquidity pools which require an equal amount of two or more tokens. Bancor also offers a conditional 100% protection against impermanent loss for selected pools.

Originally launched on June 12, 2017, the Bancor Protocol raised $153 million through its initial coin offering (ICO) of 50% of the initial supply of BNT. Three years later, Bancor V2 was released, and the Bancor DAO was set up to allow BNT holders to dictate the direction of the protocol. Subsequently, Bancor V2.1 was launched in 2021, which introduced a vested form of impermanent loss protection. Now with Bancor 3, users get to enjoy cheaper transactions and instant access to impermanent loss protection.

 

What’s New In Bancor 3?

Bancor 3 is now officially live on the Ethereum mainnet, and currently supports 15 different assets, including  ETH, BNT, LINK, and DAI. However, the protocol plans to onboard over 150 different tokens soon. In the meantime, users can still access the existing liquidity pools on Bancor V2 through the same interface simply by switching between different markets. Over 30 projects and DAOs have provided the initial liquidity for Bancor 3, and some of them will even be offering auto-compounding rewards as well as bonus token incentives once the Dual Rewards pools have been launched.

bancor 3 earn pageSource: Bancor

Touted as the ultimate DeFi liquidity solution, Bancor 3 brings plenty of new updates to its existing liquidity architecture and rewards programs. Among these features are the all-new Omnipools and Infinity pools and other quality-of-life improvements such as auto-compounding and Dual Rewards. But will these upgrades make life a little easier for the average yield farmer? Let’s find out!

Omnipools

If you’ve ever used some of the more popular DEXs, such as Uniswap and PancakeSwap, you might notice that these protocols make use of dual-asset liquidity pools. Theoretically, you can only swap between two different assets as long as there is a liquidity pool for it. For example, if there is an ETH-USDC pool, you can exchange your ETH for USDC and vice versa. But what if you want to swap ETH for another token, yet no other liquidity pool supports those assets?

In most cases, the transaction then has to be routed through other pools that have at least one of the assets required to finalize the trade. Going back to our previous example, if you wanted to trade ETH for Token X, but there is no ETH liquidity for Token X, your transaction would first have to go through the ETH-USDC pool. From there, if there is a USDC pool, your received amount of USDC would then be automatically swapped for Token X. In certain cases, your transaction may ‘hop’ through multiple pools, especially for long-tail assets that tend to have only a single liquidity pool. 

Depending on your slippage tolerance and how quickly your transaction is executed, you may receive much less than the expected amount of tokens. On top of that, you might end up paying double or triple the fees to liquidity providers as your trade is routed through more pools. Since users are required to pay a small percentage of fees to liquidity providers for each pool, these tiny amounts can quickly add up as you ‘hop’ through more pools, not to mention the higher gas costs associated with performing more complex transactions.

However, Bancor 3 aims to change that by implementing its new Omnipool infrastructure. Unlike the previous iteration of Bancor, which relied on separate BNT pools for each pair, such as ETH-BNT and LINK-BNT, there is now only a single pool where users can stake and provide BNT as liquidity. You no longer have to shift between different BNT pools to earn the highest yield.

bancor 3 omnipool comparisonSource: Twitter

Previously in Bancor 2.1, BNT was required to perform a swap transaction, thereby creating additional transactions and higher gas fees. With the new Omnipool, since all tokens are held within the same pool, trades are executed using a single hop, with no extra transactions needed. This allows users to enjoy lower fees and transaction costs, resulting in more volume and ultimately more trading fees for liquidity providers. 

Infinity Pools

Most DEXs typically do not have a limit on how much liquidity can be provided. As it stands, a DEX with higher liquidity allows users to trade large quantities at much more efficient prices, which promotes more volume and fees to the exchange. Due to the way that most AMM DEXs are designed, having a decently sized liquidity pool (anywhere upwards of 7 figures) allows for most traders to execute their transactions without causing a severe imbalance in the pool’s assets.

However, this was not the case for Bancor 2.1, as there were deposit limits for particularly important assets such as WBTC and DAI. If newcomers wanted to provide liquidity for these assets, they would first need to deposit a specific amount of BNT to open up space for that particular pool. Otherwise, they would have to wait for older participants to exit the pool before they could get in, which severely hinders the growth of Bancor.

bancor v2.1 add liquiditySource: Bancor

Nonetheless, these deposit caps were considered necessary for the Bancor protocol to mitigate risk since it also offers impermanent loss protection for its depositors. But after a year of experimentation with Bancor 2.1, the team has developed a way to manage risk, even in the face of unlimited deposits. As such, Bancor 3 removes the deposit limits, allowing these pools to expand into Infinity Pools. Anyone can contribute as much capital as they want, as the pool is now capable of sustaining an infinite amount of inflow from just about anyone.

With the introduction of the Infinity pools also introduces the concept of ‘superfluid liquidity’. As Bancor is primarily a DEX, liquidity is required for market-making within the protocol, allowing depositors to earn trading fees from within the protocol. By redirecting existing liquidity towards assets that have more volume, the Bancor DAO can maximize fee earnings for liquidity providers. At the same time, they can also choose to deploy excess liquidity, beyond what is required in the Bancor ecosystem, to more profitable strategies in the wider crypto space.

Auto-Compounding and Dual Rewards

When liquidity providers receive trading fees, most DEXs usually process these earnings as an increase in assets within the liquidity pool. In other words, you get a little bit more of each asset in the liquidity pool as fees are kept within the pool, and it becomes larger. This means that liquidity providers would most likely receive fees denominated in other tokens that they may not want exposure to. But unlike most DEXs, Bancor allows you to deposit and stake single assets, allowing you to receive full exposure to a particular asset by receiving the same rewards token as your deposits. For example, if you were to stake only single-sided ETH, you receive more rewards in ETH.

To further maximize the yield of single-token stakers, Bancor 3 provides auto-compounding rewards. In Bancor v2.1, while trading fees were automatically added back to the liquidity pools, liquidity mining rewards had to be manually re-added. Again, these extra steps incur additional gas costs and lower overall earnings for participants. Now with the power of auto-compounding, both fees and mining rewards are immediately added to the pool to boost yields even more.

Simultaneously, liquidity providers now have the opportunity to earn a variety of token incentives beyond just BNT. Bancor 3 allows external protocols to incentivize their own token pools on Bancor, allowing depositors to earn dual mining rewards from BNT as well as the native staked token. The third-party rewards are also auto-compounded and are protected by the protocol’s impermanent loss feature.

 

Other Features & Improvements

Although these are just some of the more prominent upgrades that users can look forward to in Bancor 3, there are plenty of other features that are equally important in achieving the protocol’s vision of simplified staking. Here are a few of those new implementations and improvements that developers and users might be interested in.

Instant Impermanent Loss Protection

In the previous version of Bancor, users got access to a vested form of impermanent loss protection with a 30-day cliff. After 30 days, users will receive protection on 30% of their deposits, which increases by 1% each day up to a maximum of 100% after 100 days of staking in the Bancor protocol. 

In Bancor 3, users can now enjoy full impermanent loss protection instantly on their deposits. Though, this comes with a few drawbacks, such as a 0.25% exit fee upon removal of liquidity and a 7-day cooling period, where users will have to wait for a week before they can fully withdraw their funds from Bancor’s liquidity pools.

bancor 3 impermanent loss protectionSource: Blocmates

Single-sided Pool Tokens

Typically, LP tokens received from providing liquidity are made up of equally valued portions of the underlying assets within that liquidity pool. In Bancor 3, liquidity providers receive bnTokens which represent their share of the pool as well as the generated fees, but purely based on which asset they are depositing. This means that DAI stakers will receive bnDAI, and ETH stakers will receive bnETH in return. These single-sided pool tokens represent 100% exposure to the underlying asset.

Since the fees and mining rewards are auto-compounded on top of the initial deposit, the bnTokens will constantly increase in value (barring changes in price), similar to a yield-bearing token. This aspect makes it a fairly suitable candidate as collateral for various lending protocols and collateralized assets. It is not hard to imagine that in the near future, users can access a collateralized debt obligation using their staked tokens on Bancor or even mint stablecoins that are backed by their Bancor positions. 

The composable nature of these single-sided pool tokens also allows users to undertake more complex and riskier strategies such as leveraged yield farming on Bancor. A novel idea, such as delta-neutral farming, can but deployed via purchasing put options or opening a perpetual short using some of the generated fees, thereby limiting downside risk for depositors.

Multichain and L2 Support

Due to how Bancor 3 is designed, the protocol’s infrastructure is now more ‘lightweight’, making it easier to deploy to other blockchains and even Layer 2 solutions such as Optimism and Arbitrum. In 2018, Bancor was one of the first DeFi protocols to go multi-chain by expanding on the EOS blockchain. In 2021, the team announced that they were building a cross-chain bridge to Polkadot. Fast forward to 2022, and we may very well see the Bancor protocol on popular Layer 1 alternatives such as Avalanche and Near.

 

Closing Thoughts

Hot on the heels of the Aave V3 launch, Bancor has made it clear that they are still in the DeFi game with the latest iteration of the Bancor platform. Still, we’ve just barely scratched the surface of what’s to come for the future of Bancor.

Slated to be released in three phases - Dawn, Sunrise, and Daylight - Bancor 3’s first phase will include all of the features mentioned above. The Dawn release aims to mitigate the problems that existed in the protocol’s previous iterations, as well as to form the bedrock for the coming two phases. 

As with all new protocols, even if they are audited, you should prioritize the safety of your funds and only put in what you are willing to lose in the event of any unforeseen bugs or hacks. Once you’re all good and ready, switch over to the Ethereum network, and don’t be shy to take Bancor 3 out for a spin!

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Khor Win Win
Khor Win Win

Win Win is an avid gamer, interested in navigating the vast world of NFTs and the cryptoverse. Follow the author on Twitter @0x5uff3r

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