Bancor and BNT Explained - Impermanent Loss Insurance and Single-Sided Pools

in this blog, we are going to explain what bancor is and how it offers single-sided liquidity staking and even something crazy called impermanent loss insurance let's dig in first let's go over a quick overview of bancor technically bancor ico'ed in 2017 raising a whopping 153 million dollars worth of eth in under three hours BNT a token associated with bancor was one of the very first erc20 tokens and bancor itself was the very first automated market maker a form of a decentralized exchange

Now we're not here to talk about the history of bancor or explain how amms or dexes work in this blog we want to cover some new ideas we haven't covered on the channel before there are three topics that we want to discuss in this blog about bancor regarding their current version 2 which is soon to be upgraded to version 3 but that'll be another blog we need to get these ideas explained first before moving forward and before we dive in we would like to thank bancor for sponsoring this blog number one single-sided staking so the first idea that is worth explaining is that bancor allows single-sided staking this doesn't mean you have to provide one asset like chain link and then the protocol takes half of it sells it for eth and then provides both the chain link and the eth to a liquidity pool like some of the other tools out there do bank or does not do this

Because they realize that it does something that not every liquidity provider wants it forces you to have half of all of your assets in the pool in eth in fact the chain link community is kind of passionate about only holding link tokens and they don't want to give up their exposure to be able to provide liquidity bancor solves this issue with true single-sided staking how does it work well bancor still has liquidity pools but here's how they work first you provide some link tokens to the pool once you do that bankor actually mints a new token called bnt to fill the other half of the pool for example maybe you give them a hundred dollars of link and let's say bnt at the time is worth two dollars each well bancore will actually create 50 new bnt tokens so that the pool is now 50 percent of link and 50 of bnt this way you've only provided link and you only have exposure to the linked tokens that you provided now we know what you're thinking doesn't that create a crazy inflationary market they're printing b t tokens almost as fast as the us prince dollars

Well you may be correct about the second half but whenever someone withdraws their link tokens from a pool the b t tokens originally minted by the protocol are then taken out of the pool and burned meaning they are destroyed and gone forever in reality they kind of never go into circulation also trading fees earned by the protocol minted b and t are also burned for and upon the withdrawal of the associated user's stake now let's say you wanted to trade link to eth through bankwood pools right you'll technically be making a trade from link to b and t and then from b and t to eth which makes b t one of the most liquid and the most traded tokens in the history of crypto basically on bank where all trades are routed through the BNTtoken actually generating a fee each time for users and for the protocol one secondary benefit of this is that all traders pay a fee for their trades well

Since the bancor protocol minted half of the liquidity for each pool it means they are entitled to half of the trading fees that were generated and since BNT has traded a ton this leads to quite a growing sum of cash in the protocols treasury you might be asking where does that money go this brings us to the next amazing bank or feature impermanent loss insurance bancor offers a unique feature called impermanent loss insurance if you don't know what impermanent loss is it's quite complicated and we highly recommend reading our blog on it as you'll definitely need to fully understand it to appreciate this feature so along with a fee that traders pay to make trades on bancor also takes a percentage of all the yields earned by users who provide liquidity and they use that to grow the insurance fund now

Just like car insurance you pay monthly to protect yourself if something really bad happens well with bancor you effectively pay 15 of the trading fees that you earn as a liquidity provider into a pool that protects you and your fellow liquidity providers from impermanent loss as mentioned bancor also uses fees earned on its own bnt supplied to its pools to help fund its insurance payouts and after covering the cost of insurance it then burns any excess fees for bnt to keep the total supply in check it is worth noting that the b t supply has been deflationary since the middle of 2021.

How this insurance works

To help you understand how this insurance works let's run through an example let's say you're providing 100 link tokens as liquidity well over the next year you earned some amount of link from the trading fees so now you should have more than 100 linked tokens right not quite let's say link price has significantly outperformed the market as you hoped it would due to the way that liquidity pools and impermanent loss work during link's price rise your principal deposit of link is sold off at a discount for the paired asset so that your cumulative stake may actually be worth less than if you simply held the paired assets in your wallet and maintained full exposure to your link tokens you were expecting to withdraw more link from the pool since you were hopefully collecting link from the fees but you are actually left with 95 link due to your earned fees being decimated by impermanent loss and now the permanent loss having eaten into your principal linked deposit that may have sound really complicated but what it means in clear terms is that you lost 5 link due to impermanent loss

This happens all the time on all kinds of different dexes well bank order makes an interesting deal with liquidity providers they say provide liquidity with us and you'll never have to worry about pulling out less length than you put in we'll track the number of tokens you originally deposit and ensure that you get back at least the same value whenever you withdraw plus the trading fees and rewards earned on your state however in exchange for this service liquidity providers are simply asked to pay 15 of their earnings to bancor so if you provided a hundred link tokens and then earned 10 link as rewards you'd pay 1.5 link tokens to bancor's communal insurance fund and then basically be entitled to get back at least 108.5 linked tokens the other part of bancor's insurance is funded through fees that the protocol earns on the bnt that it provided to its own pools in other words bancor means b t to buy liquidity in its pools

The liquidity not only matches user deposited stakes and supports single-sided liquidity but it also earns a protocol b and t and non-b t tokens which help fund the protocol's insurance payouts if the total fees earned on the protocol provided bnt are greater than the protocols and permanent loss payout bancor can cover insurance payouts without giving out any new bnt tokens long story short the result is that users can stake with confidence knowing that they'll always get back at least 100 of the tokens that they originally deposited while also passively collecting more of the tokens that they've staked through trading fees sticking with the link example if an lp deposited 100 link tokens no matter what the price movement of link is they're always owed and will be able to take out at least 100 link tokens plus the fees that have accrued on their stake now sometimes bank or may not be able to give you all of your tokens back in link

If the pool has suffered a large amount of impermanent loss and it hasn't accrued enough linked trading fees instead bancore will give you as many link tokens as possible and then pay out the rest of the insurance with an equivalent value of b t tokens now just like with car insurance if you go out and you total your car you don't necessarily get the car fixed but the insurance company will give you enough money to buy a new car bancor is basically doing the same thing with its insurance idea they just print more bnt tokens to cover the insurance payout now the great thing about both single-sided staking and in permanent loss insurance together is that you can actually provide linked tokens and passively earn more link with a hundred percent exposure to the upside of the token while also being protected from any and permanent loss you'd experience on another platform's pool one thing we do want to note about the insurance feature is that currently you must provide liquidity for at least 100 days to receive the full insurance protection though we do hear that's changing in bancor 3

When full insurance protection will basically be instantly offered whenever you provide liquidity but that's for the next blog the last thing we want to mention is how these two features create a unique opportunity for bancorp since the collapse of defy 2.0 narrative new protocols and dows out there are looking for places to basically provide liquidity safely and profitably so that their users can trade with the tokens efficiently with a few of the laws out there it is actually legally risky and maybe even illegal for a protocol to sell half of their supply and then use that capital to buy ethereum to then effectively provide liquidity to uni-swap with single-sided staking a dao or another project can simply supply their own protocol minted tokens to bancore and never having to worry to sell their token to supply liquidity it can provide the same amount of capital fully in their own native token because bancorp provides the other side with its bnt right now there are actually over 30 dow treasuries that have committed to providing liquidity to bancor and have already reaped the benefits some of which are polygon yearn keeper dao barnbridge and engine we think we'll see the impact of this idea in the future as bancor becomes a place that many dows use to provide liquidity in their tokens and earn passive protected yield on their treasury funds so that kind of wraps up

How bancor works

let's get into the specific tokenomics first off bnt isn't a governance token on its own you need to actually stake bnt in bancor in order to get voting rights to vote in the bank or dao whenever you stake your b t tokens you technically receive v b and t bancore's governance token one could say that bancor technically has a proof-of-stake governance model this means that all voters not only have exposure to bnt but they also have skin in the game as liquidity providers on the protocol in other words all the voters in the bank or dow are both bnt holders and liquidity providers while compared to decks like uni-swap token holders who do vote on the changes don't have to be liquidity providers this basically means all bnt holders will be voting in a way that is most likely beneficial to all the other liquidity providers while on the other hand uni swap holders will vote in a way that's exclusively beneficial for the uni token and not necessarily the liquidity providers even more so the tokenomics of bnt are a little tricky so we're not going to cover them too much in

This blog although one of the developers explained to me that bnt is sort of like an index of its deepest pools since all the tokens must pair with bnt at first glance some users might get worried by the protocol's single-sided liquidity system which is constantly minting more bnt to match the stakes coming into the system but that's fine because the protocol minted bnt is used to earn even more bnt for the protocol and ultimately both of these are burned it's also worth noting that bancor has a great revenue model to collect tokens that fund its insurance model and help make it sustainable like we said overall the specific tokenomics of bnt are difficult to explain although in our opinion bancor is a very interesting project with a bunch of unique ideas this kind of wraps it up for what we have in this blog about bancor but soon i'll be working on another blog about bank or v3 which makes improvements on all of these ideas and we're quite excited to explain it anyways thank you guys so much for reading this blog we hope that you've enjoyed it we really hope that you've learned something and most of all we hope to see you in our next blog