This post introduces the concept of BNT Staking Rewards as a mechanism for incentivizing users to provide liquidity on Bancor.
Users who provide liquidity on Bancor (“liquidity providers”) help the system flourish. More liquidity means Bancor can offer cheaper prices to traders and generate more trade volume and fees.
Staking rewards aim to create an incentive for users to participate and contribute to the system by performing a specific action the system requires: providing liquidity.
How It Could Work
The Bancor Protocol will start generating staking rewards through the creation of new BNT (inflation). To begin earning rewards, you must deposit BNT into a Bancor liquidity pool (e.g., the MKR/BNT pool). Holding BNT in a Bancor pool entitles you to a share of its staking rewards.
Users vote in the BancorDAO on the amount of new BNT created for staking rewards and its distribution to different pools on the network.
Bancor liquidity providers (as members of the BancorDAO) receive rewards based on:
- the pool(s) they’re providing liquidity to
- their ownership stake in the pool(s)
For example, in a given month:
- $100K in staking rewards is generated
- Rewards are distributed to “qualified” pools based on some characteristic (e.g., liquidity depth)
- The MKR/BNT pool qualifies for 5% ($5K) in rewards
- A user supplying 10% of the MKR/BNT pool’s liquidity receives 10% of the staking rewards ($500) on top of their share of trading fees.
In this way, liquidity providers on Bancor stand to earn not only from a pool’s trading fees, but also from its staking rewards. The APR from fees and rewards could attract new capital to Bancor from crypto users seeking yield.
In addition, staking rewards incentivize BNT token holders to become active participants in the network. Users who are unwilling to stake their BNT in the system would see their BNT slowly diluted, while users who contribute “work” (or liquidity) on the system would gradually increase their share of protocol ownership.
The model for rewards distribution is being designed carefully to prevent against the concentration of rewards in one or a small number of pools, and instead, to provide a relatively even distribution of rewards across dozens of pools in the network.
Simulation of Monthly Staking Rewards Per Liquidity Pool:
Simulation of APR From Staking Rewards Per Liquidity Pool:
Conclusion
Staking rewards encourage users to bootstrap network liquidity. This gives time for trading fees to become a sufficient incentive to provide liquidity on Bancor.
As a first step, core community members can submit a proposal for BNT Staking Rewards to be voted on by the BancorDAO as the first Bancor Improvement Proposal (BIP).
Stay tuned for public proposals and join the conversation with other community members on the Bancor Developers Telegram group.
Further Reading:
- Katana: A New Self-Service Portal for Creating Liquidity Pools
- Bancor Zaps: Enter & Exit Pools With a Single Token
- How to Add Liquidity on Bancor
- What Sets Bancor Apart From Other DEXs
- xNation Offers Self-Service Liquidity Pool Creation on EOS
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 counterparty. Users add liquidity to automated market makers in exchange for trading fees, BNT staking rewards and voting rights in the Bancor DAO. Since 2017, Bancor has processed billions in trade volume across thousands of tokens, with millions in fees generated by liquidity providers.
