Using Bancor Vortex
Summary
- You can now borrow against your staked BNT.
- Simply deposit BNT in any whitelisted pool, receive vBNT (similar to a pool token) and swap for other tokens on bancor.network
- You can do whatever you wish with the proceeds from the vBNT sale, including providing “leveraged” liquidity on Bancor to earn more fees & BNT rewards.
- vBNT is required to eventually withdraw your staked BNT from a pool, and you must be using the same wallet you staked with.
- Please use Bancor Vortex carefully and only after fully understanding the risks involved, explained in greater detail below.
Example scenario:
- Greg is long on BNT; he has $1M+ worth of BNT staked single-sided in the LINK pool on bancor.network.
- A new yield farming project commences with an attractive APY for ETH deposits.
- Before Vortex, Greg would have been forced to unstake some BNT and swap it for ETH to participate in the project; now he can sell vBNT and keep his BNT cosy in the pools.
More information on Vortex mechanics and the risks involved can be found below. Bancor Vortex video explainer.
Questions? Ask in the Bancor telegram, or join Bancor core devs for a live AMA on Vortex, February 18 at 12pm GMT on Clubhouse (available on iOS/iPad only — recording to be shared).
Unlocking Your BNT Stake Requires vBNT
When BNT is deposited in a whitelisted Bancor pool, it generates vBNT at a rate of 1:1. vBNT tokens are a special kind of “pool token” that represents the depositor’s part ownership of the pool while offering several additional features, including:
- Vote with vBNT in Bancor governance
- Stake vBNT in the vBNT/BNT pool for a % of its swap fees; or
- Leverage vBNT by swapping it for any token on Bancor
To eventually withdraw your full BNT stake from a pool, an LP must hold at least the same number of vBNT that they were issued at the time of deposit. BNT stakes can also be withdrawn in portions (i.e., it is not a requirement that the full stake be withdrawn at once). As the BNT stake grows due to swap fees, the total number of vBNT required to unlock it does not change.
Example:
- Alice deposits 100 BNT in the LINK pool, and receives 100 vBNT.
- Her vBNT represents her percentage ownership of the LINK pool and the fees collected by the pool.
- Some time later, her BNT stake in the LINK pool has doubled due to swap fees, and is now worth 200 BNT.
- Alice withdraws her 200 BNT from the LINK pool, which burns the 100 vBNT that she received at the time of the deposit, returning 200 BNT to Alice’s Ethereum address.
Selling vBNT is Borrowing Against Staked BNT
vBNT can be swapped for other assets on the network. Users can then do whatever they wish with the proceeds from the vBNT sale; however, without vBNT, it is impossible to withdraw staked BNT.
Example:
- Bob deposits 100 BNT into the YFI pool and receives 100 vBNT.
- He swaps some of his vBNT for ETH via the vBNT/BNT pool.
- Bob uses the ETH for providing liquidity to the ETH/BNT pool on Bancor to earn a % of the pool’s swap fees and mining rewards.
- After 12 months, Bob’s staked BNT in the YFI pool has grown in value to 200 BNT, and he decides to withdraw it.
- He has some WBTC in his wallet, which he swaps for 100 vBNT.
- Bob can now withdraw his staked BNT from the YFI pool by providing the 100 vBNT to the pool, which burns the vBNT and returns 200 BNT to his wallet.
The Vortex vBNT Burning Scheme
In order to maximize the leverage BNT LPs can get, Bancor protocol will purchase vBNT from the pool and burn it to provide a consistent buying pressure. The cost of leveraging staked BNT is basically the difference in vBNT:BNT rates at the moment of selling and re-buying the vBNT. This makes it an important consideration for LPs wishing to leverage their capital. While the consistent vBNT price support is designed to stabilize the system, it also means that opportunities to re-buy vBNT at dramatically discounted rates will be rare. Further, LPs considering a leveraged position at a low vBNT swap rate should be mindful that the protocol burn would keep the upward pressure on the vBNT price which might result in a higher cost of leverage. An LP could then wait in the hope of the vBNT price falling again in order to avoid the cost of buying vBNT at a higher price.
Make no mistake — all leverage involves an element of risk, and swapping vBNT is no different. The relationship between the price of vBNT and BNT on the pool, and the price of BNT vs the market overall, makes the decision to leverage non-trivial. However, amidst these volatile forces, there is an island of certainty. Any position can be recovered by buying BNT, and staking it in the contract to receive the vBNT required to unlock the leveraged deposit. This provides a ceiling that effectively protects leveraged LPs from absurd short squeeze conditions, such as those that rocked Wall Street during the GameStop phenomenon; however, that ceiling climbs with the market price of BNT.
As a general prudency measure, LPs should be prepared to subsidise at least part of their loan repayment by purchasing BNT equivalent to what they are unable to recover from vBNT the pool.
Example:
- Fred swaps his vBNT at a rate of 0.5 BNT/vBNT.
- In the following months, the number of LPs wanting to leverage their staked BNT drops dramatically, and the token-burning feature of the Vortex slowly raises the price of vBNT in the pool back to 0.9.
- When Fred returns, he is only able to buy half the amount of vBNT he originally sold before its price returns all the way to 1:1.
- To obtain the remaining vBNT, Fred must purchase BNT from the market, and stake it in a pool to receive the remainder of the vBNT he started with, which is needed to unlock his full BNT stake.
What are the risks?
The specific risks of using the Vortex to borrow against staked BNT are dependent on the precise strategies employed by the LP. However, all risks can be reduced to a simple idea: what are the chances that the round trip will cost more money than it makes? More precisely, the total vBNT sale price + profits from leverage must be at least equal to the repurchase costs to break even.
Example scenario:
- Greg is long on BNT, and has $1M+ worth of BNT staked single-sided in a Bancor pool.
- A new yield farming project commences with an attractive APY for ETH deposits.
- Before Vortex, Greg would have been forced to unstake some BNT and swap it for ETH to participate in the project; now he can sell vBNT and keep his BNT cosy in the pools.
- Should Greg sell some of his vBNT and participate in the other project?
This question has no right or wrong answer — it depends entirely on Greg’s risk appetite. However, Greg’s thought process can still be explored in a reasonable way, and using the equation above.
Evaluating the Risk:
- Greg can easily determine the swap value of whatever vBNT he is willing to leverage for this trade.
- For the sake of illustration, we will assume Greg is comfortable leveraging 1% of his stack, or $10,000 worth of staked BNT. At ~$3.50 per BNT, this corresponds to 2,857 BNT.
- The bonding curve determines a total swap value for 2,857 vBNT at $8,500 (a price point of 0.85 BNT/vBNT), which he performs in two hops to ETH.
- Due to the nature of the yield farming project, Greg can also approximate the profits: The project is reporting a 50% APR on ETH, and Greg has decided on a tentative window of 6 months to take advantage of this leverage opportunity.
- If the reported APR is accurate, Greg can expect a yield of $2,125 for this activity.
- After determining these numbers, the left hand side of the risk equation (above) becomes $10,625. This is everything that Greg can know ahead of time.
- To effectively manage his risk, Greg needs to be careful that the cost of repurchasing the required 2,857 vBNT to reverse the leverage does not exceed $10,625.
There are a few things that might cause Greg to concede his leveraged position earlier than he expected:
- The yield farming is not as profitable as advertised. After a few weeks, Greg can start to make an informed choice as to whether this leverage strategy still makes sense.
- The price of vBNT increases. This could happen due to token burning via the Vortex mechanism, other LPs returning from leverage, or spectators buying vBNT in anticipation of a short squeeze.
- The price of BNT increases. The price of vBNT in the pool is expressed relative to BNT; if the price of BNT vs ETH starts to climb, the effective price of vBNT vs ETH will also climb.
The opposite is also true; Greg could decide to stay leveraged longer, or increase his leverage if the yield farming activity is more profitable than expected, or if vBNT or BNT begin to experience some negative price volatility.
Staking vBNT
Leveraged activities require knowledge and skill to execute, and mistakes can be painful. Therefore, these kinds of market strategies may not be suitable for a large proportion of the BNT community — and that’s ok. The Bancor Vortex also provides a completely stress-free means for more risk-averse patrons to earn yields on this new feature: simply stake vBNT in the vBNT/BNT pool in exchange for a percentage of its swap fees. To start, the amount of space for vBNT staking will be limited to 250K BNT, while the BancorDAO can vote to increase the limit.
vBNT Liquidity is Protected From IL
The Bancor Vortex was introduced into governance in two parts. BIP9 discussed the leverage feature in general, and proposed a vBNT burning mechanism. Thereafter, the vBNT pool was proposed for a special kind of whitelist status. The latter offers vBNT holders a way to support their leveraged community members by providing vBNT liquidity to the pool. Importantly, its unique whitelist status has been approved, which allows vBNT LPs to earn swap fee revenue, and therefore benefit from the Vortex, without leveraging their staked BNT.
