DAPP Network Prepares to Bring External Impermanent Loss Protection to the Bancor Network
TLDR;
- The DAPP Network community intends to optimize its liquidity position through a collaboration with the Bancor DAO that will inject ~$1.5m of liquidity into DAPP.
- Through an innovative reward mechanism developed specifically by the DAPP Network for this purpose, the BNT<>DAPP liquidity pool’s impermanent loss protection will be covered by DAPP.
- The DAPP Network will open-source this mechanism so that the Bancor community can provide significantly more liquidity to many more promising projects with low initial market capitalizations while remaining profitable on its innovative impermanent loss protection program.
- Vote FOR to whitelist DAPP Token with a co-investment of 500k BNT.
“A marketplace without liquidity has no real product because the ability to transact on the platform IS the product. Liquidity is to marketplaces what product-market fit is to other product categories.” (Julia Morrongiello)
Liquidity is the lifeblood of all marketplaces, representing the efficiency with which a marketplace matches buyers and sellers on its platform. A marketplace without liquidity has no real product because the ability to transact efficiently on the platform IS the product. Liquidity is to marketplaces what product-market fit is to other product categories.
Having liquidity means that there is sufficient volume on both the demand and supply sides for both to enjoy a positive user experience with low slippage and short delays. For example, if someone were to use the Uber app to hail a ride, but the waiting time was 30 minutes, they would stop using the app very soon. Similarly, if an Uber driver was to get booked for only 2 rides a day, they would probably start investing their time towards making income in a different way to earn more.
When a new marketplace is created, it will initially have little to no buyers or sellers. Getting to liquidity is always a challenge: how does one attract buyers if there are no sellers and vice versa? The ability to service buyers and sellers simultaneously when launching a new marketplace might seem like a chicken and egg problem, but it is actually an essential requirement for a marketplace to prosper. Let’s discuss how the DAPP Network is tackling these challenges in both its marketplace for DAPP Network services, and the greater market for the DAPP Token utility itself.
DAPP Network’s Chicken and Egg Liquidity Problem
When looking at the DAPP Network like a traditional marketplace, its supply side consists of the DAPP Service Providers (DSPs) who are running infrastructure to provide various decentralized services for developers. In exchange for services rendered, DSPs receive a portion of DAPP token inflation, similar to miners or block producers performing essential functions on their respective chains. On the demand side, there are projects and software developers in need of services and infrastructure required to unleash successful multi-chain immortal applications that are decentralized from frontend to backend, including the data they generate — all in a cost effective and usable manner. Since DAPP is the utility token that powers the DAPP Network itself, its own liquidity is also a critical component, as both buyers and sellers in the DAPP Network rely on it to transact.
For the DAPP Network marketplace to gain adoption, projects and developers collectively need to acquire a sufficient amount of DAPP tokens in order to provision the relevant DSP services required for decentralized applications. Without efficient liquidity of DAPP on Ethereum, acquiring the necessary tokens for even a single project would become an impossible task — defeating the purpose of the buyer/seller marketplace for development resources to begin with. Blockchains with low on-chain liquidity for tokenized projects are seeing developers gradually migrate to chains with more trading and DeFi activity, such as Ethereum, for this reason.
The DAPP Network Solution: Bancor (With a Cherry on Top)
In early 2021, the DAPP Network rolled out a decentralized governance layer giving tremendous power to the community as to the development and direction of the network, as intended. Through its proposal system, the community voted that the DAPP Network should set an example for how to tackle liquidity limitations by using its own bridging technology to bring the DAPP token from EOS to Ethereum. A bridge does not necessarily create liquidity on its own, so a liquidity mining initiative was also architected as a way to incentivize DAPP tokens to be transported cross-chain and be made available to the vibrant liquidity ecosystem of Ethereum.
The DAPP Network community chose the Bancor Network as its main destination to drive liquidity because of the unique advantages offered through their platform that are not available anywhere else in DeFi, and that are uniquely suited to the liquidity needs of projects like the DAPP Network, among others.
Bancor v2.1 offers users the ability to provide liquidity to a pool with a single token and maintain 100% exposure to that token, while also providing impermanent loss protection, an innovation spearheaded by Bancor to tackle one of the most painful problems plaguing AMMs (Automated Market Makers like Bancor, Uniswap and others). In contrast to Bancor, other AMMs require LPs to take on exposure to two or more assets when providing liquidity to pools. With single-sided liquidity, Bancor LPs can stay long on a single asset while earning swap fees and mining rewards from contributing liquidity to pools. To support single-sided token deposits, the protocol itself provides the matching BNT a user would otherwise need to deposit, through a Bancor Protocol co-investment. For example, if a user staked $100,000 worth of a token into a pool, it would trigger a $100,000 worth-of-BNT stake to be emitted from the protocol and deposited into the opposite side of that pool instead of the user. This dynamic BNT supply mechanism has significantly increased the total value locked (TVL), trading volume, and fee generation of the Bancor Network at large, which has resulted in many win-win scenarios for both Bancor and for the projects and users providing liquidity to pools in the network. The impermanent loss protection program has many additional cool features you read about here, and it’s likely the team and community will keep innovating even further.
In order to enable this single sided staking feature on Bancor, a token must first be “whitelisted” through a governance proposal made to the Bancor DAO and voted on by BNT token holders. This is to ensure that the Bancor community remains in control of how much BNT the protocol is emitting via this protection program, and that it is going to the best places to achieve the desired effects (promoting overall liquidity for the benefit of the network as a whole.) The whitelisting proposals also include a request for co-investment from the protocol itself to provide the BNT at an amount requested by the proposer. The more BNT is approved for co-investment with a whitelisted token, the more users will be able to deposit more of that token into that pool while benefiting from the unique protection program. When considering whether or not to approve a requested amount of co-investment, the primary aspect that the Bancor DAO considers is whether or not the protocol will earn more revenue from the swap fees generated in that pool, than it will pay out from the protocol in impermanent loss protection.
Bancor v2.1 removes IL risk for LPs and transfers it to the Bancor Protocol, which aggregates and backstops IL risk across its pools. The protocol uses fees earned from its co-investments of BNT in pools to compensate for the network-wide cost of IL. While some pools may have high IL and low fees, others may have low IL and high fees. If there aren’t enough fees generated to fully compensate an LP’s IL at the time of their withdrawal, the protocol emits BNT to cover the difference.
#DAPPNetwork is offering a uniquely attractive proposal for @bancor because it allows them to both benefit from the additional liquidity, fees, and users, while sharing the cost of doing so with the new token community in a more balanced alignment. (📣 Click to Tweet 📣)
Since the impermanent loss protection is covered by the protocol, it must take on much higher risk when agreeing to co-invest alongside tokens with lower market caps that have the potential to increase disproportionately in price compared to BNT due to their early stage and potential upside. When this volatility occurs and an LP withdraws their single-sided token stake, BNT must be minted to cover the impermanent loss which is paid out to the LP.
The DAPP Network recently submitted a proposal to the Bancor DAO for a 500k BNT (~$1.5m) co-investment, which would allow for nearly 100m DAPPs (at time of writing) to be single-sided staked into the BNT<>DAPP liquidity pool. The reason that a relatively large amount of co-investment was requested is because the DAPP proposal also offers a compelling mechanism to provide an additional external source of IL protection to remove some of the risk and cost from the Bancor Protocol.
To offset the risk explained above that Bancor incurs when whitelisting for co-investment tokens with low market caps, the DAPP Network community has developed an innovative smart contract that is able to compensate LPs for impermanent loss they incur by using DAPP tokens rather than BNT or both together. The proposal suggests that every time DAPP is unstaked from Bancor, and impermanent loss protection is owed to the LP — the protection amount will be paid in DAPP (by the DAPP Network) rather than in BNT provided by Bancor. This makes DAPP a uniquely attractive proposal for Bancor Network stakeholders because it allows them to both benefit from the additional liquidity, fees, users and awareness of incentivizing a new token pool, while sharing the cost of doing so with the new token community in a more balanced alignment.
The Bancor Network and its community have even more to gain from this than just described. The DAPP proposal further suggests making this innovative reward mechanism open source, so that additional projects can easily and safely follow in its footsteps. As liquidity is injected into promising low market-cap projects and initiatives, numerous tokens will be available for trades at lower slippage on Bancor. Since these projects can use the DAPP Network’s solution to cover impermanent loss protection using their native token, the co-investment risk for Bancor is significantly reduced while the potential benefits are maintained. DAPP Network is proposing a win-win liquidity bootstrapping solution for all parties, which we hope will help usher in a new generation of liquidity innovation and stakeholder incentive alignment for the ecosystem.
The BNT<>DAPP liquidity pool on Bancor should quickly provide an increase in liquidity depth for the DAPP token on Ethereum and tackle the chicken and egg liquidity problem for the token, allowing the DAPP Network to then further provide an efficient marketplace for both buyers and sellers of DAPP Network resources for developers of scalable decentralized applications. Once live, additional DAPP liquidity mining initiatives may generate even more trades and fees in the BNT<> DAPP liquidity pool, further aligning incentives for DAPP and BNT holders alike.
Vote FOR to whitelist DAPP Token with a co-investment of 500k BNT.
The DAPP token whitelisting and co-investment proposal is going up for Bancor DAO community vote on Monday, July 26. We encourage Bancor community members and the entire DAPP Network to support this initiative by voting FOR with vBNT (staked BNT) and by spreading the word within their respective communities to ensure the proposal is approved.
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