Here’s what Asaf and Nate had to say about the upcoming Bancor V2 and ENJ liquidity pool.
Nate: Hey I’m Nate (Head of Growth at Bancor) and Asaf is here (Head of Product at Bancor). I have been working with the project for 2.5 years and Asaf has been at Bancor for over 3 years.
We’re both psyched to be here answering your questions. We are long-time fans of the Enjin community and have been working with the brilliant folks at Enjin for quite some time.
While you may be most familiar with Bancor as a trading protocol—having listed Enjin as one of our first tokens on the system in 2017, and the Enjin Wallet using Bancor for swaps—you may be less familiar with Bancor as a solution for everyday users to act as market-makers or “liquidity providers.”
We’re thrilled that ENJ will be listed as a launch pool in the upcoming Bancor V2—allowing any ENJ holder to easily provide liquidity to the ENJ pool and generate fees from ENJ trades on Bancor.
What Bancor V2 Means for Developers & Gamers
Game developers use Enjin Coin to mint ERC-1155 assets; gamers use it to purchase those assets—and Bancor V2 is here to make it even easier for them to acquire it.
The magic of Bancor V2 is you can do all this while maintaining 100% exposure to ENJ.
So if you have ENJ laying around in your wallet, we hope you’ll put it to work in the upcoming ENJ pool! You can find more details in our post announcing ENJ as a V2 launch pool.
Nate: You can join the ENJ pool by staking your ENJ in the pool.
Once V2 launches, this will be possible in a couple clicks using any supported Web3 wallets on the new Bancor.Network interface from within the Enjin Wallet Dapp Browser.
Anyone can provide liquidity to the ENJ pool and, in return, receive conversion fees from trades that pass through the pool. Liquidity providers receive “pool tokens” proportional to their share of assets in the pool.
Conversion fees accrue in the value of your pool tokens. As the pool processes ENJ trades and generates fees, the price of your pool tokens too rises.
You can withdraw your liquidity from the pool and realize the gains by selling your pool tokens back to the ENJ pool.
If you are familiar with providing liquidity to Bancor V1 pools, the process is similar.
You can see a step-by-step guide for V1 liquidity providers here:
Guide: How to Stake Liquidity in Bancor Pools
The success of the Bancor Protocol depends on users staking tokens in Bancor liquidity pools and generating fees from trade volume. Liquidity pools perform autonomous, peer-to-contract token trades and generate fees from each trade.
The key differences with Bancor V2 are:
- Providing liquidity is possible directly on the Bancor.Network interface (in the Enjin Wallet Dapp Browser)
- You’ll be able to provide your ENJ to the pool and maintain 100% exposure to ENJ. That’s unlike Bancor V1 and existing automated market maker (AMM) solutions on the market, which require you to take on exposure to a separate reserve token in the pool.
Nate: So price slippage is effectively the cost of trading with an automated market maker (AMM) liquidity pool.
The lower the slippage for a given trade, the better the price for the trader.
Liquidity amplification dramatically reduces price slippage for traders and will allow liquidity providers to generate more fees for the same amount of capital.
Warning the next part has numbers and gets a little techy so some of you may want to shield your eyes.
Here’s how it works:
With AMMs, slippage for a given trade can be calculated by dividing the size of the trade by the amount of liquidity in the pool.
For example, say there is an ENJ pool with $100,000 in liquidity. A user wishes to buy $5,000 worth of XYZ. The estimated slippage would be 5,000/100,000 or 5%, so the user would receive $4,750 worth of ENJ from this trade.
Losing $250 to slippage is not great, right?
This is why AMM pools have been criticized for having low capital efficiency—or, in other words, requiring a lot of liquidity in order to offer prices that are competitive with order-book based exchanges.
This is where Bancor V2 “liquidity amplification” comes into play.
Basically we have figured out a way to optimize the AMM’s pricing curve to dramatically reduce slippage.
You can read about the technical details here:
Amplified Liquidity: Designing Capital Efficient Automated Market Makers in Bancor V2
While we’ve seen a massive surge in the use of automated market makers, AMMs are often criticized for not being capital efficient. Critics say they require a large amount of capital to offer prices that are competitive with order-book based exchanges.
Effectively, we can make the ENJ pool act like there is 20X more liquidity in the reserves.
So let’s return to the $100,000 ENJ pool example from before. With 20X amplification, this pool will act like a $2 million pool!
Slippage on a $5,000 trade would be 5,000/2,000,000 or .25%. So the user would receive $4,987.50 from the trade – saving the trader $237.50 vs. a legacy AMM pool.
Crucially, what’s good for traders is good for liquidity providers.
Since the pool is able to offer significantly lower prices with the same amount of liquidity, it will attract way more trades and generate more fees for liquidity providers. ENJ LPs will generate ROI for the same amount of ENJ staked.
With amplification, we expect to see the ENJ V2 pool win trades not only over competing DEXs, but also offer prices that are better than centralized, order-book based exchanges.
OK you can open your eyes again.
Nate: OK so we define an “on-chain liquidity protocol” as one which is built on automated market maker (AMM) liquidity pools.
Such a protocol is similar to a decentralized exchange (DEX) in that it allows users to perform trades between tokens in a completely decentralized and non-custodial manner.
However, it is different than a regular DEX because anyone can own a “piece” of the exchange and collect fees from trades. That is, everyday users (token holders) can easily act as market-makers.
Providing liquidity on Bancor is permissionless (no central party can block or control the process) and easy for everyday users (add liquidity in a couple clicks).
This stands in stark contrast to regular exchanges, where liquidity comes from a small number of whales and professional market-makers. While market-making on most centralized exchanges and DEXs involves high capital costs, permissioned access, advanced trading strategies and manual maintenance, on Bancor, everyday users can add liquidity and immediately start earning trading fees. You can do so with as little as $1.
Here’s a step-by-step guide on how to do it today with Bancor V1 pools.
A similar guide is coming soon for Bancor V2 pools and will be created specifically for the ENJ pool!
Now, let’s put this in the context of ENJ. When ENJ lists on a normal exchange, there are professional market makers who create liquidity for ENJ and take a fee from each ENJ trade.
With Bancor, it is the ENJ community providing liquidity – meaning everyday ENJ holders can market-make and generate fees.
If you hold a project’s token, you can now easily acquire a piece of its liquidity on a DEX and collect fees from its trade volume. This not only introduces new opportunities for users to earn passive income, it also fundamentally changes how DEXs operate.
Read more about this vision of community-sourced liquidity and “user-owned exchanges” here.
Nate: So as a liquidity provider, you are never transferring coins to Bancor.
You are transferring coins to the ENJ/BNT liquidity pool smart contract. In return, you receive ERC-20 “pool tokens” – which represent your proportional share of the pool’s underlying assets (including yield from fees and rewards that accumulate in the pool).
Similar to the ENJ V1 pool, the V2 pool will be managed by the ENJ team; however, it is worth noting that pool managers have no special rights to withdraw anyone’s liquidity besides their own.
Pool managers can only update the pool’s fee and, in the initial stages of a pool, set the max amount of liquidity that can be staked. Beyond that, they have no control over the funds or transfers.
As a liquidity provider, you can store your pool tokens in your own wallet, and withdraw your liquidity from the ENJ pool by selling your pool tokens back to the ENJ pool contract.
You can think of this process as similar to lending your ENJ to a decentralized lending protocol and generating yield, or using your ENJ to mint a stablecoin, except with Bancor, you are minting a pool token redeemable at all times for the pool’s assets. When you withdraw liquidity, these pool tokens are burned.
In the future, the Enjin Wallet could integrate liquidity pool staking natively, so that you can provide liquidity to the ENJ pool directly from the Enjin Wallet. However, that will not be live at launch.
In the meantime, you can move your tokens to a supported Web3 wallet and provide liquidity using the Bancor.Network staking interface from within the Enjin Wallet Dapp Browser.
Nate: Yes, similar to the ENJ V1 pool on Bancor, with the V2 pool, when you provide liquidity (i.e., “stake” your tokens in the pool), you are entitled to a share of fees from trades that pass through the pool.
Since Bancor V2 mitigates the risk of impermanent loss, we expect the yield from these fees to be significantly higher than Bancor V1.
Following the release of V2, the BancorDAO will also vote on BNT “staking rewards” (i.e., “liquidity mining”).
Incentivizing Network Liquidity with Bancor Staking Rewards
This post introduces the concept of BNT Staking Rewards as a mechanism for incentivizing users to provide liquidity on Bancor.
Staking rewards are designed to increase the incentive for liquidity providers, and allow users who provide liquidity to Bancor pools to receive weekly distributions of BNT.
And staking rewards are expected to increase the APR of providing liquidity to the ENJ pool even more.
You can find more info on BNT staking rewards and the BancorDAO here.
Nate: The Bancor and Enjin teams have a long history of working together—and for good reason: Bancor’s core mission is to provide liquidity to the long-tail of assets, and in-game assets are perhaps the most viable “long tail” out there.
These assets (which have relatively low volume in their early days) are fundamentally failed by the order-book based exchange model.
As such, ENJ was one of the first tokens to join Bancor V1 in 2017, and the Enjin Wallet is among the leading crypto wallets utilizing Bancor Protocol for swaps.
With V2, by increasing Bancor’s liquidity pool, Enjin adopters will be able to access cheaper prices on ENJ trades through the Enjin Wallet, meaning less slippage.
This provides a liquid on-ramp to the Enjin ecosystem.
And with Bancor V2, Enjin can enlist the ENJ token community to serve as liquidity providers (LPs) to this on-ramp. ENJ holders can generate conversion fees, and they can do so without having to give up their 100% exposure to the ENJ token.
It’s also worth noting that the ENJ pool on Bancor V2 will consist of two on-chain reserves: an ENJ reserve on one side, and a BNT reserve on the other side.
ENJ liquidity providers are entitled to 50% of the fees generated by the pool, while BNT liquidity providers are entitled to the other 50% of fees.
The more trades processed by the pool, the more both ENJ and BNT liquidity providers profit.
We can’t wait to see both ENJ and BNT holders unite and start filling up the pool to generate a share of the fees and to provide cheaper prices on ENJ trades!
Asaf: Bancor was created from a need. We realized that order book is limited and doesn’t provide good solution for all types of assets (we see this now on ERC-1155, for example).
This is how automated market making was established.
Since then, we have continued developing the solution and now gear to release a new AMM solution that has a better market fit to current days issue, allowing projects to stake their token without impermanent loss while maintaining the same long position.
Asaf: We have one goal in mind, make AMM a solution that can be used by everyday users on a regular basis.
For this, we are evolving and improving the automated market making smart contracts, finding better ways they can work and be more and more competitive to centralized exchanges in terms of price and usability.
2020 and beyond will be times where dex rise up to the challenge and provide a solution for the masses.
Nate: If you are already staking in the ENJBNT V1 pool, you can withdraw your liquidity currently on xnation.io or, when V2 launches, directly on bancor.network.
Then you can re-stake your ENJ and/or BNT to the ENJBNT V2 pool.
Bancor V1 will continue to exist for as long as the Ethereum exists, so moving your liquidity is up to you.
Though it’s worth noting that V2 does offer the additional features:
- single-token exposure
- impermanent loss mitigation
- liquidity amplification
Asaf: We believe in automated solutions. Order book trading was designed out of a need and based on the available technology at hand. It has maxed its expansion abilities and it is time for a new solution.
AMM solutions are always better by design but require some adjustments to better address the known issues of capital efficiency and impermanent loss.
We see a future where all trades will go thru some form of automated solution and at the same time allow every user to own part of the solution and earn fees.
Nate: Safety is our number one priority.
The code is undergoing rigorous auditing and stress-tests by Consensys Due Diligence and 1inch.exchange, as well as public bug bounty. Additional audits will be performed on the system following the launch.
I think Bancor V2 code will be among the most audited code in DeFi. Some of the best white hat hackers in the industry are trying to attack the contracts and no critical bugs have been flagged.
In addition, there will be insurance solutions offered through Nexus Mutual for liquidity providers who want extra protection.
All that said, no audit or bug bounty is 100% full-proof. As with any DeFi protocol, in the early days of Bancor V2, we advise liquidity providers to start with only small amounts.
Nate: Bancor is not a centralized exchange and doesn’t offer any centralized services. It is and has always been a DEX.
Bancor invented and was the first to implement AMM liquidity pools, which Uniswap later adopted.
However, I would say that Bancor offers more flexible AMMs and in Bancor V2 this provides key features over Uniswap V2 for liquidity providers.
Uniswap V2 LPs (like Bancor V1 LPs) are subject to:
- Impermanent loss
- Multi-token exposure
- High price slippage
Bancor V2 offers LPs:
- Impermanent loss mitigation
- Single-token exposure (i.e., 100% exposure to ENJ)
- Low price slippage through liquidity amplification
Asaf: V1 pools use a static weigh distribution. This means that if token value changes, traders need to balance the pool by extracting value.
V2 pools use dynamically changing weights. This means that when token price change in the eco system, we adjust the weights to lock this value in the pool.
Because of this dynamic weight process, we can use amplification and maintain pool balance.
We’d like to extend a big thank you to Asaf and Nate for taking the time to join, and to everyone who participated by asking questions!
Until next time—see you in the chat room.