DeFi Project Spotlight: Bancor, The Dark Horse Decentralized Exchange

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In 2017, Bancor pioneered automated market makers (AMMs) to replace order books using a native reserve asset, the BNT token. After losing ground to other decentralized exchanges such as Uniswap or Sushiswap, Bancor’s v2.1 showed that the project is far from over. 

Re-Introducing Bancor

Understanding Bancor can be tricky because of the system’s complexity, but there is a reason why the total value locked in the protocol has skyrocketed in 2021.

Bancor’s USD monthly volume. Data from Dune Analytics
Bancor’s USD monthly volume. Data from Dune Analytics

In October 2020, Bancor released v2.1 to an enthusiastic user base. Still, it took the market some time to notice that Bancor has been working to solve some of the most significant problems users face when they stake their coins. 

To understand these improvements, a broader explanation of Bancor’s system is needed. 

In 2017, Bancor came up with a method to trade coins on-chain through a new system. Instead of leveraging order books, the protocol introduced pooled trading. By creating different pools of ERC-20 tokens and Bancor’s native token, BNT, traders could effectively exchange with the pool instead of each other. The more liquidity provided to the pool, the lesser the price impact for any transaction. To attract funds, liquidity providers were promised part of the swap fee from these transactions. To this day, this system is fundamentally unchanged in all of DeFi. Decentralized exchanges all function with liquidity pools used by traders to exchange currencies.

The next big innovation in decentralized exchanges was creating pools between any two ERC-20 tokens, removing the necessity for a central currency. Largely, Ethereum took on that role as it makes up $3.4 billion out of Uniswap’s $7.6 billion current liquidity. This convenience is largely why Bancor struggled to keep up with Uniswap or Sushiswap, especially during the summer of 2020.

BNT is at the center of Bancor. All liquidity pools are divided equally between an ERC-20 token and BNT. In that sense, BNT is a sort of neutral unit of exchange. Interestingly, this idea of a neutral exchange currency to facilitate global trade stems from economist John Maynard Keynes. 

At the Bretton Woods conference, he proposed a supranational currency called “bancor,” which would be used internationally to settle transactions between different national currencies.

Current ranking of decentralized exchanges by total value locked. Data from DeFi Pulse
Current ranking of decentralized exchanges by total value locked. Data from DeFi Pulse

However, Bancor’s unique system allows specific innovations which would be impossible for its competitors. In v.2.1, for example, Bancor introduced impermanent loss protection and single-sided liquidity provision. 

The Project’s Advantages

When users stake funds in a liquidity pool, they expose themselves to impermanent loss. In simple terms, this means that they will become increasingly exposed to the weaker asset they provided over time. As the price of both assets change, originally supplied equally, the liquidity pool automatically updates the user’s liquidity to keep a 50/50 split in value between the two. 

In a blog post, the Bancor team illustrated this issue by comparing holding LINK from April 2019 to April 2020 and supplying liquidity to an AMM like Uniswap in the same period.

LINK/ETH profit LP vs. holding. Source: Bancor
LINK/ETH profit LP vs. holding. Source: Bancor

As the price of LINK quickly grew during that year, AMMs consistently sold it for Ethereum to conserve a 50/50 split of assets in the liquidity pool. While both LINK/ETH liquidity providers and holders made a profit, the fees generated by supplying funds to Uniswap were insufficient to cover the impermanent loss.

In v2.1, Bancor aimed to solve the impermanent loss (IL) issue by subsidizing potential impermanent loss. Everyday funds are staked in Bancor; users receive 1% of impermanent loss “insurance.” After 100 days, liquidity providers are entirely insured from any losses they might have suffered because their preferred asset’s price grew much quicker than the second one in the liquidity pool.

Besides this impermanent loss protection, Bancor’s BNT system is uniquely suited to allow single-sided liquidity. This means that, contrary to other decentralized exchanges, users can choose to supply only one of the two assets in Bancor’s liquidity pools. While Balancer offers a similar service, they immediately sell part of the supplied coin for the other one. Bancor, however, co-invests in pools with its native coin BNT to keep the pools balanced. 

When users invest in a Bancor pool, Bancor essentially provides as much value in BNT as in the users’ token. From this invested BNT, the protocol earns swap fees and uses them to reimburse any impermanent loss incurred by the users during their time in the liquidity pool. However, when users add BNT to the pool, the protocol burns its added BNT and the fees accrued, diminishing the total amount of BNT in circulation.

Visualization of Bancor’s monetary policy and impermanent loss insurance. Source: Bancor
Visualization of Bancor’s monetary policy and impermanent loss insurance. Source: Bancor

As Uniswap founder Hayden Adams, the creator of Uniswap, explained, users face two types of risks when they supply funds to a liquidity pool. 

First, there are unavoidable impermanent loss risks in a liquidity pool between two tokens whose value is unrelated. Eventually, as the price of the two tokens diverges, users end up with different quantities of each token, changing the user’s amount of exposure to these two tokens. But, just as problematic, one takes inventory risk by supplying two tokens in equal measure while expecting much better results from one of the two.

With v2.1, Bancor solved inventory risk by allowing single-sided liquidity and subsidizing any impermanent loss in the liquidity pools. This system is made possible by Bancor’s unique model and can’t be replicated by decentralized exchanges such as Uniswap, Sushiswap, or Curve.

To further incentivize participation, Bancor has also started offering substantial liquidity mining rewards on certain pools selected by governance. The current liquidity mining rewards for providing major cryptocurrencies such as LINK, ETH, WBTC, SNX, or AAVE hover between 10% and 20% APY while supplying BNT to these pools can pay up to 70% APY in BNT. These rewards are voted on by governance roughly every two months.

Current Bancor liquidity mining rewards.
Current Bancor liquidity mining rewards.

The Shortcomings of Bancor

According to DeFi Pulse, Bancor has $1.78 billion currently staked in its smart contracts, 31% of the current biggest decentralized exchange Uniswap. In contrast, Uniswap did $1 billion in volume over the last 24 hours, according to CoinGecko. Compared to that, Bancor’s $70 million in volume only represents 7% of its competitor.

In essence, while Bancor is doing a phenomenal job at incentivizing users to provide liquidity on their platform, they do not seem to attract as much traffic and volume on their exchange. This is an important issue as volume represents liquidity provider fees. If those disappear, then the incentive to LP on Bancor disappears as well.

This lack of volume could be due to two different issues—first, the strength of network effects. Uniswap became the dominant exchange during DeFi summer and has been the go-to address for any project launching its coins. In contrast, Bancor’s whitelisting process adds a lot of security to its pools but lacks the speed and openness of Uniswap. 

Anyone can make a pool on Uniswap at any time. In a sector as fast-paced as DeFi, this is an incredible advantage that can turn dangerous very quickly. Rugpulls, scam tokens, and many other issues can arise from this policy. For now, though, these drawbacks aren’t enough for the Uniswap team to reconsider its stance.

The second issue is the gas fees, which are exacerbated by the current congestion on the Ethereum blockchain. One of the most important innovations of Uniswap was gas optimization. 

In a test swap operated on Apr. 9 at fast gas prices of 126 gwei, an identical swap between ETH and DAI cost $90 on Bancor compared to $41 on Uniswap. If the transaction included BNT, the gas fee on Bancor dropped to $55.

This is almost unavoidable due to the structure of Bancor. Bancor doesn’t have an ETH/DAI liquidity pool. To swap ETH with DAI, the protocol must use BNT as a medium of exchange. Due to the rise in the price of ETH and blockchain technology’s inherent limits, gas fees have become a significant issue.

Looking Ahead

Before v2.1, liquidity providers needed to supply equal parts BNT and their token of choice to Bancor’s liquidity pools. The addition of single-sided liquidity was nothing less than a game-changer for Bancor by removing this problematic barrier. The new liquidity provision system also allows for improved tokenomics and subsidizes the tricky issue of impermanent loss. 

As the numbers show, the future looks bright for Bancor. Liquidity has grown, but most importantly, the amount of unique users has also seen a sharp rise. Liquidity providers have taken notice and with improved liquidity comes improved prices for traders with lower slippage. This creates a positive spiral that improves the protocol as more people use it.

Number of unique wallets benefitting from Bancor’s impermanent loss protection system. Source: Dune Analytics.
The number of unique wallets benefitting from Bancor’s impermanent loss protection system. Source: Dune Analytics.

In the last few months, Bancor has also doubled down on adding features facilitating access to the protocol. In March, they added a fiat ramp allowing users to access Bancor directly from their fiat bank accounts.

The tokenomics of Bancor have also been given additional thought. Starting with their next update, Bancor will use 5% of all swap fees to repurchase vBNT from the open market and burn it. As vBNT is received by users when they lock BNT in the protocol, this will gradually lock an increasing amount of BNT in the liquidity pools forever, reducing the circulating supply.

While gas optimization will be a determining factor for Bancor’s future, the hottest topic in DeFi right now is layer 2 solutions. 

Bancor suffers from Ethereum congestion and high gas fees like many other DeFi protocols. With Uniswap’s v3 announcement, the pressure on other protocols to offer layer 2 solutions has increased. On a call with the Bancor team, Crypto Briefing learned that this is something they’re keeping a close eye on. The team insisted on the necessity of doing it right and not rushing an incomplete solution. 

More information on a layer 2 solution can be expected in the coming weeks.

Disclaimer: The author held ETH, BNT, and several other cryptocurrencies at the time of writing.

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Decentralized Exchange DODO Hacked for $2.1 Million

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After Successful Launch, Solana DEX Raydium May Integrate SushiSwap

Key Takeaways

  • Raydium, a new decentralized exchange running on Solana, may soon integrate SushiSwap.
  • A proposal on the SushiSwap forum details a plan to use Raydium as a bridge to bring the exchange onto Solana.
  • Raydium supports order books and has quickly drawn attention from the DeFi space.

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SushiSwap on Solana? Thanks to Raydium, it may happen soon. 

Proposed SushiSwap Integration 

Raydium, a new automated market maker (AMM) built on the Solana blockchain, may integrate SushiSwap. 

A proposal called “Bonsai” on the SushiSwap forum details a plan to “build out SushiSwap on Solana and Serum.” Written by someone using the moniker handroll, the proposal starts by acknowledging SushiSwap’s growth, which Ethereum helped. 

The post explains how Raydium was built on Serum and Solana to solve three issues: expensive gas fees, lack of limit orders and advanced trading, and fragmented liquidity. 

Handroll, who appears to be involved in the Raydium project, also says: 

If we could somehow work alongside the community to build out support for Sushiswap on Solana, we think the community would quickly see even wider reach while Sushi products would benefit from ecosystem-wide liquidity, fast transactions and low fees on Serum.” 

The proposal notes that Serum’s decentralized order book could potentially support SushiSwap’s liquidity pools. It then explains how Raydium could effectively be a bridge to bring SushiSwap onto Solana. 

The process would involve supporting SushiSwap’s liquidity pools and staking on Serum, followed by Raydium’s testnet. Later, developers would deploy SushiSwap’s Bonsai pools on mainnet, and Raydium would integrate SushiSwap’s Raydium pools.

Raydium Launches on Solana 

Raydium recently launched on Solana and has quickly garnered attention from the DeFi community. The project’s early success has been helped by Solana and Serum figurehead Sam Bankman-Fried, who alerted his Twitter followers to the launch earlier this month. Explaining the advantages of Radium, Bankman-Fried told Crypto Briefing: 

“Raydium is unique in two ways: 1) Solana makes it fast, cheap, and high throughput 2) Because it provides liquidity on Serum orderbooks, it is able to provide to all the flow on Solana, not just users who seek it out; and it has the flexibility to provide in different ways in the future.”

Bankman-Fried also helped SushiSwap early on, standing in to take ownership of the SushiSwap contract’s keys after Chef Nomi rug pulled the community. He told Crypto Briefing that a SushiSwap integration would be beneficial for both protocols. He said:

“Integrating SushiSwap would help bring users and Sushi airdrops over to [Raydium], and would help bring fast and cheap transactions, liquidity, and fees back to SushiSwap.” 

Raydium includes an order book for trading while also promising low gas fees. In some ways, the Solana network has branded itself on its low running costs, which is a possible attraction for regular DeFi users as Ethereum gas fees hit new highs (a fast trade hit 1,000 gwei yesterday). 

In a tweetstorm, Bankman-Fried explained how Raydium could aggregate liquidity across protocols and provide access to traders. It achieves composability by using Serum as “an on-chain matching engine,” fast transactions on Solana, and the support of order books to allow market makers and takers to share order flow and liquidity. 

Raydium’s pools went live on Feb. 19 and already have millions of dollars in total value locked. The RAY token, meanwhile, has soared since launching on Sunday. In a week where the rest of the market is experiencing a downturn, it’s already hit a market cap of $121.8 million, trading at $11.20. 

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Tezos (XTZ) Ranks 7th in Top Staked Assets, Records Highest Number of Contract Calls

Tezos (XTZ) just had the largest number of contract calls in January, with several dApps due to launch. Tezos also ranks 7th among the best staking crypto assets. In February, there is the opportunity to launch some new dApps and the most distinctive modification of the Tezos: Edo.

Smart Contract Call Record

Tezos is one of the surviving and still growing projects of the ICO frenzy in 2017 when it raised $232 million. While taking a closer look at its performance last year, several successful upgrades to the protocol are attracting more DeFi platforms, DEXes, and NFT marketplaces to the blockchain in 2021.

Contract calls are interactions with a smart contract in the form of transactions. It is an important indicator of the increasing adoption of the mainnet’s smart contracts. Currently, the number of contract calls has increased to 1,209% of the July 2020 total. Each month thas seen a new record in the number of calls, except for November, which fell by 10%.

January saw a 22% increase over December, putting the growth at 2.2 times more than the total number of contract calls in July last year, clearly indicating its exponential growth.

Further on, developer activity is still showing continuous growth; an average of 700 new test networks were deployed each day in December increasing to 930 in January. February will bring many new launches and achievements to Tezos and maybe even more in the future.

Bringing Oracles to Tezos

Oracles are the backbone of the current DeFi platforms. They are an integral part of providing real-time financial price data to logs and applications so that the platform can create financial products, such as algorithmic stablecoins, derivatives markets, loans, and insurance projects.

Harbinger, the oracle developed by Blocksale, offers real-time price issue signing across multiple exchanges and supports market data APIs from Coinbase Pro, Binance, Gemini, and OKEx.

It is based on the Compound Finance Open Price Feed but differs from Chainlink in that it costs money to publish price data in the chain. Tezos difference because it can be cashed by betting on the prize won by the Tezos holder; that is, it can be funded in advance.

With improved protocols, price oracles, entering new markets for Defi, NFT, and DEX, reducing gas costs for cheaper transactions, wrapped ETH and stablecoins, Tezos has the opportunity to compete with Ethereum and position itself as a more scalable alternative in cases of high gas fees on the network. 

There are currently 119 projects built on the Tezos blockchain, and if gas rates go down, they could expand even further into DeFi.

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After FAANG Stocks, Injective Protocol Lists GameStop

Key Takeaways

  • Injective Protocol has listed GME futures trading on its Solstice Pro decentralized exchange (DEX).
  • Due to the decentralized nature, anyone can trade GameStop’s futures contracts against the USDT stable coin.
  • GameStop’s listing on decentralized exchanges such as Injective gives stock market traders a chance to enter the DeFi sector.

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Decentralized exchange (DEX) Injective Protocol has rolled out the first decentralized and commission-free futures trading of GameStop (GME) stock.

Injective Competes With US Brokerages 

Injective has listed GME futures trading on its Solstice Pro decentralized exchange (DEX).

Due to the decentralized nature, anyone can trade GameStop’s futures contracts against the USDT stablecoin. The exchange also listed the trading of other large tech stocks such as Tesla, Amazon, and Twitter on their platform last month.

GameStop has recently attracted massive interest from retail traders causing its stock price to rise exponentially. Earlier, a subreddit known as r/wallstreetbets pooled together its members to make trades against short interest on GME stock.

The short squeeze that ensued caused hedge funds like Point 72 and Melvin Capital to close their short positions after losing billions within a few days.

The incident has been viewed as a rare moment in history where retail traders displayed their dominance over large hedge funds.

However, U.S. brokerage firms such as RobinHood decided to halt the GME stock’s trading amid the carnage. The trading suspension has been criticized by politicians, entrepreneurs, and other large investors.

According to Cameron and Tyler Winklevoss, and many other experts, the incident proved once why there is a need for decentralized financial markets.

In this context, GameStop’s listing on decentralized exchanges such as Injective gives stock market traders a chance to enter the booming DeFi space.

Injective said it would provide 24/7 access to futures trading of the stock, a feature that traditional brokerages cannot avail to their customers.

The exchange can finalize transactions within a second on its Layer-2 blockchain, which costs almost-zero gas fees.

Disclosure: The author did not hold crypto mentioned in this article at the time of press.

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Uniswap Hits $20 Billion in Monthly Volume, Eyes New Record

Key Takeaways

  • The leading decentralized exchange, Uniswap is on track to achieve a monthly volume of $25 billion.
  • Uniswap is now the 4th largest spot exchange in the world, outpacing many centralized counterparts.
  • Despite the end of its incentives program, LPs on the platform continue to increase.

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Uniswap, the leading decentralized exchange, is on track to set an all-time high for monthly volume at $25 billion.

Uniswap Shows No Sign of Slowing Down

Uniswap is now the fourth largest spot exchange globally, consistently earning the majority market share across all DEXes. It beats popular centralized exchanges like Gemini, Bittrex, Poloneix, and Bitstamp.

7-Day Average Volume-image
7-day volume on DEXes. Source: Dune Analytics

Uniswap surpassed 300,000 Monthly Active Users (MAUs) in December 2020, and the median trade size has risen to ~$1,300, according to the protocol’s strategy lead, Teo Leibowitz.

Uniswap routers account for more than 20% of all transactions taking place on the Ethereum blockchain. Uniswap has also decided to use Optimism as their Layer-2 solution to combat high gas fees, joining Synthetix and ChainLink in adopting OVM.

On Jan. 16, 2021, Optimism soft-launched OVM on the Optimistic Ethereum mainnet. Along with scalability improvements, Uniswap also boasts an incredibly loyal community of liquidity providers (LPs) to keep trading costs and slippage fees low.

On Nov. 17, 2020, the protocol saw a sharp decline in its liquidity due to the liquidity incentives program ending on that day. Despite the lack of incentives, however, liquidity on the platform continues to increase. Currently, the protocol has $3.36 billion in liquidity.

The protocol has more than 72,000 LPs at the time of press. These LPs are expected to receive $75 million in fees for January 2021. Uniswap earns the third-most in transaction fees, after Ethereum and Bitcoin.

Uniswap Transaction Fees
Source: Crypto Fees

Hayden Adams, Uniswap’s creator, stated that since the inception of Uniswap V2, the protocol has seen a trading pair get deployed every 12 minutes. This equates to roughly 115 new trading pairs per day for the last 249 days.

Uniswap Grants Program (UGP) is now live, too. The deadline for Wave 1 is Feb. 28, 2021, while the deadline for Wave 2 is slated for May 31, 2021.

UGP became the first governance proposal to pass successfully. Before this, the first two proposals failed to meet quorum.

The first proposal aimed to lower the UNI required to submit a proposal and lower the threshold required to reach a quorum. The second proposal aimed at distributing UNI tokens to users who interacted with the platform via proxy contracts.

On Sept. 17, 2020, Uniswap airdropped their native governance token called UNI. Eligible participants received 400 UNI, which amounted to $1,376 at the time. Today, this sum has increased substantially and now amounts to $5,056.

The team is keeping the updates of Uniswap’s upcoming V3 under tight wraps, and thus not much is known about the upgrade.

However, the team was spotted hiring four engineering personnel, including a senior frontend engineer, smart contract engineer, full-stack engineer, and software engineer intern.

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