Thread by @korpi87

1) It's been a while since my last bullish thread on $BNT but @Bancor Team keeps building and it deserves some commentary. Let's talk about a new addition to $BNT tokenomics, Vortex Burner, which puts deflationary pressure on circulating supply of $BNT.

https://twitter.com/korpi87/status/1370740679450714116

2) Let's start with a quick reminder how @Bancor works. In contrast to other AMMs like $UNI or $SUSHI, in Bancor, you can provide liquidity with a single token. You don't have to pool your token with other asset which often leads to impermanent loss (IL).

https://twitter.com/korpi87/status/1366483496806580225

3) Whitelisted pools in Bancor are fully protected from IL. It works by bundling an array of pools into one bucket. Some pools have high IL, others don't and fees they generate are used for IL compensation. It shifts IL from single-pool risk to a risk spread across many pools.

4) Single-sided liquidity, IL protection and liquidity mining rewards are the features which attract a lot of liquidity into @Bancor. TVL has been growing consistently since they were introduced a few months ago and it's approaching $2B mark.

5) Higher TVL means that bigger trades can be executed with low slippage which attracts more volume and generates more fees for liquidity providers (LP). This is true for all AMMs. But what's quite unique about @Bancor is the fact that around half of LPs are $BNT holders.

6) So 50% of total fees paid by traders goes to $BNT holders while it's only 16% for $SUSHI and 0% for $UNI holders. This is a great example how @Bancor protocol success is aligned with $BNT token holders. Something that can't be told about many other governance tokens.

7) Vortex Burner is a further improvement to $BNT token model (as if it wasn't good enough!). It's designed to:
- Increase locked $BNT liquidity.
- Reduce circulating supply of $BNT.
- Increase lending capacity for $BNT LPs.

Let's ELI5.

8) When you provide $BNT to @Bancor pool, you get vBNT in return. It represents your stake in the protocol which consists of underlying $BNT plus accrued swap fees. Both can be redeemed when you send the same amount of vBNT back to the pool.

9) You may also decide to sell your vBNT for other token in Bancor (e.g. $LINK or $ROOK). It's done via vBNT/BNT pool, called Bancor Vortex. Purchased tokens can be used to earn more yield by providing additional liquidity on Bancor or by using them in other DeFi protocol.

10) But selling vBNT removes the option to unstake the associated $BNT stake. To get back your staked $BNT, you will need to buy back vBNT. In other words, you are making a bet that you will earn enough to get the same amount of vBNT in future and keep some profit on top of it.

11) Notice that if 1 vBNT > 1 $BNT, arb opportunity exists. You can buy BNT, stake it, get vBNT and sell it for more BNT. So vBNT/BNT has an effective ceiling at 1 vBNT = 1 BNT. If you sell vBNT for 1 BNT, you are almost guaranteed to buy it back at lower price in future.

12) The lower vBNT/BNT rate is, the more room to climb vBNT has, therefore, the higher the risk that you will have to buy back vBNT at higher price in future. So vBNT/BNT rate determines the borrowing risk at any given time. The higher the rate, the lower the risk.

13) So what is Vortex Burner? It collects an adjustable fee (5% atm) from swap revenue generated by LPs and uses it to buy and burn vBNT. For example, if a $100k trade is executed on a pool with a 0.2% fee, 200$ is collected by LPs. 5% of this fee (10$) buys vBNT and burns it.

14) Remember that vBNT represents $BNT staked in the protocol? Burning vBNT means this $BNT is permanently locked now. So portion of every swap increases locked liquidity in @Bancor. It reinforces liquidity - volume feedback loop which is extremely healthy for the protocol.

15) But $BNT locked in the protocol also means that it's removed from the circulating supply. In other words, every swap in @Bancor puts a deflationary pressure on the circulating supply of $BNT! I don't have to explain how good it is for every $BNT token holder.

16) Continuous upward pressure on the vBNT price also increases lending capacity of Bancor Vortex. When vBNT/BNT rate goes up, the borrowing risk for users who want to leverage their staked $BNT decreases - another benefit for $BNT liquidity providers.

17) $BNT token has always been in the center of @Bancor. Its utility as "liquidity bridge" between all the tokens allows $BNT token holders to be fully aligned with the growth of the protocol. Vortex Burner improves this design even further.

18) With Vortex Burner, trading volume on Bancor directly translates into more locked liquidity in the protocol and deflationary pressure on $BNT circulating supply. Sometimes you like the project but you are not bullish on its token. You definitely can't say this about @Bancor.

Full article on Vortex Burner can be found here: blog.bancor.network/vbnt-burning-i…