Why is Bancor considered a potentially underestimated dark horse in the DEX space?

This article is sourced from Wangarian's Twitter, employed at the DeFi investment fund DeFiance Capital, Translation: Lu Jiangfei

Today, I want to pour some new wine into the old bottle of decentralized exchanges (DEX) and share some new insights related to Bancor's native token BNT.

Four months ago, Bancor launched its much-anticipated impermanent loss protection solution for liquidity providers (LPs), resulting in a 70-fold increase in locked value and a 55-fold increase in trading volume. For Bancor, a DEX that may have been forgotten by many, I hope to conduct an in-depth exploration: it could be the dark horse with the greatest potential in 2021.

Bancor is a decentralized exchange that launched in 2018 and is considered a veteran in this field. However, Bancor was troubled by an overly complex token model for a long time; despite high promises, it lacked significant market appeal.

Subsequently, Bancor spent two years iterating on its product and restructuring its leadership. The original vision that Bancor envisioned has been realized one by one, making the current "Bancorian" community stronger than ever. Some core figures in the community include: Yudi Levi, Nate Hindman, and Mark Richardson.

Without further ado, let me directly discuss the investment themes I see in Bancor. In simple terms, we want to describe the current Bancor as "creating highly anticipated products with a crazy token economic model," something that the market has not paid attention to in the past, specifically including the following highlights:

1. Impermanent loss insurance;

2. Token economics that can create significant liquidity "sinkholes";

3. The price of BNT being undervalued compared to other DEXs.

Impermanent Loss Insurance

Since the birth of automated market makers (AMMs), impermanent loss has been a major pain point for liquidity providers. With Bancor V2.1, liquidity providers can now stake single-sided assets and earn returns of 60-100% with complete impermanent loss protection.

Bancor's initiative has had a substantial effect, as all liquidity providers can achieve Pareto optimal choices. (Note: Pareto optimality, also known as Pareto efficiency, refers to an ideal state of resource allocation, assuming a fixed group of people and allocatable resources, where a change from one distribution state to another can make at least one person better off without making anyone worse off, which is called Pareto improvement or Pareto optimization.)

So, how does Bancor's impermanent loss insurance work?

Bancor uses a portion of the token swap fees generated from all liquidity pools to cover the impermanent losses that have occurred within the protocol. Of all the earned token swap fee revenue, 28% will be used to compensate liquidity providers for their impermanent losses, and this process does not mint or issue BNT tokens to subsidize it.

You will find that to solve the impermanent loss issue, Bancor has actually created a self-sustaining, non-subsidized solution. However, it is important to note that you must deposit tokens for at least 100 days. Even so, for unlocking capital that reduces the risk curve, Bancor's impermanent loss solution is still quite good, as the current risk curve of Bancor can only cover single-sided impermanent loss exposure.

BNT Sinkhole: Crazy Token Model

Bancor's token model can be said to be the most elegant token model in the DEX space to date (the only one comparable is SNX). By integrating BNT as the base asset, liquidity providers and token holders have the same vested interests, as BNT token holders will also become single-sided staked liquidity providers, and impermanent loss will thus become a thing of the past.

As a BNT token holder, you can earn yields without impermanent loss of up to 50-100% annually, creating a huge incentive for people to stake their BNT tokens.

Since the V2.1 version, the amount of staked BNT on the Bancor platform has surged, currently accounting for 61% of the total staked tokens.

Bancor Vortex

Another aspect of Bancor's "sinkhole" token model worth noting is the Bancor Vortex mechanism, which can enhance the capital efficiency of BNT tokens by providing up to 1.0x interest-free leverage.

So, how does the Bancor Vortex mechanism work?

Through the Bancor Vortex mechanism, you can:

1. Stake BNT tokens to earn swap fees and liquidity mining token rewards;

2. Obtain vBNT tokens and then deposit them into the Vortex to borrow more BNT (while also earning mining token rewards);

3. Use the borrowed BNT tokens to purchase any assets without interest or liquidation risk.

Advantages of the BNT Model

Based on the above token model, BNT stakers can earn the highest swap fee income among all DEXs. Comparing the swap fees of different DEXs per transaction:

• Bancor: 8bps

• Sushiswap: 5bps

• Uniswap: 5bps (including fee switch)

Thus, the net profit margin for BNT token holders can be effectively improved.

Market Competitiveness

Thanks to a series of innovations, Bancor has discovered more and more opportunities in the market. Let’s compare the current data with that from October 2020:

Valuation

Although the price of BNT tokens has risen, it remains relatively low compared to other DEXs.

According to conventional metrics analysis within the crypto industry, BNT and SUSHI seem to be the two most undervalued tokens.

It is very important to conduct valuation comparisons; through comparison, we can see that Bancor's past and future growth opportunities are severely underestimated. As shown in the figure below, in recent weeks, Bancor and DODO have captured the vast majority of the DEX market share, and I believe Bancor's growth trend will not stop here.

The Road Ahead

After two years of perseverance, Bancor V2.1 has brought an exceptionally high market fit product. With the impermanent loss insurance solution during this period, Bancor's unique BNT token model has fully leveraged synergies, and the Vortex further enhances capital efficiency.

Conclusion

Bancor's design approach, along with its "only" $1 billion in locked value, is just the beginning. It is expected that in the near future, we will see billions of dollars in liquidity seeking solutions for yields without impermanent loss.

2021 could very well be the key year for Bancor to become the dark horse in the DEX industry.

Disclosure: The author currently holds a position in BNT tokens. Please note: Just because everyone is doing something does not mean you should too; please make your investment decisions based on your own research and analysis.