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Bancor’s V2 Generates Large Yields as DEX Volumes Continue to Climb

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Bancor V2 was launched to the Ethereum mainnet last week and introduced a series of updates to help them claim a chunk of the $4.5 billion total value locked (TVL) in DeFi.

The automated market maker (AMM) was launched during the frenzy of 2017 having raised $153 million in an ICO, but the platform failed to gain significant traction. Uniswap on the other hand, which launched one year later and raised a mere $100,000, managed to double Bancor’s TVL in just twelve months, and, after launching V2 in May, is now at $104M daily volume – or 14x more than Bancor – which today sits at $7M.

Surprisingly, Bancor has taken a different approach than protocols such as Balancer and bZx and is not running a liquidity mining program (i.e. they do not provide token rewards for providing liquidity to their platform). Instead, they provide a set of features that they say will help users trade with lower price slippage, thus attracting more volume, which translates into more fees paid to liquidity providers (LPs). The first launched pool, BNT/LINK, is currently providing 365.53% APY.

Source: Dune Analytics

What’s New in Bancor V2?

One of the most exciting new features is the 20X liquidity amplification, which reduces the pricing curve. It allows liquidity pools in Bancor to inflate the value of reserves when pricing a trade so, when an investor trades against a $500,000 pool, it is as if he was trading against a $10 million pool. As a result, price slippage is reduced and provides investors with more competitive prices. 

Source: blog.bancor.network

However, Bancor V2 was not the first to introduce liquidity amplification. Curve.fi uses the same approach to provide almost zero slippage when trading between stablecoins, as can be seen in the chart above. The critical difference for Bancor is that it achieves a similarly low slippage but between highly volatile assets and not just stablecoins on wrappers.

Bancor V2 also mitigates impermanent loss, one of the most common issues facing liquidity providers that pool assets in AMMs such as Uniswap. Impermanent loss is the result of the simple x * y = k pricing formula, oftentimes leading to LPs having less than what they would have had if they simply held the tokens in their wallet (learn more about impermanent loss).

Bancor V2 solves impermanent loss by using oracles that make their pools set up weights using market prices instead of pool prices, which are determined by arbitrageurs trading against the pool. Bancor also allows LPs to stake one single asset to any given pool. In other AMMs such as Uniswap, LPs have to stake multiple assets to a given pool, exposing them to multiple asset risk.

Closing Thoughts

Decentralized exchanges, which are currently seeing more than $1.5 billion of weekly trading volume, are becoming the de facto trading platforms for investors in this space. Iterations on early models such as Uniswap seem like a big win for the industry as a whole, but it still remains to be seen if this is a one-player win all market, or if network effects will be distributed across a much large set of players.

Featured image credit: bancor.network

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