Auto-Compounding Rewards are now live on Bancor
Auto-Compounding Rewards, one of the key features of Bancor v3, are now live. Auto-Compounding Rewards can be used by any whitelisted token project wishing to incentivize liquidity in their pool. The rewards are instantly liquid — meaning they are used for trading while being distributed to LPs in the pool. Projects can provide their LPs with the benefits of participating in a gasless, auto-compounding rewards program. No contract interactions are required by LPs; so long as they hold the pool token, they are automatically participating in the rewards program.
What are Auto-Compounding Rewards ?
“Auto-compounding” refers to the process of no longer having to manually claim and restake rewards. Most AMMs allow trading fees to be auto-compounded, but not rewards.
Bancor’s unique single-sided pool tokens allow for a passive rewards system in which pool token holders can earn rewards without any further interactions with a rewards contract or incurring additional gas costs, e.g. claiming the rewards and re-staking them which incurs gas fees. Offered by token projects, Auto-Compounding Rewards apply when the reward token is the same as the deposited token.
In simple terms, not only trading fees, but liquidity mining rewards provided by token projects are auto-compounding gaslessly on Bancor, enabling a truly “set and forget ‘’ liquidity provision experience, with no user action required.
What’s unique about Bancor’s Auto-Compounding Rewards?
What’s unique about Auto-Compounding Rewards on Bancor v3 is that they enter the TKN pools as trading liquidity from day one. This means that the rewards support trading of a project’s token as opposed to sitting idle in a separate rewards contract.
Auto-Compounding Rewards on Bancor v3 also address the issue of constant sell pressure that is seen with traditional liquidity mining programs where LPs:
- Provide TKN and a base asset as liquidity and in return receive LP token(s).
- Stake their LP token(s) into a rewards contract.
- Collect their TKN rewards at a certain time interval.
- Sell half of their TKN rewards for the base asset (e.g. ETH).
- Provide TKN and a base asset as liquidity and in return receive LP token(s).
- Stake LP token(s) into a rewards contract.
The above transactions end up costing gas for LPs but can also be quite damaging to projects as their token is experiencing constant selling pressure. Due to how Bancor v3 implements Auto-Compounding rewards, this selling pressure is alleviated as any TKN rewards are transferred gaslessly from the project to LPs. From an LP’s perspective, the bnTKN pool token that they hold will over time unlock more TKN as rewards are transferred to them.
Another unique feature of Bancor v3 Auto-Compounding Rewards is that a project has the option when distributing rewards to choose between a linear distribution:
or an exponential decay distribution:
A linear distribution will distribute a set amount of token rewards per block until they run out (i.e. expire). On the other hand, an exponential decay distribution will decay slowly over time and could potentially take years (depending on the decay factor) until the rewards being distributed are dust amounts. One can think of an exponential decay distribution as similar to the bitcoin reward schedule where every four years there is a halving event. The difference is that an exponential decay distribution has a smooth decay as compared to an abrupt step-wise decrease.
Conclusion
Bancor’s Auto-compounding Rewards are beneficial for both token holders and token projects to build and maintain sustainable liquidity:
Token Holders/LPs:
- Earn rewards gaslessly without any additional contracts interactions
Token Projects:
- Rewards used as trading liquidity from day one
- Minimize sell pressure
- Choose between a linear distribution vs and an exponential decay distribution
Auto-Compounding Rewards are supported on the Bancor.network app for tokens that have had deposits re-enabled. Deposits are expected to be re-enabled in the Bancor.network app for all tokens, at which point Auto-Compounding Rewards will be supported for all whitelisted tokens in the network.
If you are interested in having your token whitelisted on Bancor, or utilizing the auto-compounding rewards feature for your existing whitelisted token, see this section of the Bancor docs.
See Openzeppelin’s audit of Bancor’s Auto-Compounding Rewards here.
