Crown Capital, a decentralized gaming NFT investment fund, has had an interesting journey. They have been navigating a turbulent market from its initial seed round to launching its first liquidity pool on Bancor. Crown is a pioneer using several of Bancor V3’s new features that have been tailored to DAOs like Crown — auto-compounding rewards and external liquidity protection.
Crown Capital was recently approved by the Bancor DAO to enable deposits and create the first liquidity pool for their native token, CROWN. Liquidity is a necessity for Crown Capital, which serves the desire to have their token freely traded in an open market.
There are both centralized and decentralized options to establish liquidity for their token. Centralized exchanges generally charge prohibitive listing fees and other overhead costs. The decentralized route can be equally costly, depending on which liquidity strategy is chosen.
Let’s first take a look at what would have been required if Crown Capital started a liquidity pool on a traditional dual-sided AMM. Dual-sided AMMs require an equal value of the token and its exchange pair (if creating a 50/50 pool) to be provided simultaneously, which can put the project in a difficult situation if part of the development fund must be set aside and used for liquidity.
Without existing liquidity it is not obvious where and how Crown Capital should exchange CROWN for ETH. Among the limited options are reaching out to VCs with OTC token deals or holding an ICO. While these options have their own set of benefits, they may also have quite a negative impact on the project and its community. The level of success is determined by many factors; one such example being market conditions at the time. If the market is down, a project will most likely be faced with a more difficult challenge raising funds compared to when the market is up, resulting in a less than promising impression.
Suppose Crown Capital proceeded with a combination of the options presented above and created a dual-sided pool on a DEX(e.g. establishing a 50/50 CROWN/ETH pool). After establishing the pool, its ongoing health requires constant attention. Replenishing the depth of the pool as tokens are traded into the market may require reappropriation of treasury resources, or appealing to investors in continuing fundraising rounds. Alternatively, they may rely on their community to provide CROWN-ETH liquidity in equal proportions. This has been a mainstay of DeFi over the last 24 months, and has proven ineffective, unreliable, and expensive. Incentives via liquidity mining rewards have established a culture of mercenary participation, which ultimately injures the token health and leads to mass exodus of liquidity provision at the conclusion of the incentives campaign.
Bancor offers an attractive alternative which was deemed the best fit for Crown Capital, its DAO, and its community, despite the absence of BNT distribution.
Single-Sided Liquidity
The decision to use Bancor as Crown Capital’s de facto liquidity solution was a calculated one. Bancor is unique; it is a single-sided liquidity protocol, and the ability to bootstrap a pool using entirely the project’s own token resources via Bancor’s single-sided model is attractive to new teams. These projects strictly provide their own native token for only one side of the liquidity pool while the Bancor Protocol provides an equivalent dollar amount in BNT for the other. Ultimately, in order to fund an initial liquidity pool, a project spends only half the amount on Bancor than it would on any traditional dual-sided AMM. Thus, the project’s finances can be put to better use achieving its goals — in Crown’s case, constructing a portfolio of yield-generating gaming NFTs.
Proposal: Enable deposits for CROWN, increase trading liquidity
Auto-Compounding Rewards
When initially petitioning for a whitelisting approval by the Bancor DAO, various benefits to Bancor were listed; one of those benefits referencing Crown Capital’s reward program and indirectly referencing Bancor’s auto-compounding rewards feature. Following the approved whitelisting and recent creation of their liquidity pool, Crown Capital will now officially be among the first projects to offer their own rewards program using Bancor’s auto-compounding feature and have already committed 3.75M CROWN to be distributed over a 3 month time period in the future.
Proposal: Whitelist CROWN with 100,000 BNT trading liquidity limit
Running a 5 year reward program through Bancor provides confidence in a long-term commitment of Crown Capital to Bancor as its main source of liquidity on Ethereum with the goal of securing long-term liquidity providers. In addition, should a CROWN pool be started elsewhere at some point in the future Bancor’s auto-compounding rewards feature helps to ensure the deepest pools. One of the unique features of the rewards program is that the rewards are instantly entered into the TKN pool and used as trading liquidity from day one. The depth of the pools helps to support preferred trade routing through integrations with DEX aggregators such as 1Inch and 0x API. All else being equal, capturing the majority trade volume for the token drives revenue in the network.
Unlike conventional rewards campaigns, the CROWN liquidity providers need not take any actions at all to participate in the program. There are no gas expenses, no claiming, no restaking actions or additional contract interaction required. While the benefit of not having to spend any ETH on gas for these claiming and restaking transactions is clear, there are additional benefits that might not be as obvious. The auto-compounding of rewards increases the depth of the liquidity pool and therefore results in less price impact when performing a trade. This may very well prove to be a direct benefit to liquidity providers in the future. Again, should a CROWN pool be started elsewhere, it would be difficult to compete with the Bancor pool due to its depth and rewards, resulting in a greater amount of fees generated, a portion of which are redistributed back to LPs as further incentive to provide liquidity on Bancor.
The auto-compounding feature therefore offers a special mutual benefit. As an additional result of the rewards being used as instant trading liquidity, Crown Capital’s burden of repeatedly attending to their liquidity pool is greatly reduced, while the diminished mercenary presence in the program reduces the risk of sustained sell pressure of the rewards for the base asset. The auto-compounding feature also offers two distinct distribution models: Linear Distribution and Exponential Decay Distribution. As a result, projects are given the ability to leverage the flexibility of the rewards to improve their token liquidity via revenue distribution to liquidity providers.
Dylan Shub — Founder of Crown Capital DAO
External Liquidity Protection
CROWN liquidity providers could very well become the envy of much of the DeFi community in more ways than one. Crown Capital has clearly proven to be very well aware of the value of single-sided liquidity provisioning and auto-compounding of rewards. They have also recognized the importance of liquidity protection by providing 256,000 CROWN tokens as external liquidity protection. Liquidity providers are therefore protected against the effects of deficit (price divergence and rebalancing) by the very project they are supporting.
Governance
As previously explained, a healthy liquidity pool is a necessity for projects and their token holders. However, what hasn’t been as clearly stated is the need for active participation in maintaining a healthy DAO. Without a strong DAO, the future of these projects are left in the hands of a select few and may therefore be considered centralized in decision making and seen as risky investments. Community members are then left to answer the difficult question: Which is more important? Provide liquidity and help ensure a healthy pool or vote in governance and contribute towards the future direction of the project?
The need to decide between the two is eliminated with Bancor V3’s introduction of bnTKN, a fully composable single-sided pool token.
Although the value of these pool tokens vary slightly due to the accrual of trading fees (and in Crown’s particular case, rewards as well), they are representative of the number of underlying TKN deposited as liquidity. As a result, Crown Capital is now proudly supporting the use of bnCROWN as a 1:1 bnCROWN:CROWN governance token with plans to implement a dynamic structure reflective of each pool token’s true individual value. Crown Capital’s decision to support bnCROWN as a governance token allows for Crown LPs to contribute to the health of their liquidity pool, earn trading fees, and still remain active DAO participants.
In contrast to the status quo, Crown Capital is able to:
- support its initial liquidity with single-sided liquidity provision
- launch an auto-compounding rewards program
- provide external protection for its liquidity providers
- strengthen its DAO with the support of a composable pool token
- avoid parting with any seed capital and
- maintain its treasury fund
All as a result of choosing Bancor V3 as their preferred AMM.
