How DAOs & Token Projects Can Use Bancor 3 To Drive Healthy Liquidity
With Bancor 3, DAOs and token projects are able to build a valuable source of community-funded liquidity that is provided by real token holders (rather than professional market-makers or mercenary yield farmers), enabling a safer, more sustainable and more profitable place to deepen on-chain liquidity while generating passive, protected yield exclusively in their native token.
Here’s how third-party DAOs can work with the Bancor DAO in the new Bancor 3:
1. Earn single-asset yield on treasury funds with zero risk of impermanent loss.
With Bancor’s Single-Sided, Protected Liquidity, DAOs only need to provide their project’s token to their pool and Bancor provides the BNT side of the pool, so the DAO doesn’t need to liquidate tokens or pair with ETH in order to provide liquidity, allowing DAOs to earn yield on their treasury with greater capital efficiency and zero risk of value leakage while being 100% protected from impermanent loss.
2. Incentivize pools and attract “stickier” liquidity
DAOs can incentivize their pools with liquidity mining rewards in a way where the rewards are less likely to be farmed and dumped. Why? Pools on Bancor tend to attract long-term token holders as liquidity providers, since holders are more sensitive to the risk of value loss when LP’ing, and Bancor fully protects against IL. So as a DAO, your liquidity mining rewards are being dropped on participants who are long-term holders and less likely to dump the rewards.
Moreover, the rewards issued by DAOs are auto-compounding and exist as liquidity in the pool from the moment they’re activated, which is different than traditional yield farming programs where rewards sit idle in a separate rewards contract and must be manually re-staked by a third-party auto-compounder (which extracts a fee) or by an individual LP (who pays gas each time). Rewards in Bancor auto-compound gaslessly, and require zero maintenance to maximize yield, making it all the more comfy for token holders to stay in the pool long-term.
3. Generate trading liquidity from the Bancor DAO
In Bancor 3, the Bancor DAO can direct trading liquidity to the highest-earning pools on the network. The Bancor DAO’s mandate is to invest its liquidity (via BNT) in listed tokens that drive the most protocol revenue (ie., trading fees minus the cost of impermanent loss protection). Listed token projects (third-party DAOs) are incentivized to receive more trading liquidity from the Bancor DAO, since more trading liquidity means lower slippage trading on their token. There are several mechanisms in Bancor 3 that third-party DAOs can use to encourage the Bancor DAO (i.e., BNT holders) to direct liquidity to their project’s token.
They include: (1) Deposit their treasuries on Bancor, creating more liquidity on the network (2) Offer “External Impermanent Loss Protection” on their pool, which takes some of the burden of covering the cost of impermanent loss off the Bancor DAO and onto the third-party DAO; (3) Provide liquidity mining rewards to BNT holders; and (4) perform protocol trading (e.g., token buybacks) via their pool on Bancor / encourage their token community to trade on Bancor, driving more fees to their token holders (and BNT holders) providing liquidity on Bancor.
4. Integrate Bancor’s first-ever Single-Sided Pool Tokens
Bancor 3 introduces the first-ever fungible Single-Sided Pool Tokens. Unlike normal Pool Tokens, Single-Sided Pool Tokens only rise relative to their underlying assets, creating a new kind of “up only” money lego that is easily composable in other DeFi products. We envision use cases where Bancor’s Single-Sided Pool Token could replace the underlying token in native staking use cases, which imparts a “superfluid” property to the system, and helps alleviate the competition between liquidity and native staking utility for token projects.
A recent article in CryptoSlate covered this topic: — and we’ve already seen Opium Finance propose that its Single-Sided Pool Token in B3 be used as a voting token in its own system, while MPH has proposed using accept its Bancor pool tokens as a native staking asset.
While the yield farming craze has drawn a ton of liquidity and attention to the DeFi ecosystem in the past two years, it also attracted a number of opportunistic participants who extract significant value from DeFi projects via their liquidity and rewards programs. Bancor 3 will put DeFi liquidity back in the hands of DAOs and their loyal token holders.
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