Automated market maker exchange Bancor releases no-liquidation lending with vortex. It allows users to increase their capital efficiency while providing liquidity in its pools.
Called Vortex, the solution allows users providing liquidity in BNT, Bancor’s utility token, to borrow funds while continuing to obtain a yield from swap fees. The Vortex proposal adds functionality to vBNT, creating infrastructure that allows users to sell the token for the original BNT. Once vBNT is converted, users can exchange it into any other asset.
The vBNT’s selling mechanism makes Vortex a no-liquidation lending platform, letting liquidity providers receive their future rewards immediately. Since their principal continues to accrue swap fees, the loan will eventually be repaid.
The “no-liquidation” part of the loan comes from the fact that vBNT and BNT are essentially the same tokens. The vBNT reflects the rise in the price of the BNT collateral. BNT staking creates vBNT at a one-to-one ratio, but the price relationship between the two is not straightforward.
The Combination of Protocol Revenue and Loans Results in Complex Tokenomics
The price of the vBNT token comes from a BNT/vBNT AMM pool, which means the market will define the price. A potential arbitrage mechanism means that vBNT is unlikely to ever be worth more than 1 BNT, as arbitrageurs could simply stake BNT, sell the vBNT, and obtain more BNT than they started with. The cycle could repeat an infinite number of times until the vBNT price returns below 1 BNT.
According to Mark Richardson, the creator of Vortex, Bancor uses internal records to define ownership within an AMM pool. The vBNT can redeem a BNT liquidity pool only if that address had already created one. A governance-defined portion of the protocol’s fee revenue will be diverted to periodically buy and destroy vBNT from the pool with BNT, providing a constant buying pressure.
This has the added result of creating a sink of BNT and vBNT. Since one vBNT unlocks one BNT, the destruction of the vBNT supply creates an imbalance with the tokens contained in AMM pools. Some of these tokens would therefore remain locked in the pools forever. But this would not impact liquidity withdrawal for individual liquidity providers due to the large excess capacity.
The vBNT token mechanics have a number of interesting ramifications. In addition to the ability to borrow while continuing to receive yield, liquidity providers are also able to leverage their liquidity to receive more swap fees. The price of vBNT directly affects how leveraged the system can be, as prices close to 1 BNT could support almost infinite leverage. At the same time, as more LPs enter leveraged
