DeFi by Design EP#59: Building Sustainable Yields in DeFi w Impermanent Loss Protection

Transcript

welcome to d5 by design where we talk all things blockchain and cryptocurrency while striving to educate empower and enrich it's your boy andy and welcome back to the defy slate youtube channel smash the like button on this video that really helps us out and sit back and enjoy the content thank you very much what's going on y'all welcome back to episode 59 of the d5 by design podcast here today to talk about some of the updates of d5 that we've seen in you know just in the sector as a whole really seeing a lot of evolving features and factors happening a lot of a lot of different chains now layered to different types of protocols and liquidity and all sorts of stuff and uh lucky for us we're sitting down with the

lads from the bancor team haven't spoken to these lads since september of 2020 where nate and i did a video about bancor v2 we actually talked about some of the sushi swap og farming pools man came a long way since then um the markets are all all over the place right now but you know what's important is we're seeing continuous capital and social capital growth into the ecosystem so i'm excited to talk more about uh dexes and amms and kind of the evolvement of of liquidity mining yield farming and um this kind of d5 2.0 3.0 um you know and what's coming so excited to talk to mark and nate from bancor and pass it over to

my boy rob how you doing rob yeah good morning everyone thanks uh thanks for listening it's january 6th and uh markets are a little all over the place but uh i i think um you know everyone is still very excited about about the future of uh dfi's uh as a whole um today we're gonna talk about the evolution of amms indexes kind of how liquidity has gone from like this renting model into more of a protocol owned liquidity model uh these are like the og amm guys to be talking to mark and nate uh bancor was one of the first amms uh launched and uh they've came a long way v3 is now uh coming out and it's right around the

corner so we're gonna dig into that as well as all the evolution around amms and and uh d5 so i will uh pass it over to mark and let him introduce himself what's going on mark thank you rob uh yeah so my name is mark richardson i'm the um the head of bancor's research right now um before i was in uh defy i was just before i was working for bancor i was actually just one of their community members i was there when the dow first got established in october of 2020. um i helped put together some of the first proposals that uh that organize how our dow operates and i also um you know put together uh our part of our deflationary um mechanism that it's called the vortex

um and so you know i as a community member i was kind of contributing to the to the contract sort of uh in my free time uh but then i uh accepted a uh a invitation to work for bangkok full-time from the bancorp foundation um in january of 2020 and so i've uh shifted from my career in in the physical and life sciences to to working in in d5 full-time at that time um but before then you know i was a i had a post-doctoral fellowship with the australian government working for an organization called the csiro this is the the company that invented wi-fi they invented stay in contact lenses they invented uh insect repellent you know it's a pretty

big organization um and there i was working on sort of uh you know fast uh test strips for for covert diagnoses i was working on um you know other types of uh diagnostic devices for things like um drug resistant infections and other things like that uh before that i was a lecturer for the chemistry department at uci um and before that i was a phd student at melbourne so it's been a it's been a weird transition i would say but not one that is too out of character for the scene uh it seems that the the more and more i talk to other people in positions similar to mine uh they seem to actually come from non-financial non-economic

backgrounds and they actually have a lot more in common with the physical and life sciences anyway so i don't feel as out of place as you might expect ozzy might yes sir well welcome on i'm excited to hear more about your experiences so far um and nate let's kick it off how you doing um you know a brief intro and maybe a quick update as to you know kind of what you you've been working on the last year and a half or so since we've chatted um and we'll take it from there yeah great to uh great to be back on again uh nice to talk to you guys um my background is i've been with bancor since

uh late 2017 early 2018 always working on growth as you mentioned bancor uh invented the first amm on the blockchain so really focused over the past four years um kind of educating on what decentralized liquidity means um how it can grow the risks the rewards um and then you know just in the past two years or year and a half i think we've really seen an explosion in the usage of amms and in liquidity pools and finally people really starting to get these concepts

well and have them you know really play a fundamental role in the growth of ecosystems across different blockchains before that was involved in some mobile startups had some exits and before that was a financial journalist working on covering the stock market and uh new financial technologies um so that's a quick bit on my background now to answer your question in the past let's say uh if we spoke in mid 2020 we were gearing up to launch v2.0 which was a very interesting time for us

we discovered some very fascinating things about the way impermanent loss works um and what it really is and have really evolved bancor into uh a protocol that uh or or as a team we've evolved as really sort of the scientists on uh impermanent loss and how to maximize uh yield on amm liquidity pools and why impermanent loss is such an important part of that story and so bancor quickly pivoted into v2.1 we found a very unique way of using

protocol owned liquidity to co-invest with liquidity providers and figure out how to cover them from a permanent loss to create this really simple and safe way to provide liquidity in a single asset not in two like in most amm pools like uniswap or sushi and also be fully protected from impermanent loss so that if your token goes up and if there's volatility in most pools you can pull out less than if you just held the asset on its own uh in bancor that's never the case we're always tracking the whole value if you just held the asset in your wallet and ensuring that you get back at

least that plus trading fees and mining rewards and so in the past year and a half we've really iterated and optimized um on this sort of simple we call it safe staking model we saw liquidity reach upwards of two billion from i think when we probably spoke was around like 15 million um users has gone up gone up quite a bit uh with that uh volume the dex landscape has uh evolved quite a bit and defy you know became a thing um and we're now in the precipice of launching our next version uh bancor v3 we've just uh in the past month or so

announced what the uh features of the first phase of v3 will be we haven't even announced that what the second phase will entail but there's already a lot of meat to chew on in that in that first phase and we're really doubling down on this sort of simple safe mechanism of getting yield on the assets that you love and we're you know really focused on allowing you to earn more uh on your tokens while doing even less and have it costing even less so yeah that's that's a high level of kind of where we're at um today and look look forward to sort of digging in uh wherever you guys uh want to go yeah dude yeah

shout out to your og article uh back in the day on impermanent loss that thing probably saved me from like getting wrecked in so many pool twos you don't even understand i was i was so close to going into so many plateaus i'm glad yeah well now we actually we actually have a tool that uh if you have been wrecked on those pool twos or in any pools you can go to something called il.wtf you guys might know fees.wtf where you can see your gas pr your the gas you spent over time well we have il.wtf now and you can just plug in your wallet address and see how much impermanent loss you've suffered over time if you share it we're awarding a certain number of lps who share their il in a

given month you'll get a bancorp bailout so we'll send you a thousand dollars in bnt but this is another mechanism for to really get the word out that you know there's 30 billion dollars roughly staked in amm pools and a lot of that liquidity is actually losing money um versus just simply holding the tokens outside of the pools um so so we're really focused on getting the word out and that and really helping people understand why uh you know we think il risk should not be in the hands of everyday users and liquidity providers and should be managed by a protocol to any listeners that are thinking about

using this website just make sure that you're sitting down before uh putting your your wallet address into there there are some of the the losses on there have been cataclysmic and uh it's uh you know you might be surprised to see just how much better off you would have been by not being involved in some of these d5 protocols yeah i just took a look at uh at one of the addresses and i'm glad i was sitting down um thankfully i'm not wearing socks or else they would have flown off um yeah so that that's super um super like important right for for d5 to to get a um a handle on the amount of impermanent loss that we're seeing and kind of

educate you know not not only users but also uh builders and and uh founders of decentralized exchanges as far as the the types of protections that they can put in place now like my understanding and this might be consistent with our listeners understanding is is the traditional amm model is x times y equals k and without even getting too technical or in in too much math there it's kind of like that seesaw model where if one side of the pool uh you know increases it starts to sell that that side of the pair and by the other side and that way x and y kind of balance out so that k is always maintained

is that kind of where bancor started maybe you could give us like a brief history lesson as far as how bancor originated in in that model and then uh you know the evolution that that you all have taken up until now to uh to really fix some of those impermanent loss issues yeah certainly nate do you want to take the first part yeah so just on the first part and then i'll i'll let mark sort of take the closer to today um the the issue with il is that the lps have different interests than token holders and this kind of creates an issue right

you want the people who are holding your asset to make it more liquid and also earn money from doing that and when you have the liquidity that's sort of spread across you know thousands or millions of token holders that liquidity becomes more robust you know you don't have a big whale that can just withdraw it at any second and so you from our perspective want the interests of your token holders and your lp's to be aligned you also whenever if you ever want to drop rewards on your pool um or even as a project if you want to provide liquidity to your own token you know you you want to if the token goes up that to ensure that you're

making more money now the the issue with impermanent loss and the sort of seesaw model that we saw uh pretty early on in i'd say even in 2017 we were doing protocol on liquidity because we were working with projects that say that said yeah you know i want to open up a pool and i want to provide all this money that we just raised through our token sale to the pool and get the sort of passive earnings but what we would see happen is when the token went up a lot the pool like you said sells it off at a discount to arbitragers who end up you know such that the pool will lose more value than it earns from the trading fees

and so we saw this kind of misaligned interests and and really felt that that it had to be fixed that people who are long on an asset should be able to provide liquidity and get passive earnings on it and should not be punished if it if it goes up a lot and they could have said ah shoot i should have just been holding it in my wallet um and so that's how we sort of approach the problem is you know how do we set up a model where the risk is transferred off of the liquidity provider and sort of diversified across a wide number of tokens

and sort of managed by a protocol in this case bancor such that you know the you're really only providing liquidity or protecting against liquidity where it's sort of profitable for for the bancor protocol so now you know i'm getting a little uh deep in the tokenomics and all that but i guess what's just important for you to take away from this is that we saw misaligned interests between holders and lps and we saw the importance of decentralized liquidity to early stage projects and so we were focused on designing uh something that aligned the interest of token holders and liquidity providers

and so i'll let mark kind of uh clean up and take us to sort of you know today yeah so i think if i yeah one of the ways that i've been discussing um you know amms with with people that aren't like super familiar with d5 or might not have a strong mathematics background or something like that that are you know still buying and trading cryptocurrencies it's like like andy what's your what's your favorite cryptocurrency right now other than b t of course uh sheba sheba right and so um do you use a centralized exchange for that like maybe under finance or kraken or something yeah yeah yeah exactly yeah so have you ever wondered like okay so let's say i

don't know what the what the the trading uh what what sheba is trading at right now but let's just pretend it's a dollar just so that we've got some easy numbers to to deal with i'm a billionaire exactly one day andy one day but let's just say like um you know let's say uh you know you're you're convinced that sheba is gonna go to two dollars right it's the reason you're buying it at one dollar um but then i come to you and say hey um andy like i want some of this this shiba token sell it to me for a dollar right are you gonna do that are you like are you ever gonna sell me the the shiba that you're that you have at the price that you're currently buying it for on whatever centralized exchange you're using

no right exactly why would you do that what markup would you offer right how much extra do you want me to pay for your shiva right here right now i'll give you three and a half percent extra right but the what's interesting about this is that people often forget that when you're buying these things it's not something from faceless entity there is someone who is selling you their own shiba tokens right and they are agreeing to sell it to you at whatever the the current market rate is and the um the way that they determine what a shiva token should be worth is because they're using something called an order book and this is a way of balancing sort of the the buying

pressure and the selling pressure across an exchange and when one starts to dominate the other that's when the price moves in in one direction um so you know why then would someone be willing to buy and sell shiba according to whatever the the exchange tells them to write whatever the order book tells them to and it's because that they're running a very sophisticated financial strategy that you can't use right they're not just buying and selling shiba they're buying and selling hundreds of different cryptocurrencies simultaneously and they're using you know these guys have you know um backgrounds in quantitative financial analysis they're worth you know more than five hundred thousand dollars a year just in in salary in order to balance the risk metrics

that allow them to execute these things and the point is is that these guys this small handful of very gifted individuals control the whole world economy have you ever like moved through an airport like maybe you visited australia right from the united states and have had to convert your us dollars to australian dollars or something like that like maybe you visited europe or had you know had to buy euros have you ever wondered why is it that the american dollar is worth what it is and the euro is worth what it is right who who determines that you know like what what um equation or something is being applied in the background that says no the us dollar is worth this amount in the euro is worth this amount and why does it change it's a really abstract

concept that normal people have never really had to think about but the reason is there is that same market maker that same person that is selling yeshiva is also selling europeans american dollars and americans euros right um it's a very very tight-knit small centralized community and they determine what everything is worth and in a way that's an extremely corruptable process but it's also a huge responsibility right no one really actively seeks out this thing right it could be that during huge market turndowns for example in shiba that they're pulling their hair out over just how dramatic you know the price is dropping and they can't get it off their books very quickly and so

moving to a decentralized liquidity solution where these market makers aren't so concentrated where they aren't you know controlling the whole world economy seems like it could be a very uh convincing use case for cryptocurrency and it's why we invented the automatic market making because it allows regular people who don't know about quantitative financial analysis who aren't worth you know five hundred thousand dollars a year um to a hedge fund to participate in these markets and support exchange and that's valuable because it means that this system can start to take on its own characteristics and we don't need to entrust someone that we've never met with correctly valuing for example the us dollar

the problem is is that because you don't have that strong financial background you're not using the same sophisticated hedging strategies that they are and so you might actually be uh you know as a novice right as an amateur exposed to these huge downside risks and that means that we cannot rely on this system alone um to incentivize regular people to become liquidity providers there needs to be something there right there needs to be another layer of automation on top of it that is implementing those sophisticated market making strategies on your behalf so that you aren't exposed to those catastrophic drawdowns and that's what bancro is doing right now it's saying if you provide liquidity that's the only

action you have to take and all of that high level uh you know risk adjusted hedging and everything like that that's going to be conducted on your behalf so that your value is always protected that's what bancor is about it's about helping regular people to be you know to to implement the same strategies that these you know 500 000 a year quants are implementing on finance on coinbase and that are selling shipped to you right now or whatever you're buying it for fax fax yeah that's a that's a really good explanation for why um you know we need these sort of strategies implemented ultimately

um the understanding in permanent loss and liquidity provision already puts you at a level of i would say intermediate currently in d5 but that that that skill and knowledge this still doesn't protect you from um your own downfalls in terms of greed in terms of of um wrong conviction etc so um you know let's let's kind of dive deeper into that um and see how how um how are the current structures of let's let's go into the protocol owned liquidity kind of segment as part of this so how does um how do you see the protocol owned liquidity um that development how does that coincide

with this kind of strategy of of protection of of better lp positions of stronger liquidity what are your general thoughts and perhaps just a brief explanation of what pol means before you kind of get into your opinion yeah sure so i don't think i don't think protocol and liquidity um it doesn't have one consistent definition yet but in general um it it i think we can all agree on what the the high level concept is and that's the idea that the um the the protocol itself offers liquidity against the token that it's responsible for um across a wide range of pairs and that there's no one that can um withdraw that liquidity right

and that last part about no one being able to withdraw the liquidity is the part that i don't necessarily agree with so let's have a look at uh so uh what protocol and liquidity on bangkok looks like um bancor is a unique uh amm because you don't need to hold more than one token if you want to provide liquidity just with shiba right if we have shiva whitelisted you could just do that you don't need to have eth or something you don't need to supply the other side of the pool you just supply the one token that you want to be a liquidity provider for and that's it whereas if you're on something like sushi spot um the you know the the general um the general user experience is that you

need to provide sort of equal value of sheba and eth and supply both sides of the pool simultaneously now the reason why sushi does that is because it doesn't have a universal numerator right it doesn't own eth even though ether is in all the pools if is not its token it's someone else's projects token right it's the token of the blockchain it's vitalik's token it's the ethereum foundations token it has nothing to do with sushi swap they've just you know uh decided to onboard it as the the main token that powers the whole ecosystem which if you think about it as being like you know using i don't want to say a competitor's token but the token of a project that you have nothing to do with it's weird right it's like imagine bancor deciding to use ship as the main token of our ecosystem it would just be

you know maybe we we could do that um but it's kind of strange because there's now this huge component of your own product that you don't have control over right that is now at the whim of some other dao or some other community or some other collection of developers and they now have this huge influence over the health of your of your ecosystem so bank or instead of using ether is the main token it uses its own token bnt which is something that we do have control over and that gives us access to much more sophisticated monetization policies um for the protocol including things like impermanent loss insurance and single-sided staking so on the protocol owned liquidity side it's the bnt that we're talking about

not the rest of the tokens so if you approach uh the bank or amm and say hey i want to provide you know ten thousand dollars in ship liquidity the protocol will say fine i will combine that with ten thousand dollars of my own bnt tokens and we become business partners and that is what the that is the the strategy of the the bangkok protocol and the bangkok dao with regards to protocol and liquidity so the you uh who own the the ship tokens you will always own the same value of ship tokens plus whatever trading fees that you've earned on that side of the pool and the protocol will always own the opposite side and so when you withdraw the

bancore protocol also withdraws and it burns its bnt tokens so in that sense um the the bancorp protocol i think currently owns something like 80 85 percent of the uh the the total bnt in existence and it's mostly used to um to provide liquidity against uh you know liquidity providers such as yourself if you wanted to provide liquidity and so the important distinction here that i make between bancor's approach to protocol and liquidity and something like olympus down is that if you want to withdraw let's say that you're done you're like oh you know that was fun i've made some money ship's gone up in value or something i want to withdraw my liquidity now bank all will let you

right so we don't own your ship whereas with olympus tower you can never withdraw after you've provided your ship to the protocol you'll never get it back and so in a sense things like uh olympus dow or really just uh something like a yield aggregator like wi-fi except you never get your money back you know it's a i i think things like olympus dow are you know that they have some really interesting sort of um aspects to how they handle their own token so for example you know the the arm token um or whatever the you know the uh the the fork is on avalanche in in wonderland or whatever it is um

they provide these like huge inflationary awards on that token knowing full well um and you know and even with the bonding mechanism that they offer you know you can buy that token at a discounts if you wait five days or something but all that does is create an arbitrage opportunity right and so even though the um they have these protocol and liquidity systems where it seems like uh users are never going to be able to to withdraw their their tokens back by debasing the currency what it allows users to do is effectively buy it back over time and so uh what ends up occurring is they you end up converting something like an eight thousand percent apy which is i think what olympus dow is currently running at um

because the protocol itself isn't actually generating eight thousand percent um all it's doing is forcing the the token price down by that same rate um and so the protocol ends up owning a lot of ohm because people are trading it back for the token that's on the other side of the pool um and that's kind of where the protocol ends up just owning everything uh whereas on bangkok we don't need to debase the currency because if you really wanted your tokens back you can just withdraw and the protocol will buy it so you know whereas things like ohm don't deflate until they reach a dollar right om is still sort of a um a quasi algorithmic stable coin like it's it's supposed to be pegged to a die it's just going to take a little while to get there

um for bancor it hasn't it it's not targeting any press and it will deflate every time you withdraw so the bnt is only present for as long as it uh is only present for as long as it needs to be there and when you withdraw it you know everyone shakes hands and walks away with their profits and the ba and the uh protocol burns uh all of the bnt that it has left plus all of the bnt that it garnered from the secondary markets as a result so it's different approaches it's still both protocol and liquidity but bancor we want to make sure that the users still own their liquidity right whereas projects like olympus dow want to make sure that the protocol owns all of it and i think one of these is sustainable and the other one isn't and i'll let you uh determine

which one uh which side of the aisle i'm on and things like that i just yes i think nate wants to wants to hop in here and and before he does just a real quick yeah go ahead mate oh sorry if there's uh if there's a lag um yeah can you sorry can you hear me yeah yeah can you hear me now sorry about that you guys good can you hear me yeah we can okay oh yeah sorry yeah you can't hear me no nathaniel okay he's jumped out

he's gone yeah mark i had a quick question um kind of before nate shares is you know you you spoke a lot about the deflationary mechanism of of bnt and how as the liquidity is pulled and how it essentially how a user when they pull their liquidity the other side of that pair uh is burned on in bnt and you know of course that that leads to a deflationary supply of bnt is there an inflationary uh counterpart yeah yeah to to that at the time yeah of course yeah yeah so yeah bnt is not uh i wouldn't call it a deflationary currency it's uh i would say when it's

running um when it's running well um it you know the protocol is attempting to uh to hold a stable supply so we you know we're not trying to burn bnt indefinitely we're not trying to mint bnt indefinitely but we do need to make sure that the protocol scales pretty well um and the fact that um yeah so if i uh what i'll do is i'll talk about how this the most of the inflation happens and then we can talk about why that's price neutral um so for example uh the banco dial will decide on what we call a funding limit and this is basically the the size of the pool that we're uh that we're willing to uh support and there are a couple of parameters that we have to consider um one of which is

you know what what is the the likely insurance uh risk associated with that token because if you're providing ship and ship goes 1000 x right as i'm sure that everyone hope it does uh on bancor unlike any other decks we say fine if it goes 1000 x we're going to give you all of that value right if you withdraw you're gonna we're going to make sure that you have all 1000x of that valuation appreciation at the time you withdraw the problem is that as the as the ship token you know goes parabolic like that um the the uh secondary markets are actually going to be buying those ship tokens off of the pool and they'll be buying it

with bnt or that's the best way that you can think about it and so this means that if you do want to withdraw then there's going to be a slightly less ship there then or maybe a lot less ship there than what you actually originally provided and that's when the insurance contracts kick in and reimburse you the remaining difference in the token that the liquidity in the token that the protocol has which is bnt so you'll still always have you know whatever value that you thought you should it's just that the denomination might be might be changed a little bit and so that's one of the uh one of the sources of inflation or these insurance payouts but that is partially offset by or actually you know it since july

has been entirely offset um by what we call the bangkok vortex and so how this works is that um you know there's a complex component that's going to be a long conversation we'll maybe we'll leave that for a dedicated podcast i'll just do the short version here today um and that's that uh all liquidity providers on on bancor forfeit 15 of their fee revenue so we don't touch your principal right if you provide a hundred dollars hundred dollars is always there but if you then earn a hundred dollars in fees uh the banker protocol currently takes 15 of that so for every hundred dollars that are actually earned on your tokens you get 85 and the protocol takes 15 and

that 15 is used to buy and burn b t so as long as the protocol is performing well the idea is to basically balance that token buyback and burn with the rate of insurance payouts and so as long as those two numbers are almost equal over long periods of time then the the cost of providing insurance um for you know these kinds of uh impermanent loss events is is neutral compared to what the uh the protocol is actually doing so the the idea is that that insurance um payout and the the protocol earned fees cancel each other out and so the

inflation matches the deflation um the other ways that uh the protocol inflates and deflates is during liquidity provision and withdrawal so when you provide liquidity to a pool that has available funding um so for example adding you know a thousand dollars of ship the protocol has to mint a thousand dollars of bnt in order to support that deposit and complete the um you know complete the liquidity pair and then when you withdraw um whatever is uh you know you get whatever you're supposed to get and the protocol will burn the bnt on the other side so these are the basically the the four components of inflation and deflation that the bankhold protocol is constantly balancing and what the banco

dow is responsible for for the management of and so that's making sure that the roughly the amount of bnt minted during during deposits is roughly the same as the amount of bnt destroyed during withdrawals and that the amount of b t destroyed as a result of the insurance premium is about the same as the amount of b t paid out in insurance payouts so those are the the sort of the inflationary and deflationary forces and you know in general over the over the course of version 2.1 um it has been basically break even we've been doing pretty well about that so there are weeks or months you know where it might becomes a little bit inflationary or a little bit

deflationary but it's basically you know a a wiggly line around the breakeven component so so far so good can can you guys hear me awesome okay yeah we've always been able to hear your name oh sorry about that uh i just want to simplify this a little bit and and you know protocol liquidity you can think of it first as like how does bancor work or how does uh olympic uh olympus work so like how to how does do our individual you know protocol own liquidity mechanisms working uh but then you can also think about it and there's a way to hold in on it where for your sort of uh token communities

and and projects what does protocol own liquidity uh look like for them and i think there's like a fairly easy way to to define uh protocol liquidity which is just when a protocol acquires or owns its lp tokens so when uh it either uh in the case of like olympus pro um can uh sell its tokens at a discount for its own lp tokens or in the case of uh bancore if a protocol can a pro can deposit its treasury into bancore pools

which then acquires its lp tokens and then it owns its lp tokens and i think as a sort of let's say liquidity as a service solution there's a very key distinction between let's say an olympus pro bonding model and a and a treasury acquiring its pool tokens by depositing bank or pools and that's where with the olympus model you acquire your uniswap liquidity pool tokens or your sushi liquidity pool lp tokens or another amm and well what do we know about most amms is that they're subject to impermanent loss so as the value of your token goes up your lp tokens the value of those goes

down and you're suff you're suffering and permit loss on those lp tokens that you own now let's think about it when you acquire your own liquidity or own your own liquidity through bancor that is and we've seen now six seven i think we're over ten and close to a dozen projects that have started to do this they've said hey wow bancor offers a pretty crazy service single-sided uh exposure with il protection so i can take my own treasury that i have provide liquidity to a bank or pool own my lp tokens and not only i'm holding single-sided lp token so i'm only having to provide my token

but those lp tokens that i have you know that are technically a part of my treasury now are not subject to il so even if my token moons they're not losing value they're maintaining value and i'm earning yield on top of that and so i think that that's a pretty interesting way to look at um you know i i actually did a quick thread on this last weekend but i've started to call it uh like ppol protected protocol on liquidity or like people um and uh i think that that is a a much stronger um or you know i guess both kind of have some some benefits i think there's sort of clear

benefits to that which is as a treasury you know you can provide your treasury to bancore and have these protected lp tokens uh and also you you don't have to provide you know half the pool in in ether another asset uh so so that's an another interesting way to look at protocol and liquidity not just how bank core is designed with its own protocol in liquidity or olympus but how what's the service for other um you know other other uh protocols yeah and the value add you know that's important as far as as far as the offer from from olympus from bancor from other protocols um you know and i'd like to

kind of switch us up here to the tokenomics of these d5 1.0 protocols including bancor including any protocol that kind of institutes its own liquidity mining via a dex um you know the ones that we've spoken about today are sushi and um of course there's uniswap and others um now the question here is regarding the the voting lock model of curve um and not to be a tokenomics hater but my interpretation of buyback and burn is that it's kind of a waste of energy of tokens um yes it accomplishes the that like the deflationary model but at the same time um it could be used for something like a ve

uh a ve model for you know for for sushi or for bancor in this case so sticking to to to bank what are your thoughts on implementing a ve bnt model where um you can effectively have votes to um offer liquidity mining on on on different pairs via ve bnt thus creating this kind of uh desire to own as much ve bnt as possible thus a desire to own bnt and i think we're kind of in the mid stage of this game if you will curve really got it off early now we're seeing kind of like the wars for for uh for tokamak um and a few others and just real quick if you could give an

explanation um to our audience as to why the voting mechanism is important and why the curve wars even exist and then i'd love to hear you your thoughts on implementing a similar one for for uh the pools on bancor and for the bancor token uh mark your yeah so i think yeah i got it um so yeah okay so the it is a it is certainly an interesting um an interesting model um but again uh all a lot of this um you know a lot of this desire i still feel like is an illusion because uh what how it's generated is entirely through

inflation right so you know you're not actually generating value you're just cutting it up into smaller and smaller pieces so imagine so like my view of these types of models and liquidity mining in general by the way is that you know it's like you've got one one piece of pizza or something or you've got like one pizzas come out of the oven and then you tell people that they're going to get twice as much pizza and so what you do is you cut the pizza in half and it's like now we've got two pizzas right and so you've just made 100 yield and someone's like yeah but i want 400 yield it's like fine so i'll cut those into half again and now we've got quarters of a pizza right this is all it does it's just a stock split model and so what's interesting is like i think

that the market partially isn't smart enough to to know that that's how these things work um and you know i i i think that i and i don't mean that necessarily as a you know meaning that people aren't educated enough or something like that but just humans when they're in a you know this euphoric phase of of how um you know seeing number go up in d5 uh generally i have difficulty seeing the forest from the trees and it it affects even some very smart people so when i say that you know it's the it's the market isn't smart enough to figure this out i don't want you to think that i'm you know thinking that uh regular d5 users aren't intelligent people they clearly are um it's just that

sometimes the illusion can be so convincing that it can be difficult to see anything else or people are um subscribing to that greater full theory and they wonder how much longer it can it can continue so let me just and mark real quick is is is part of you your thesis and we'll take it to the curve model is that surely you can lock up curve um you know but at the end of the day the all curve is doing is yeah is inflating their token through um all their pools of liquidity mining so it's like you know you're locking something that's also being inflated to get more of what's being inflated as well right right so at a certain time yeah so what you've actually done it's not

really an incentives model but a disincentives model because if you don't participate um you're going to get diluted right and that's that's really the uh the why i think it's so effective so it kind of forces you to participate for risk of losing um you know losing interest in the token that you already own and i don't think that that's necessarily a good model to do it and by the way bancor is also partly guilty of this but just in much less dramatic fashion because you know we've also had a liquidity mining program has been immensely successful and um you know it still does um have this property of diluting people that aren't staked in the protocol um and so you know they i i don't mean to put us on the

predecessor and say hey you know we're we're not playing these games because we have played them um i just think that it's we'd really need to start growing up and thinking about you know where does value actually come from um and eventually the only sustainable business model has to be one where that's contingent on fee paying customers right people that actually bring in value that wasn't already there um the other problem that i have with these kinds of governance models is that at some point you the the reason we we like dows is because um the the token holders themselves are invested in the in the health of the protocol that they you know that they are subscribing to but with things like what curve is doing

and why i think these inflationary rewards and the the types of bribe system that they've introduced is not good is that um it's demonstrable now that a lot of co-voters don't care about the curve protocol right they will do they will vote for whatever is required to get them the reward from you know whoever is offering it so things like convex or urine or whatever it is exactly yeah right and they will still they will still vote it in even if they know it's a bad idea um and it and you know this has resulted in some very near misses for curve right things like the the moshi token which was a um you know one of the uh uh azim azim's scams after armify and things like that

um and you know i going into it right if you have a look at the um the the governance chats within curve itself there are community members that are deeply um committed to curves continuity and they should be right curve is a phenomenal project it has got you know it's got some of um some of my favorite ideas like some of the actual good innovations in in the deck space and there aren't many um have come directly from curve right i'm a big fan of um you know their stable swap invariant for um for stable coins was nothing short of brilliant um their implementation of of concentrated liquidity i would say is is um actually better than uni swap v3s um

it's no it's not making a huge amount of money right now but that's okay you know that everyone is still sort of sorting everything out the point that i'm making is that curve is a terrific project and it's a shame that the um the dow seems more concerned with what tokens they're getting than what is good for the protocol and that's an issue yeah so so mark i don't mean to put you on the spot here but i'm going to curve it curved token is up you know well over 50 or 60 percent the last few months and uh and bancor can't seem to get a green candle so um what's going on here for for the banquet community but so i guess that's not even the question it doesn't

like prices are relevant but i i guess the question is more so on developing tokenomics that create value um and you know i understand the deflationary kind of aspects but let's kind of delve into that i think nate might have to go but if you can stay on for a few minutes nate if you have any if you hit have a quick thing as well on just kind of overall dex tokenomics we'd love to hear that before you go and then we can keep going with mark i i do have to jump guys uh and uh and i'm excited to hear the remainder of this podcast because it's a it's a conversation that that uh you know we've definitely been having as a community um you know i will

leave you with with this that um the yields on bancor tend to be so high that people um kind of kind of discount that like if you look at the the gains that you would have gotten over the past year from both the yields of staking bnt and holding it you should consider that as well as the as the token price but there's no question that um curve has has a little narrative going for it right now and you know the week before it was uh uh d5 2.0 and it was everyone was om and you know we'll always have these sort of d5 flavors of the week and i think it's our

job as as builders in the space to sort of um understand from the noise what what is real and and what will deliver over long-term um the most value to the protocol and the owners of it so i know that's quite vague and i have to jump but uh but uh i i know i'm leaving it in good hands with mark and i'm excited to to hear the the remainder of this but thanks guys i'll talk to you soon yeah thanks for coming on nate you're the man so mark what the hell is going on with the prize yeah you know it's a fair question it's something that we talk about and real quick mark you can speak

broadly too about you know because like sushi and uni are seeing the same thing you know it's not like it's just bank or you know trader joe can't seem to get back up after its initial like you know all these decks high emission tokens just what's the what's the tokenomics that are gonna fix the you know that are going to bring them back to life almost you know yeah absolutely um so yeah a couple of things so yeah you men and you you know i've got the um i'm just looking at the curve chart now actually and you're right like since the um since the crash back in may uh yeah curve has done extremely well and i think that it is um uh you know it's definitely fair to attribute it to sort of the success of its tokenomics model but part of me always wants to remind

everyone that it's still kicking the can down the look down the road because you know four years from now they're going to be unlocking uh you know a stupid amount of curve tokens um and that that's going to probably have an effect so in a way it's probably saving up for this like mega dump you know in in four years time or something uh but that's just me speculating anyone listening to this don't listen you know i'm from a rival project i can say whatever i want about another token's price it doesn't mean anything but you know but personally this is something that you know i am worried about in the space i do pay attention to lockups because i don't think they're healthy um i think that you know a lock up with a slow release schedule is okay um you know you do want to have a functional market and

giving people the ability to dump whenever they want is probably not good but having sudden unlocks is is not good either um although it is good for the price in the short term but even then like you know considering all of these things um i'm looking at you know at the at curbs bottom this cycle was 30 cents and it's up like five dollars right now so let's be generous and call that a 20x um you know bangkor over the same time like during the same cycle started 11 cents you know so it's already done 100x and then capitulated back down to 30x so i'm not really you know i'm not really worried too much i think in the in the grand scheme of things across d5 um you know the trends on all of these things are pretty much the same you can have a

look at like the the link chart for example which i'd say like you know the link token and the link project are among sort of like the most um fundamentally valuable in uh in cryptocurrency and i don't think that's controversial um but they've also been struggling with you know uh with you know their token price and stuff and so i think that you know yeah price price it doesn't always it doesn't always represent what's actually happening like nate kind of hit on it's right now it's the convex curve narrative for curve and we're going to see the same thing with the toke token and just as more and more projects pull these kind of locked models out um now um um unless you have something pressing i'd love to kind of hear more about the

idea of of locked and linear release liquidity mining so there's a really big project on twitter again kind of the narrative now right like i've been in it for months i got lucky with it but this defy kingdoms project with the jewel token they've been they've been doing yield farming at insanely high rates like when i first got in it was four thousand percent and it stayed like that because it was unknown for like two three months now most of the pairs are down to about four hundred percent which is still absurd but here's the kicker starting july 15 2022 80 percent of your rewards are released linearly for a year so up until july you're getting twenty percent immediately so still twenty percent of four hundred percent is what

eighty percent of four thousand percent eight hundred percent so it's still a really damn good yield in the in the near term but we gotta see what's going to happen to the token come middle of this upcoming year right so i'm curious what your thoughts are on kind of like this split lock um liquidity mining if this is something that could be used if it's if there's a if there's a way to do liquidity mining with more splits lock-ups and governance or if it's all just kind of like the the same iterations of just kind of you know creating value through new token missions yeah absolutely i think that um yeah so i'm familiar with the the uh the dual lm schedule it's something i had to look at recently i'm actually pretty impressed with it i i think that it is likely to

um to help keep the market uh functional for longer periods of time what one of the things that you know that kind of shakes the you know people from traditional finance pull their eyeballs out when they have a look at the type of volatility that we're experiencing in in in crypto on a daily basis and you know a lot of that volatility over the last year i think has actually been sustained uh by things like liquidity fighting schedules across uh across the space because there's so much new value being injected and you know that um that value gets split through you know through inflation of all of these projects different type different tokens and whatnot and i think partly this is why saying

lock ups are a good thing right because you you do want to be able to sort of give the market time to react right no one likes to be surprised when you know someone suddenly decides to dump 25 percent of token supply um and so that's bad right it's really bad you do want to protect against that kind of thing um but then you know once you start that lock up right like let's say that the dow decides okay no one gets the liquidity mining for a year right and then all of a sudden you know the lock up the the the lock-up period is coming to an expiry you might not blame the dow for thinking you know what can we put it off for one more year you know like i really don't want to see all of these tokens suddenly end up on the secondary

market um and then you know eventually you kind of end up in this spiral and so i think then that this is where the the linear release is actually a really good answer to that where you say okay you know let's we're going to deal with this once and for all we are going to do this inflationary schedule and that's that um but and we are going to look at your tokens you're not going to be able to sell them all all the time which is great because um the you know the mercenary defy users the ones that don't really care about the projects that the liquidity mining on and are just there for sort of the the fast turnaround they're generally the customers that you don't want and they're going to be probably put off by some of these um by some of these lock-ups and linear

vesting schedules so it's a good idea i do think it's a good idea it's a way that we can kind of tame the beast um where people still feel like they're getting those you know um you know amazing um amazing rewards yeah it's like holy oh 4 000 but then i'm like oh wait oh my god they get to keep looking at you cutting up that pizza into smaller and smaller pieces um and so they still get to be you know excited about how many pieces of pizza there are now but the trick is that you know unlike the the pizza analogy when you're doing these these kinds of splits each piece can actually grow in value as well just because there are no more just because there are more tokens doesn't

necessarily mean that the price has to go down which means that these kinds of linear vestings are um could be an important component of that one of the things that i like when i'm saying that i'm critical of the lock-up it's because often you haven't yet paid the price for those emissions so when people see the token price you're kind of fooling yourself right like it's like one of these uh my favorite analogy for this is i'm gonna create you know andy coin right and we're gonna print a trillion of them right so the contract is gonna have a trillion supply and then i want you to buy one andy coin from me for one dollar right we'll just otc deal one dollar of andy coin

and then what is our market is our market capitalization now a trillion dollars because there's a trillion coins and the last sale for one coin was a dollar it's like well maybe that market capitalization isn't real right we need to find out how much people are actually willing to pay for andy coin and that's what lock up doesn't give you yeah and we're seeing that with joule because the the fdv on it is like 10 billion the current market cap is 1 billion but but the thing is as as you're saying as long as the linear vesting you know kind of works in terms of um people don't dump immediately and the token price continues to go up um i mean it's surely an experiment and i'm i'm obviously invested and it seems as if you are as

well i'm sure a lot of people who have seen it on twitter probably got in some you know i mean i'm invested in the idea i'm invested in the idea i don't know not necessarily a project i got you um we'll see because if it kind of works then we could probably see a lot of these game five projects do a similar a similar kind of um in a way you know every generation needs to relearn the same lessons uh and you know it's unfortunate but it's true it's why history it's why we've got idioms like history always repeats itself what we're what we're now starting to do with these you know um these uh you know vesting schedules and liquidity mining but you know you can unlock some now and you're going to get some later that kind

of thing this kind of stuff has existed in the in the centralized markets since forever right this is a big part of financial regulation right so it's almost but it's interesting to see that left to our own devices crypto's kind of learning to self-regulate you know like we've we've done the the stupid thing right where we've it's like you know whatever the token supply can be whatever we want we're going to pay our users and our vcs and ourselves thousands and thousands and thousands of new tokers like there's no consequences and then it's like okay there are consequences we need to do something about this right the thing is is that in centralized finance it was governments that were stepping in saying

i'm going to show you what works and what doesn't work or it's like you know you idiots you of course you can't just make free money you need to find the mark you need to give the markets time to adjust right you need to have some sort of bona fide price discovery process um and in crypto it's like yeah we did the experiment we now agree but we don't need a regulator to tell us what to do anymore the community is kind of learning to do it itself and i think that that's extremely helpful and you know it's this is why i'm paying attention to things like jewel is that they are representing huge man it's huge this first like epoch of self-regulation like self-regulation behavior it's good yeah and and you know i think that this is you know this is

what i heard people say about bangkok one day and when we're talking about self-regulatory behavior we're not just talking about emissions um and you know inflation versus deflation and currency evaluation and all that kind of thing but also more broadly you know like can we actually sustain a decentralized financial system like what what protections do you need to give people um because you know the banks in the traditional world they still have to um they still have to offer insurance they still need to be insurance policy holders in case you know something bad happens and they can't afford to um you know to to refund um all of the the bank accounts that they're responsible for they need to do

that and that's part of the that's you know that's if you consider things like dexes to be sort of quasi online high interest savings accounts which which i do i think that is the closest analogy that we have um it's like yeah maybe we should figure out how to insure it and i don't necessarily mean against smart contract risk which is like what nexus is already annexing what next but um bridge mutual and others have already figured out how to do but how do you insure against you know financial risk not anyone necessarily exploiting the contracts nothing getting hacked but users still losing money because they made a bad financial decision and we didn't educate them uh correctly about how to hedge against it so that's what bancor is doing right the the dual thing

is a very specific case how do we self-regulate inflation bancor is much much more general much much more i dare i say difficult how do we self-regulate as an actual you know financial industry and so yeah that's there's a whole article to be written about this self the self-regulation of of um new projects new ponzis self-regulation of inflation the self the self regulation of um yeah as you're saying like the emission schedule of the inflation of creating new tokens and of debt um and i think d5 has done a pretty good job so far of not unleashing too many under collateralized debt protocols yeah yeah exactly yeah it's also

yeah it is any any closing thoughts man we're kind of gonna wrap it up here if rob has anything else as as well we got a two minute window here um and yeah it's been a pleasure to uh to talk about everything everything d5 yeah i mean yeah i was i i'm so excited to talk to you guys honestly uh if you ever wanna um to chat again uh you know how to reach me maybe after our version three is out we'll have a lot more to um to discuss um but yeah i just just in closing um i think that you know of at least this last part of the conversation um with regards to protocol liquidity you know emission schedules liquidity mining the ridiculous yields in d5 um i just think it it's 2022 is probably

going to be a really good year for the d5 community to sort of sober up a little bit and and work out whether or not we're in this for a good time or are we in it for a long time or can we have a bit of both you know and i i think that that's what bangkok version three is a testament to right it's not just about um you know milking a token for everything that it's got um but it's also not sort of you know a boomer protocol either it's somewhere in the middle and we're trying to find that that balance between giving users what they want right which is fairly high returns on their money and i think that they they are owed that um but also how do you do that forever

and you can't do it with inflation so there needs to be another answer um and i think that if i had any closing uh any closing thoughts it would be to remind people of that that we can't keep relying on these inflationary mechanisms forever there needs to be something underpinning it if we want the industry to be taken seriously and that's where i want us to be yeah thanks mark we we uh you know hardly touched on v3 and that's probably a conversation for another time but i think we went really deep on on v2 and uh almost almost a recap of what worked what didn't and and now this is kind of uh you know really setting up a solid um entrance introduction into v3 um

and the different narratives that are kind of swirling around that was that was quite a conversation on on the curve wars which i i i'm still kind of getting my getting my i don't know what anyone's going to thanks uh yeah i don't know when anyone's got the wrong idea by the way i'm a huge fan of club like i said you know i've uh their white paper the the original um like stable swap invariant introduction is one of my favorite white papers in the industry i'm a huge fan of that project i'm just a little bit concerned with the the way that their governance thing is is going but i have absolute faith that they're going to self-correct just as just as jewel is doing just as bancora is doing um but yeah it's don't worry i think i think the curve community is

doing all right maybe you should focus on the bnt community i think the curve community's doing all right i don't think i don't think they're too worried right now all right messing around but um yeah good stuff agreed it's going to be interesting to see how these unlocks happen they shouldn't implement a linear schedule asap but we'll continue this conversation mark thank you so much for coming on