On June 19th, BNT distribution was paused per the Bancor DAO’s intervention policy. Information regarding the BNT minting pause is available in two of our blogposts (1,2)
Q: Why was the BNT distribution mechanism disabled?
A: Extreme market conditions in June 2022 exposed an economic vulnerability in the Bancor protocol under specific unforeseen circumstances.
Due to heavy selling pressure on the BNT token at the time, the BNT price rapidly diverged from the prices of tokens listed on the protocol (TKNs) in tandem with large TKN withdrawals from the protocol.
The automated rebalancing of Bancor AMMs resulted in arbitrageurs selling BNT to the protocol in exchange for TKNs, creating deficits in the TKN vault balances and a surplus in the protocol’s BNT vault balance.
The amount of BNT distribution needed to cover the pending withdrawals created a runaway effect in the BNT price that could have resulted in only the fastest LPs being able to withdraw from the protocol and the rest of LPs being unable to withdraw.
Per the Bancor DAO’s emergency intervention policy, the DAO took emergency action to pause all BNT distribution until repairs can be made.
Q: How does disabling the BNT distribution affect users?
A: As a direct result of the BNT distribution being disabled, users who choose to withdraw from the protocol are choosing to do so knowing they are not eligible to receive BNT in the event of vault deficits. This was a vital mechanism used for securing user funds. Keeping BNT distribution live to also cover the deficit would have resulted in that BNT immediately being traded for a user’s originally deposited token, resulting in zero chance the slower moving users would retrieve any of their funds at all.
Q: If I withdrew from Bancor at a loss while BNT distribution is disabled, will I be able to get back my initial amount in the future?
A: Currently, any losses incurred due to deficits by users who withdrew from the protocol are final. The Bancor DAO controls the protocol and has the ability to revisit this in the future. The Bancor DAO uses discourse for its governance and it is available at the following location https://gov.bancor.network
Q: What does it mean when a pool has a vault balance in deficit or surplus?
A: The vault balance represents how many of a specific token are currently in the protocol. The vault is in surplus when it contains more tokens than was directly supplied by liquidity providers. The vault is in deficit when it contains fewer tokens than liquidity providers deposited.
Q: If I keep my liquidity in Bancor, will I ever be able to withdraw it all?
A: All users have the ability to withdraw their liquidity from the Bancor protocol. TKN liquidity providers in Bancor v3 who withdraw from a pool that is in deficit will not receive BNT as part of their withdrawal to make up for the pool deficit. In other words, you can decide to hold off on withdrawing until the issues are resolved, or withdraw now with TKN only and zero BNT.
Q: My loss from withdrawing was more than just impermanent loss, shouldn’t I receive BNT from token rebalancing?
A: BNT distribution is the mechanism that reimburses LPs for deficits from rebalancing and impermanent loss. Disabling this mechanism was required to avoid a complete loss of funds for all users due to hyperinflation of BNT. If you choose to withdraw at this time, BNT will not be distributed for losses incurred from impermanent loss or rebalancing.
Q: Is letting trading continue causing me to lose more of my tokens?
A: Trades are good for the Bancor ecosystem and help restore health to the protocol. However, it can lead to fluctuations in pools that are in deficit, such as the ETH, LINK, and wBTC pools. Right now with BNT distribution disabled, this could result in being able to withdraw more, or less tokens.
Q: Was this a necessary decision?
A: There was no previous issue with the functionality of the BNT distribution on v3. The mass exit introduced a huge threat to the protocol and users' funds. If this mechanism had not been immediately disabled, and a portion of BNT was made available during this time to cover deficits (and assuming the BNT token would have been immediately traded for the originally deposited token) it could have led to the draining of all liquidity pools, left those users slower to react with none of their funds, and the collapse of the entire protocol.
Q: Who made this decision and how was it done without the DAO?
A: The Bancor DAO passed “BIP21: DAO Multisig Intervention Policy“ that gave the multisig signers emergency powers to take protective actions if an emergency presented itself. Such an emergency presented itself on 6/19/2022 which required special intervention to protect users of the Bancor protocol. All emergency actions taken are subject to a subsequent ratification vote which the Bancor DAO later on approved.
Please refer to BIP21 from the Bancor Governance for more information: https://gov.bancor.network/t/bip21-dao-multisig-intervention-policy/3504
Please refer to the ratification of emergency actions take on Sunday June 19th 2022 for more information: https://gov.bancor.network/t/ratification-of-emergency-actions-taken-on-sunday-19th-june-utc/3714
Q: Why were deposits disabled?
A: This was strictly an ethical decision to prevent users from participating in liquidity provision while the protocol in the process of assessing the potential risk.
Update: As of 8/3/2022 the Bancor DAO voted to enable deposits for all tokens on chain. This means that anyone can interact directly with the smart contracts and deposit tokens.
Q: Why is trading still enabled?
A: If trading is disabled then the community needs to make sure that the pools between v2.1 and v3 are well equilibrated (a large effort to undertake). If the pools are frozen then the Bancor AMM will not be in sync with the rest of the markets, and there will be additional complexities with having to rebalance the pools in the future.
Q: What options do I have?
A: v3 BNT liquidity positions remain unaffected by the emergency action. LPs may continue providing liquidity and earning trading fees or withdraw the full amount of BNT deposited in addition to any rewards received and/or fees earned.
v3 TKN LPs may continue providing liquidity and earning trading fees or withdraw without BNT for any deficit.
v2.1 BNT LPs may continue providing liquidity or migrate to v3 and withdraw the full amount of BNT deposited in addition to any rewards received and/or fees earned.
v2.1 TKN LPs may remain on v2.1, migrate to v3 to provide liquidity and earn trading fees, or migrate to v3 and withdraw without BNT for any deficit.
Q: How is my position affected when it migrates from v2.1 to v3?
A: v2.1 withdrawals require migration to v3 because otherwise more technical changes would have been involved in a time of emergency. Any changes to the contracts will expose the protocol to unforeseen vulnerabilities and possible exploits, putting liquidity providers funds at risk. Bancor is also designed as an upgradeable unitary system where future versions supersede current ones. In this spirit, the migration process from v2.1 to v3 has not attempted to transfer surpluses on a single position basis. Therefore a significant portion of the perceived surplus present in v2.1 belongs to positions that have been migrated to v3. Bancor is DAO controlled and dealing with any surplus is ultimately up to the DAO.
Q: What are deficits and surplus on Bancor v3?
A: Please refer to this explainer on Bancor v3 mechanics to understand how deficits and surpluses are calculated in v3.
Q: Will withdrawals be reactivated for v2.1?
A: This is a decision for the Bancor DAO.
Q: What happens if I stay on v2.1?
A: Nothing, but If a liquidity provider wishes to withdraw, it would require a migration to v3 first. Also, the proposal passed to increase the v2.1 vortex to 100% meaning that v2.1 LPs do not collect trading fees.
Q: How can I calculate my deficit & surplus on v3?
A: On the portfolio page, under holdings, for each token that is in deficit there is a red triangle next to it. Hover over this red triangle to get an approximation of your withdrawal amount.
Alternatively, for v3 a close approximation is to input the ERC20 token contract address in the "stakedbalance" function and compared that to the token quantity in the MasterVault contract.The "stakedbalance" entry represents the initial principal and accrued fees for all users who deposited that specific token.
Master Vault Contract: https://etherscan.io/address/0x649765821D9f64198c905eC0B2B037a4a52Bc373
Stakedbalance Function: https://etherscan.io/address/0x8E303D296851B320e6a697bAcB979d13c9D6E760#readProxyContract#F22
Q: I’m trying to make a withdrawal, but it’s telling me "withdrawal is temporarily paused!". Why, can’t I make a withdrawal?
A: The price in the pool is too volatile. Please try again in a few minutes.
Q: Will I get more of my TKN if I withdraw before others?
A: The relative deficit or surplus of the system in TKN should remain constant so long as the market does not cause a change in the deficit or surplus. Regardless of the amount of TKN being withdrawn, or depth of the pool, the amount users are able to withdraw is proportional to the deficit of the pool. Example: If a pool has a deficit of 25% and everyone were to leave while the market does not cause a change in the deficit, then everyone will have a 25% deficit in their withdrawal.
Q: What is the origin of the deficit?
A: Anytime a trade occurs, a deficit and surplus appear.
Q: Are there historical analytics to view the deficits/surplus for a token overtime?
A: You can visit our analytics site to get historical information around surplus/deficits for a specific token over time and other Bancor network stats.
Please refer to the analytics site for more information: https://analytics.bancor.network/