The Community Fund currently has 51,523 bwNXM (50k wNXM originally deposited) deposited in Bancor V3 (recently migrated from 2.1), which was originally approved by the community to provide greater liquidity and earn a return on idle governance tokens. In the past month, Bancor has turned off its Impermanent Loss (IL) protection and Liquidity Mining (LM) rewards, passing on significant losses to users. As a result, we anticipate that we’ll take a 40-50% haircut on the capital deposited.
Bancor is currently working on a solution to rectify the problem, the plan will focus on:
- Fee allocation — divert fees to deficit reduction and affected LPs.
- Expand fees — grow fees from trading and build new fee-earning strategies involving arbitrage, liquidations and native lending.
- Fee burning — optimize fee burning aimed at replenishing pools.
- Protocol analytics — better data to drive DAO decisions on protocol health and proposed new features.
Unfortunately, the size of the deficit and the relatively small revenue means that even at peak transaction volume, we’d be looking at many years to be made whole. With transactions depressed due to these issues, and capital leaving the platform leading to lower liquidity, it’s possible that this might take upwards of a decade to resolve. Unless the Bancor team takes serious action, like having their foundation fill the entire deficit, this problem is unlikely to be resolved for many years to come. While the Bancor team is obviously working hard to rectify the situation, the solutions proposed don’t resolve our issues in a timeline that aligns with our capital needs.
As the wNXM price increases in proportion to the BNT price, the deficit will grow, meaning a larger haircut. Given that wNXM is currently undervalued, in our opinion, and BNT is continuing to be heavily depressed, the situation is likely to get worse and could leave us deeper in the hole.
This proposal, written by the investment team and community fund members, proposes to withdraw the funds from Bancor v3 immediately, and absorb the 40-50% predicted value loss. We don’t believe that any significant recovery will happen within the next few years, due to declining fees and the size of the (growing) deficit. Meanwhile, we’re still carrying the smart contract risk of having the funds deployed there, as well as the opportunity cost.
Given that our community fund is almost entirely in NXM and wNXM, the market decline has significantly reduced our runway. By our count, and depending on current market price, we have between $1.5-2m worth of capital in the community fund that is not already allocated for other activities. Based on the projected spend this gives us 24-36 months of runway, which is far less than we would like to see. Therefore, redeeming the capital in Bancor to add to these funds makes a material difference. Unless we anticipate that within the next 24-36 months Bancor will be able to significantly reduce the deficit, the prudent course of action is to cut our losses.