Experiments in DAO-to-DAO Liquidity - Mark Richardson

hello hello good afternoon denver uh thank you for your audience um today's presentation is actually not the one that was advertised on twitter i've decided to go a completely different direction so the first one was something called doubted our experiments in in liquidity but over the last few weeks i've had a few let's say troubling conversations with developers and i have decided to basically turn my current understanding of cryptocurrency as an industry into a fable something you could explain to maybe a small child a person who is first developing a cryptocurrency project something like that and so in order to avoid sort of pointing the finger at any projects that i see as being sort of a perpetrator of some of the myths that uh i will be talking about today we're going to be using a completely hypothetical cryptocurrency um which is just represented by these acorns okay and so for the purpose of this thought experiment i want you to assume that these acorns are essentially fixed supply tokens okay standard something like erc20 now for any market where we have uh a fixed supply of something that is is determining a press of course we need a way to determine that price right the the resource itself is being traded between two different characters minimum and we often um represent in in financial markets the people that are um trying to sell a good right trying to sell some some currency or a another store of value um as a bear right and so it seems appropriate that in our fable that the person selling these these acorns would be the bear character and the bear is essentially uh is is characterized by the sense that they would prefer dollars over the thing that they are selling right they would prefer cash instead of having these acorns now the customer the person on the other side of that transaction is the proverbial bull right the person that loves these acorns they want to get their hands on as many of these acorns as possible and they're willing to part with dollars in order to obtain more ownership of these things so this is the transaction okay the bull is exchanging dollars to the bear and the bear is giving the acorns back to the ball now because of their preference okay we can actually have a look at from sort of a game theory perspective what the incentives for each one of these characters is if the bull okay um is uh very very motivated right to buy lots and lots of these acorns then of course the bear has an incentive to try and get the best possible press right and that means driving the price of the acorn up over time so as long as the ball isn't running out of steam then uh the bear is going to continue to up the price of the the resource that they're parting with and then of course the opposite to this situation is that the bear is too motivated to get rid of these things right he has way too much of this resource and he is overwhelming the the motivation of the bulls to buy that thing so that's relatively easy to understand and i hope that for most people in the audience the reason why i chose balls and bears is not too mysterious but what i think is mysterious especially from a developer standpoint is what does the bull even want right why are they purchasing those acorns and this is mysterious because um and you know it's also important from i think a project um a project development perspective because in general when we're creating these tokens we care about the price right i know that price talk is generally something that's considered distasteful and i want to point out that in this presentation i'm not referring to any cryptocurrency specifically so this is an entirely hypothetical thing sec please don't come after me so what i have found is and what is slightly disturbing is that projects have decided that they don't understand the bull and we're going to imagine a completely different character entirely and so we have basically supplanted the role of the bull with the role of the squirrel and the squirrel is a character that we understand perfectly well right obviously squirrels love acorns but what do squirrels do with those acorns we've created protocols where squirrels essentially are uh make an initial purchase for some number of acorns and then they lock them away okay can i get a quick show of hands who knows what i'm talking about right can anyone think of a cryptocurrency that you buy at once and then you are given an incentive to lock it up right that you put it away for some like for some unknown reason okay and maybe that that project will then reward you with additional acorns afterwards surely you've seen this before and i'm not going to mention any projects by name that i i'm going to assume from the the faces of the audience members that you know what i'm talking about what's interesting is that in this scenario the role of the bear has become something a little bit more abstract right and he can look on in distress as the squirrel is actually amassing more and more acorns and that puts his role as the sales person at risk so let's assume that we've got a fixed supply a very large collection of these acorns i want you to think about what it means for those icons to have a price okay and we're thinking about market capitalization at the moment if we start with something like this right where the squirrel has a very small proportion of the the acorns in the in the market and we assume that the rest of these acorns are now available for price discovery that means that the bulls and the bears are battling it out and the actual value for each acorn is known right because the overwhelming majority of them are currently available for trade what happens when that squirrel keeps going when he amasses more and more of these acorns over time now a much larger segment of the market is without price discovery right essentially you now know the price of a smaller proportion of the tokens that are available for sale now what's alarming is in a lot of these projects it is actually deliberately designed to exacerbate this process right they are trying to give the squirrels more and more incentive to keep amassing these tokens and keeping them out of the market now one of the justifications for that is that when the market is becoming diminishingly small then we end up in sort of a scarce resource environment right and that means that potentially the vanishingly small quantity of the tokens currently available should support huge price appreciation but it's a symmetric argument if there is that potential for massive price appreciation then there's also the potential for massive price depreciation and in fact when the market is losing confidence in any asset right it doesn't have to be acorns or cryptocurrency it can be gold right it could be um you know insurance bonds whenever something is becoming increasingly scarce in general the market shies away from it they lose confidence in it they no longer trust the price that they're given and this is the part that is um most important to to myself right as a uh as the the product architect of bancor is that it's not really the fact that the squirrel has ownership of these things the market doesn't care about that what the market cares about is that the amount that the squirrel owns hasn't been subjected to price discovery and so they don't trust the price of the token overall so what we're really looking at is this huge chasm between the liquid component which the market has made up its mind on what it's worth is and then this illiquid component that even though it has the same name as a part of the same erc20 contract is actually part of a completely different reservoir of of value and the question is what is that illiquid component worth and this is what i want you to consider right now there's a hypothetical that i often give on amas which is if we mint something like one million tokens and then i sell one of them to you for one dollar is our market cap now one million dollars right are the other 999 999 tokens now automatically worth one dollar because i sold one of them to you for one dollar there's no reasonable answer to this but it's something that you should be considering because this is currently happening in the cryptocurrency markets at a very very very large scale and it has hurt some projects that have subscribed to this bull thesis that having a scarce economy is positive now in the most dramatic sense you could say that that illiquid component is worthless i'm not necessarily making that claim but there is a strong argument for that claim i think that it is better to say that that illiquid component has an unknown value okay remember this hopefully this was not controversial right when the bear has too many acorns and he's got too much motivation to get them off of his books this is generally a price depreciation event what you have to realize now is that eventually that squirrel is likely going to want to get rid of his acorns and he has now taken the place of the bear and so this leads to dysfunctional markets so here's the thought experiment and the purpose for this workshop is what can we do about that if we want to keep these kinds of staking mechanisms intrinsic to the cryptocurrency economy is there a healthier way to handle it so consider this when the squirrel purchases this acorn from the original stack we can create a derivative of it at exactly the same time that we're calling in this case bnacion that bn prefix stands for bank on network and this is a single-sided pull token that is fully insured for the value that originally represented and this is different for example from like pool 2 pool tokens where you've got two different assets reflected under the same pull token the bank or pull tokens on version three represent exclusively one asset they are denominated entirely in the acorns that the squirrel provided and so now rather than removing those acorns from the original stack he has instead issued a a single-sided pull token that that represents the acorns that he purchased while the acorns that that are there remain liquid for price discovery now these liquid staking derivatives they can be used for all of the normal stuff that you want to use staking assets for maybe securing a network right because these um these single-sided pull tokens these insured single-sided pull tokens are still denominated in the value of the token that was purchased you can still use it for example um to punish bad behavior slashing these pool tokens is just as detrimental to the squirrels financial affairs as slashing the acorns themselves for example you could also use these for example in voting economics vitalik buterin sometime last year in his blog pointed out that there is this dichotomy in in dow tokens in voting tokens where if you have purchased a very large number of these you might suspect that it's because you think it's important that that dow function well and that you're going to use those tokens um to to vote on important proposals but if you're providing liquidity with it then you're not voting with it and that is you know that that decision is problematic one for the health of the market or two for the health of the dow that you've invested in and so we're trying to remove that necessity that the user has to choose one or the other and instead that they can do both provide liquidity and vote at the same time and so this means that all of those acorns that the squirrel has collected can now be amassed in with the liquid component and replaced with a liquid derivative that has the same purpose so this is one of the major premises behind bancor's version three and we think that this is a huge industry blind spot and i'm not sure why people haven't spoken about it at you know at scale um but it's not you know i would say that this is no longer a point of speculation um if you want you can i i'd encourage you to come up and speak to me after this presentation i'd like to bring your attention to a couple of uh cryptoeconomic resources and cryptocurrencies that over the last 12 months have been damaged by their own popularity the success of the project has been so great and so much of that native token has been staked away that the market lost interest in it because they can no longer trust how illiquid it has become yeah so if we replace that that squirrel's component with a liquid derivative then we might have much healthier markets and we can practice safe decks together now if you would like to reach out to me about anything that i've mentioned during this presentation or all of the features that i haven't mentioned that are also a part of version 3 please feel free to email me at marketbancor.network you can also reach out to me on twitter or telegram but thank you so much for your attention i'm happy to take any questions [Applause] how is the uh peg um insured and how is it different than um other kind of liquid staking like uh conve convexes like um curved cvx pools yeah yeah so the the the curve pools are um they're not really liquid right so the the cvx that's being staked there um isn't really being used to facilitate markets you can't trade against another user's staked cvx right or another user's stake c crv um so this is more this is something much more similar to something like a uni swap v tuple for example where let's say that you you provide liquidity with both usdc and eth but you're using the eth component you know to stake on beacon chain for example right to secure the network there the problem is that the value of that pool token because it's denominated in both usdc and eth and it's susceptible to impermanent loss which is that you know uh divergence uh that price divergence cost of providing liquidity because it's exposed to that the um the security of the network is kind of threatened by the fact that the collateral that is being provided has a volatile value denominated in the token that was provided so what do i mean by that if you provide let's say 100 usdc and 100 eth to a pool and then the price of eth goes up the um the total valuation of your pool token is going to be worth less than what um than what you would have had if you had just provided uh that same stake to the beacon chain alone but that is not the case on bancor on bancor the full value of your liquidity position is insured all the time and so even if the price of eth moves away from bnt which is the thing that it's paired with the network actually guarantees the value of the of the whole stake as if you had hollowed it right as if it had been staked in the beacon chain itself so there is no uh attack vector where you can just trade on the pool for example and and adjust the the value of the pull token in order to exploit some security mechanism in some other protocol so it's yeah it's it's not about maintaining peg it's about ensuring the value of the liquidity provider's position but i hope if that's not clear i can elaborate on that further is that okay thank you any other questions if not then please give a warm round of applause thank you thank you so much [Applause]