Bancor's 'self-arb' bot shows promise as DAO votes to adjust BNT split

Bancor’s self-arbitrage bot called “Fast Lane,” which was created to help deal with the protocol’s deficit, is performing well in a testing phase and will soon be ready for roll-out, according to the project’s Head of Growth Nate Hindman.

“In testing, it has already burned a ton of BNT, and the deficit remaining in the protocol is hitting all-time lows,” Hindman told The Block.

Bancor first proposed Fast Lane in December last year as a self-arbitrage bot that seeks out opportunities in Bancor pools. Users can call the bot’s contract to take advantage of a possible arbitrage trade and earn a finder’s fee from the returns. The bot is supposed to burn the rest of the gains, thus helping to reduce the protocol’s deficit.

The self-arbitrage bot will compete with other bots for the opportunities in Bancor pools. Fast Lane will, however, have a significant advantage as it will be exempted from paying transaction fees on the protocol.

What caused the Bancor deficit?

Bancor’s deficit arose due to the decentralized exchange’s decision to stop offering impermanent loss protection for liquidity providers. Impermanent loss is a major risk borne by liquidity providers when there is a significant divergence in the price of one or more of the tokens supplied, and the value of the liquidity provider’s position declines and may result in losses if they withdraw from the pool before the token prices recover.

The decentralized exchange had been using its BNT token to reward liquidity providers to make up for any losses in their position, and the arrangement worked well when BNT was valuable enough to offer significant cover.

However, the continued selling of BNT tokens by liquidity providers in a bear market can drive down the price of the token even further, and Bancor was subsequently forced to stop rewarding liquidity providers with BNT tokens. The action left many providers with a 50% decline in their positions and a subsequent $28 million deficit for the Bancor v3 protocol.

Bancor DAO voting to adjust BNT split

With the bot nearing its launch, the Bancor DAO is looking to fine tune its parameters. The DAO is currently voting on a proposal to adjust the Fast Lane BNT token split to 50/50 between the caller and the burn address from the previously proposed 10/90 ratio. The caller refers to the user who calls the bot contract when an arbitrage opportunity is spotted.

This new split has been described as being more economically self-sustaining because of the fact that the previous split created a scenario where the transaction cost to reward a caller could be greater than the value of the reward itself.

Voting on the matter will conclude on March 25. The vote has yet to reach to meet its quorum requirements as of publication tine.