Bancor DAO mulls proposal for self-arbitrage bot to cover $26 million deficit

Quick Take

  • Bancor’s self-arbitrage bot will seek out opportunities in v3 pools.
  • The arbitrage bot is one of the ways Bancor is attempting to cover its $26 million deficit.

Bancor DAO, the decentralized community that oversees the Bancor DEX, is considering a proposal to create a self-arbitrage bot to profit off opportunities on its own protocol in an attempt to reduce the deficit of $26 million on the platform.

The proposal calls for the creation of an arbitrage bot called Bancor Fast Lane. This bot will search for arbitrage opportunities, which capitalize on differences in the price of the same trading pair across different marketplaces, on all available Bancor pools.

Bancor’s planned bot will compete with all the other arbitrage bots crawling the various liquidity pools amd extracting value from the protocol. The DAO plans to give its own bot a competitive advantage by exempting it from transaction fees that other third-party bots will still have to pay.

The DAO is also encouraging members to participate in the process, and users that find an arbitrage trade can configure the bot’s contract to capitalize on the opportunity. DAO users who spot these profitable trades will earn a 10% finders fee, according to the proposal. The fee, however, will be capped at 100 bancor tokens (BNT), currently worth about $38.

The bot’s contract will initiate a flash loan before doing the arbitrage trade, and the bot’s mechanism, as stated in the proof of concept, will require a new contract. Alternatively, the team can upgrade the Bancor v3 contract to enable the bot to function, the proposal stated.

Bancor price chart

Bancor token 1-year price action. Image: CoinGecko

$26 million deficit

The Bancor Fast Lane proposal is one of the measures being considered by the project to resolve a deficit on the v3 protocol that has reached $26 million, according to a Dune Analytics dashboard. The deficit resulted from the protocol stopping its impermanent loss protection in June amid the effects of bear market declines.

Impermanent loss is one of the main risks associated with providing liquidity on decentralized exchanges and occurs when there is a significant divergence in the price of one of the tokens supplied by the liquidity provider that results in the value of the liquidity provider’s position declining.

Bancor offered protection for this risk by rewarding liquidity providers with BNT tokens. Liquidity providers could then sell those tokens to recoup some value for their declining positions. However, the bear market saw a massive increase in BNT selling, which drove down the price of the token.

Bancor was forced to suspend the impermanent loss protection program, and liquidity providers took a 50% haircut on their positions in the process.

Apart from the arbitrage bot, the Bancor team has other plans to help solve the problem including the launch of another DEX called Carbon. The Bancor DAO will control Carbon, and fees from the protocol will be used toward covering the deficit and making liquidity providers whole.

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