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How to solve "volatile loss"? The details were disclosed by Bancor V2

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Bancor V2 mitigated "volatile losses".

Original title: "Arguments for Bancor V2's 'Volatile Losses'"

Source: Blue Fox notes

Previously, blue Fox notes mentioned that Bancor V2 tried to solve the problem of "volatile loss", but did not disclose details. A few days ago, Bancor further disclosed some details, mainly as follows:

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As can be seen from the figure, its core has two: one is the prediction machine to provide the latest prices; The second is to update the proportion of token pool according to the price of the prediction machine, which is also the dynamic pool model.

1. Assume that the initial pool is 10Eth-1000bnt, where the ETH market price is $100, the ETH price in the token pool is $100, the BNT market price is $1, and the token pool price is $1. That is, assuming that the ETH and BNT market prices are the same as the pool prices, the ETH-BNT pool is a $2,000 pool of liquid scrip and there is no arbitrage room.

The market price of ETH has gone up. Suppose ETH market price rises to $120, ETH token pool price is $100, BNT market price is $1, and token pool price is $1. In other words, the ETH market price has gone up by $20, so at this point there is arbitrage. The real value of the entire liquidity pool is $2,200, not $2,000.

3. In order to prevent losses of liquidity providers, Bancor V2 obtained the price of the prediction machine and upgraded the proportion of the token pool. How to upgrade? After obtaining the market price provided by the prophetic machine, the ETH pool price also rises to $120, so at this time the 10ETH token pool value is $1200, 1000BNT $1000, the entire token pool value is $2200, in line with the market value. After the update, 10ETH accounted for 54.5% of the token pool and BNT for 44.5%. With this adjustment, as a liquidity provider, there is no "volatile loss" due to ETH rise. Regarding what is the impermanent loss, please refer to the previous article"Does Bancor have a chance to surpass Uniswap?"

So, this is a relatively bold description. Specifically, what are the problems?

Balancer CEO Fernando Put a different tack. The idea of a dynamic scrip pool is interesting. At its heart, it's about matching the price of the scrip pool with that of the machine in the chain. When the ETH market price rises to $120, this causes the trader to arbitrage immediately and push the price to $120. Prognosticators are still lagging behind at $100. This causes the price to revert back to $100, which creates a second arbitrage opportunity for the trader until the predicted price is in line with the market. As a result, any deviation between the predicted machine price and the actual market price will cause one token in the pool to be used up. Traditional AMM has no concept of a price predictor and is managed through market perception, so there is no deviation between the market price and the pool price. So there is no value that can be "extracted" from the pool other than syncing to the new market price. These extracted prices are known as "impermanent losses". This is an inherent part of AMM.

In response, Nate Hindman from Bancor:

Nate Hindman thinks That Fernando is making wrong assumptions. First of all, the dynamic weighting of Bancor V2 does not adjust to the transaction. Therefore, in the event of a delay in the price of the forecaster (when the feed price of the forecaster is inconsistent with the market price), there will be an immediate arbitrage opportunity, but the weight will not be adjusted at this time. Only when the forecaster price is updated will the weights be adjusted to create new arbitrage incentives and rebalance the price. So there's no chance of a double arbitrage.

In a word, the Bancor V2 token pool only updated and adjusted the proportion of the token pool according to the price of the forecast machine; If the pool price is in line with the prognosticator, the weight will not be adjusted; If the average ETH market price rises to $120, the trader pushes the ETH price to $120, and when the price is updated, the ETH token pool price is already $120, and there is no arbitrage opportunity. In addition, between the second and third steps, there is indeed some arbitrage opportunity. But the fact that the price of the forecastle changed, causing the pool weight to change, and that there were two pools in each pool, prevented volatile losses.

From the perspective of both sides, Bancor V2 still had arbitrage opportunities, which was inevitable, but it did prevent volatile losses to some extent by introducing a prediction machine price to adjust the pool.