Proposal: Save. Earn. Borrow w/BancorP2P (includes: licensing fees, increased LP activity, new product, more engagement)

TL;DR

• Residual Token, Inc. proposes to build, launch and maintain, BancorP2P, a savings, lending and borrowing tool that will integrate into the existing Bancor ecosystem.
• Residual Token, Inc. will not charge Bancor development or maintenance fees, and Bancor will not incur any out-of-pocket licensing or whitelisting fees.
• Bancor - at its own expense - will add hyperlinks to its website that point to BancorP2P, and will advertise BancorP2P to its users.

Summary

Residual Token, Inc. (dba unFederalReserve) proposes to offer Bancor a license to BancorP2P, a front-end interface to the ReserveLending Core.

The ReserveLending Core (hereafter, the 'Core') is an overcollateralized Pool-to-Peer lending protocol that brings together savers, lenders and borrowers from a variety of cryptocurrency ecosystems, platforms and brands. This global connectivity is facilitated by the use of multiple front-ends that each provide access to the Core's single set of liquidity pools.

The Licensor, Residual Token, Inc. (hereafter, ‘Residual’), will build and maintain the BancorP2P front-end, and will not charge the Licensee, Bancor, development or maintenance fees (development is estimated to cost around $50,000 of Residual’s own capital, and maintenance is approximately $3,000/mos). Bancor will not incur any out-of-pocket licensing or whitelisting fees for hosting BancorP2P.

Bancor’s treasury will earn 10% of the reserves generated from borrowers connecting through BancorP2P. In other words, it will earn a portion of the APY that BancorP2P borrowers pay on loans, and in the case of loan defaults, it will earn a portion of the recovered collateral.

Additionally, revenues from existing Bancor trading tools are projected to increase due to higher trading volume. Residual projects a 30-40% increase in Bancor’s trading volume as users take advantage of interest paying deposit accounts and affordable loans available through BancorP2P. Detailed projections are available in the Forecast section below.

Note, the extent of work required to be undertaken by Bancor - at its own expense - will be:

• Adding hyperlinks to the Bancor website that point to BancorP2P.
• Advertising BancorP2P to both existing and future Bancor users.

At the user level, BancorP2P will:

• Empower Metamask, Wallet Connect and Coinbase Wallet users to earn APY - without relinquishing custody of their cryptocurrency to a third-party - via BancorP2P‘s Supply or Deposit function;
• Allow users to borrow a select set of cryptocurrency types on an overcollateralized basis at reasonable APYs; and
• Provide users the ability to leverage up, short sell certain assets, or increase purchasing power using safe, reliable and easy-to-use features.

Bancor’s users will also have the added bonus of combining the above benefits with the robust trading tools already offered by Bancor, thus spending more time in the Bancor ecosystem, and increasing overall engagement with the Bancor product suite.

The BancorP2P user interface will be custom designed to fit Bancor's existing brand style. Below are sample images of Residual's own front-end, ReserveLendingTM. The BancorP2P front-end will share a similar overall layout, along with custom Bancor theming across multiple webpages. (See also: https://app.unfederalreserve.com/markets)

Example I: User View of Current Deposits and Loans Outstanding

Example II: Market Overview

Example III: Liquidations

Example IV: Education Center

Also included with BancoP2P will be a range of “how-to” videos, along with user access to experts in the DeFi community. These experts will provide knowledge to the Bancor community on strategies to employ depending on Bancor’s users’ wishes and market conditions.

For

Onboard Bancor as a Licensee to BancorP2P, a front-end of the ReserveLending Core. Residual will build the customized front-end for Bancor at no cost to Bancor. BancorP2P will provide Bancor users access to the ReserveLending Core in an experience simpatico with the Bancor platform today, and will earn Bancor 10% of reserves generated through BancorP2P. Bancor - at its own expense - will add hyperlinks to its website that point to BancorP2P, and will advertise BancorP2P to its users.

Against

Do not onboard Bancor as a Licensee to BancorP2P.

Context

In business since 2017, Residual Token, Inc. is a Fintech SaaS company specializing in banking, Web3 and DeFi software development. Licensing software is Residual's primary source of revenue, and a live utility token, eRSDL, is used as part of its Licensing-as-a-Service (LaaS) model, which is explained in detail here: https://unfed.info/LaaS

The ReserveLending Core is a retail DeFi protocol for overcollateralized Pool-to-Peer1 lending and borrowing that is owned by Residual. The Core is based on the Compound® Protocol, which is non-custodial, meaning that Residual does not have control over supplied assets, and users are not exposed to the typical risks inherent in centralized custodial lending. The Core is also permissionless, meaning that any address is free to access the Core's liquidity pools. A review of the Core’s activity can be found here: https://dune.com/ethpanda/unFederalReserve-TVL

Front-ends (interfaces) to the Core allow users to supply assets to earn APY, and optionally use their supplied assets as collateral to borrow on margin. Users across all Core front-ends share access to the same Core liquidity pools. This means that a user accessing the Core from one front-end can supply assets to a liquidity pool; while a user accessing the Core from another front-end can borrow those assets from the same liquidity pool (assuming the borrower has supplied enough collateral to satisfy this key condition to the loan).

Residual hosts a front-end to the Core, branded ReserveLending™. Residual also offers front-end licenses to third parties (Licensees). Front-ends are custom-themed for Licensees, allowing for seamless integration with existing branded ecosystems.

Residual will build and maintain a customized front-end for Licensees, and will not charge Licensees development or maintenance fees. Furthermore, Licensees will not incur any out-of-pocket licensing or whitelisting fees for hosting a front-end.

The extent of work required to be undertaken by a Licensee - at its own expense - will be:

• Adding hyperlinks to its website that point to the front-end.
• Advertising the front-end to both existing and future users.

Allocation of Reserves

The reserves accumulated by the Core are allocated to:

1. Rewards paid to Licensees
2. License fees collected by Residual Token, Inc. (aka unFederalReserve)

Rewards paid to Licensees

The total allocation of Licensee rewards is divided amongst Licensees in amounts reflecting the percentage of the total TVL that is borrowed from the Core through each Licensee's front-end. Residual tracks and reports on these amounts using URL-related analytics and activity mapping. In this case, Residual will track Core activity tied to the BancorP2P front-end - using its URL - when estimating the licensing fee. Please refer to the Forecast section for detailed reward projections.

License fees collected by Residual Token, Inc. (aka unFederalReserve)

Given that Licensees do not pay any out-of-pocket licensing fees, Residual collects licensing fees from the Core reserves. In line with the Licensing-as-a-Service (LaaS) model, part of the licensing fees will be directed to reimburse Residual for its costs and profit expectations, and part will be used to conduct open market purchases of eRSDL tokens (eRSDL tokens are digital markers representing license state, and are burned as licenses are consumed).

Licensee benefits of hosting a Core front-end:

• Rewards. Licensees are rewarded part of the Core reserves. A Licensee’s rewards reflect the TVL that is borrowed from the Core through its front-end. The greater the amount borrowed, the greater the rewards.
• No out-of-pocket licensing or whitelisting fees.
• Residual will not charge development or maintenance fees.
• Expansion of product offerings to both existing and potential users.
• Removal of the need to build, test, maintain and audit a similar platform in-house.
• The Core has undergone extensive security tests and audits; most notably Trail of Bits successfully completed an audit just a few months ago.
• In-house Core access means that a Licensee’s users no longer have to visit potentially risky third-party lending services.

User benefits of accessing the Core via a front-end:

• Users can access global liquidity pools that are also accessed by users of other front-ends. As more users are introduced through new front-ends, the size of these liquidity pools is expected to grow significantly.
• Users can earn APY by supplying assets.
• Users can earn profits by shorting assets:

1. Supply asset
2. Borrow asset to be shorted
3. Swap out of borrowed asset into a stable coin on a DEX/CEX
4. Swap back into borrowed asset at a lower price
5. Pay off borrowed asset

• Users can take advantage of arbitrage opportunities:

1. Supply asset
2. Borrow asset
3. Use borrowed asset to invest elsewhere. Profits or APY earned elsewhere should be greater than the Core spread (spread = borrow APY less supply APY, which is the effective cost of borrowing in the Core).

• The Core has undergone extensive security tests and audits.
• The front-end templates used to access the Core are designed for optimal user experience and ease-of-use.

Diagram I: Global Liquidity Pool “Core” Schematic

Forecast

There are a variety of key performance indicators (KPIs) to consider when measuring the success of the Bancor-Residual collaboration. The key driver of value for Bancor will be the Total Value Locked (TVL) borrowed from the platform. Residual expects approximately a third of Bancor’s users to be interested in using BancorP2P's deposit capabilities alone, without necessarily leveraging themselves or executing one of the shorting strategies discussed earlier. Given where Residual has seen market rates for borrowing, Residual expects Bancor’s treasury to earn a 10% royalty on the estimated 3% reserve fee revenue (refer: Table 1). This 30bps is almost double to triple the standard 0.125% broker fee other borrowing lead-generation platforms receive.

Table 1: Pro Forma Licensing Revenue for Bancor Treasury

The figures above represent estimates made by the management of Residual for the purposes of illustrating the potential revenue stream for Bancor’s treasury. These estimates should not be relied upon as anything more than Residual’s best guess as to the volume the Bancor user base would generate. Residual started with an aggressive growth curve for 2023, assuming a general market turn-around and increased adoption of Bancor as BancorP2P and other products are added to Bancor’s offering.

In this model, for instance, Residual assumes that average borrows can reach $200 million by the end of year 2, and continue experiencing significant growth in the following years. One way to verify or validate this assumption is by extrapolating from current usage trends. If just a tenth of the current daily trade volume went into deposits and was held there, then by year-end, the outstanding borrow balance would be around $50 million.

Additional to the above projections, BancorP2P saving, lending and borrowing activity is estimated to result in a 30-40% increase in Bancor’s trading volume, thus resulting in an increase in its trading-derived revenues. The basis of this estimate is as follows:

The main use cases for borrowing off Pool-to-Peer lending platforms at present are for shorting from one of the liquidity pools and/or for leveraging into another purchase (note: debt consolidation, one-time purchases, "quiet selling", etc., are all considered, but are not the main drivers behind margin borrowing in crypto). Also, Cointelegraph reports that, “... utilization rates, or the percentage of stablecoins taken out as loans versus total supplied, have also fallen to around 30% to 40%... “. Thus, Residual foresees similar metrics for Bancor; whereby its users will supply onto BancorP2P, borrow stables, wBTC or ETH and use those funds to swap into new tokens through Bancor.

Interest Rate Models and Pricing Oracle

The Core’s current APY model for USDC, DAI, and USDT is a JumpRate Version 2 model described in detail here: https://docs.cream.finance/lending/interest-rate-model

The model calls for the following inputs when calculating an APY:

Base Rate (Borrow) that includes a floor borrow rate, and logic to increase the borrow rate depending on utilization. At a certain utilization, or percentage of borrows vs total supply, the rate “jumps” to provide a repayment and supplying incentive.

The jump rate for borrowing includes factors such as:

• A multiplier based on utilization;
• A JumpMultiplier when utilization exceeds a “Kink” amount; and
• A Kink amount or utilization rate above which triggers the JumpMultiplier.

The existing factors for each pool that determine its utility include:

• Collateral Factor: The Collateral Factor is the percentage of value that one is able to borrow against their total supply value. Looking at historical price data, Residual found a 90% collateral factor on stables to be a sensible choice. This higher collateral factor helps protect accounts’ positions from volatility of asset prices, and from liquidations. This assumption is based on Gauntlet’s simulation risk report done on the Compound protocol. (https://gauntlet.network/reports/compound).

You can read the rest of the proposal here: https://gov.bancor.network/t/proposal-save-earn-borrow-w-bancorp2p-includes-licensing-fees-increased-lp-activity-new-product-more-engagement/4113