DeFi protocol Bancor pauses impermanent loss protection

Bancor is gathering criticism for halting the ILP function when liquidity providers need it the most during the current market meltdown

By Shashank Bhardwaj

Image: Shutterstock

DeFi protocol Bancor, a pioneer in the decentralised finance (DeFi) space, halted its Impermanent Loss Protection (ILP) function. It cited 'hostile market conditions' and 'manipulative behaviour' as the primary reasons for the sudden halt.

The DeFi protocol stated in a blog post on Monday that the ILP pause is a temporary measure to protect the protocol and its users. According to the blog post, “The temporary measure to pause IL protection should give the protocol some room to breathe and recover. While we wait for markets to stabilise, we are working to get IL protection reactivated as soon as possible.”

The announcement came after a tough week for the crypto market, including Bancor's native token, BNT. Bancor Network Token (BNT) is currently down by 49.1 percent in the last seven days, trading at $0.521353. BNT was consistently dumped over the previous 18 months, causing the asset's price to plummet. BNT has lost approximately 95 percent of its peak in 2021.

When a user contributes liquidity to a liquidity pool, the ratio of their deposited assets changes later. This arrangement leaves investors with more of the lower value token, which we refer to as impermanent loss.

While most decentralised exchanges, such as Uniswap, do not protect against the temporary loss, Bancor compensates for it by awarding newly minted Bancor tokens as rewards. It is up to LPs whether they want to hold or sell these tokens in the market.

Bancor's ILP was funded using the protocol-owned liquidity. The protocol staked its native token BNT in pools and used the collected fees to reimburse users for any temporary loss. When the generated trading fees exceeded the cost of impermanent loss on a given stake, the process effectively burned excess BNT. The ILP function was introduced on the platform first in 2020 and had several upgrades later.

The feature was paused to prevent BNT from continuously falling. This is due to IL compensating users in BNT, which increases the supply of such an asset and thus facilitates the token's price decline. Additionally, the team blamed the situation on “the recent insolvency of two large centralised entities who were key beneficiaries of BNT liquidity mining rewards.”

People prefer to go with Bancor in the DeFi sector for a variety of reasons. It is a well-known protocol that enables DeFi trading and staking with one-sided liquidity.

Furthermore, it provides 100 percent impermanent loss protection to ensure that users' portfolio value is maintained at all times.

The protocol has undergone several significant changes, attracting new users to Bancor and its services. However, the recent market turmoil that resulted in a 70 percent drop from the peak for most crypto assets had an adverse effect on the DeFi market as well, resulting in several critical changes that were subsequently introduced by DeFi protocols.

The writer is the founder at yMedia. He ventured into crypto in 2013 and is an ETH maximalist. Twitter: @bhardwajshash

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