A group of investors has filed a class action lawsuit against decentralized autonomous organization (DAO), Bancor, its operator BProtocol Foundation, and its founders in the United States District Court for the Western District of Texas. The plaintiffs allege, among other things, that Bancor misled investors about its ILP mechanism for liquidity providers and that it was an unregistered security.
According to the lawsuit, Bancor’s v2.1 investment product, introduced in October 2020 and the second to incorporate ILP, was operating at a deficit that the defendants were aware of and they tried to cover by releasing a new product, v3, which promised “some of the most competitive performance anywhere… without asking users to take any risk.”
Impermanent loss occurs within the automated market maker model of decentralized finance (DeFi) when a liquidity provider deposits assets into a pool and one of the tokens involved loses value against another in the pool. It is called impermanent because trading conditions can reset the value of the token later. The loss does not materialize unless the investor withdraws the token from the pool.
On June 19, 2022, Bancor experienced a spike in withdrawals, causing a “pause” in the ILP mechanism. Investors could still withdraw their assets, but they suffered the losses that the ILP mechanism was meant to prevent. This caused “losses close to 50% of their investment in the LP Program [Proveedor de Liquidez]”, that amounted to tens of millions of dollars for US retail investors, according to the lawsuit.
Co-founder of @bancor and founder of @BBSnetworkIO—@eyaltalks about how the BBS Network uses an “operator model” on #EOS to give users greater control over their own data.
Watch the full interview here: https://t.co/HNVK4Mau1Z
— EOS Network Foundation (@EOSnFoundation) May 9, 2023
In addition, the plaintiffs alleged that the founders of the DAO retained control of the DAO:
“Although Bancor is purportedly run by a decentralized autonomous organization (“Bancor DAO”), Defendants maintain near-total control over Bancor, both direct (control over its capital, employees, and code) and indirect (dominance and manipulation of the Bancor DAO). “.
They also state that Bancor’s LP Program “is a binding investment contract and a security under US law.” Besides:
“Had Defendants complied with applicable registration and disclosure requirements, Plaintiffs and other class members would not have invested in the LP Program.”
The plaintiffs bring six counts against the defendants for violation of the Securities Act of 1933 and the Securities Trading Act of 1934, as well as breach of contract and undue enrichment. They claim restitution, damages plus interest.
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