Bancor, a decentralized finance (DeFi) protocol often credited as the pioneer of the DeFi space, paused its impermanent loss protection (ILP) feature on Sunday, citing “hostile” market conditions.
In a blog post on Monday, the DeFi protocol noted that pausing the ILP is a temporary measure to protect the protocol and users. In the post you can read:
“The temporary move to pause ILP protection should give the protocol some breathing room to recover. While we wait for the markets to stabilize, we are working to get ILP protection back on as soon as possible.”
When a user provides liquidity to a pool, the ratio of their deposited assets changes at a later point in time, potentially leaving investors with more of the lower value token, known as an impermanent loss.
Bancor’s proprietary protocol liquidity was used to fund the ILP: the protocol locked up its native BNT token in pools and used the fees collected to reimburse users for any temporary losses. The process effectively burned excess BNT when the trading fees generated were greater than the cost of impermanent loss at a given stake.
The ILP feature was first introduced in 2020 and updated with further refinements with the release of Bancor 3 in the second week of May this year. However, the recent market volatility that has led to a 70% decline from the high of most cryptocurrencies has had an adverse effect on the DeFi market as well, leading to several critical changes made by the protocols. DeFi.
While Bancor hopes that pausing the ILP will help the protocol take a breather, many in the crypto community were unhappy with the decision. Cobie, host of the cryptocurrency podcast Uponly Tv, criticized Bancor for pausing the feature when liquidity providers need it most.
what is the point of impermanent loss protection if it just disappears when u most need it LOL pic.twitter.com/GAJyhr6Tib
—Cobie (@cobie) June 19, 2022
hasu, research collaborator at the company Paradigm, focused on investing in Web 3.0, went further into the impermanent loss protection claims made by Bancor and how it could lead to another “spiral collapse.”
Hasu questioned the ILP offsets strategy, saying that Bancor’s game of hiding impermanent losses is collapsing. He added:
“They print new BNT to compensate liquidity providers for losses and call it ‘impermanent loss protection’. The cost is passed on to BNT holders through inflation, causing more impermanent losses to all other currency pairs.” BNT, and leads to more inflation. A death spiral.”
You can see it clearly in the price performance of these DEX tokens:
UNI -20%
SUSHI -20%
BNT -61%Now Bancor is pulling the plug to stop the bleeding. Didn’t even take three weeks for my prediction to play out.
More reading: https://t.co/WZGiTV4Pa3
— Hasuâš¡ï¸ (@hasufl) June 20, 2022
He went on to add that the failure of the ILP program is visible from the price action of its native BNT token over the past two weeks, where decentralized exchange (DEX) tokens such as SushiSwap (SUSHI) and Uniswap (UNI) had fallen almost one 20%, while BNT has posted a 66% decline in the same time frame due to high inflation caused by offsets from impermanent loss protection.
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