DEFI

Bancor, an AMM protocol, suspends impermanent loss protection and cancels additional token rewards due to market pressures.

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Bancor, an AMM protocol, suspends impermanent loss protection and cancels additional token rewards due to market pressures.

In adverse market conditions, AMM platform Bancor announced the suspension of its protocol's unique impermanent loss protection measure. While Bancor has rarely been commented on by the market in the past, this move has not only drawn attention from the crypto community but also sparked reflections. Criticisms once directed at traditional finance are now manifesting in both DeFi and CeFi, such as Celsius pausing user withdrawals, Three Arrows Capital and Terra likened to the Lehman Brothers of the crypto industry, and lending protocol Solend attempting to propose the takeover of user funds. Bancor's decision to cancel the protection mechanism at a time when liquidity providers needed impermanent loss protection the most has raised concerns.

Bancor Suspends Impermanent Loss Protection

On June 20th, the official announcement was made that due to unfavorable market conditions, the Impermanent Loss (IL) protection is temporarily suspended. This measure is taken to protect the protocol and users as a temporary measure until the market stabilizes, allowing the protocol to breathe and recover. The announcement also emphasizes:

  • No attack, funds are safe.
  • When restarted, users will receive equivalent IL protection during the suspension period, and withdrawals during this period will not be included in the calculation.

Note: For an explanation of Impermanent Loss, please refer to the official documentation.

Bancor, known for its long-standing Automated Market Maker (AMM) status and claim to solve Impermanent Loss, has been trying to establish its presence in the Decentralized Exchange (DEX) market. However, in reality, it is closer to compensating Impermanent Loss with additional token rewards rather than addressing this AMM pain point.

Hayden Adams, the founder of Uniswap, has also stated that there is no free lunch in the world. While liquidity providers earn higher fees and token rewards, they also face higher risks such as Impermanent Loss.

As a result of Bancor's approach of using additional token rewards to address Impermanent Loss, it has faced significant selling pressure during market volatility. The official statement highlights several cost pressures:

  • The accumulation of token reward selling pressure over the past 18 months led to the need to suspend Impermanent Loss protection.
  • The suspension of Impermanent Loss protection further contributed to the devaluation of the token.
  • These costs were exacerbated by the bankruptcies of 3AC and Celsius, both of which rapidly liquidated BNT positions and withdrew significant liquidity.
  • Unknown entities holding significant BNT short positions.

In March of this year, Bancor introduced governance proposal BIP21, which allows for multisig intervention to intervene when there are attempts to exploit Impermanent Loss protection. This enables Bancor DAO to approve the temporary suspension of Impermanent Loss protection.

Bancor has stated that it will wait for the market to stabilize and research the best solution to restore Impermanent Loss protection during this period, with a detailed report to be released thereafter.

Community Comments

Mysterious governance proposals have been emerging amidst the market's intense volatility recently, with a ChainLink community ambassador expressing:

Bancor promised Impermanent Loss protection but canceled it when it was most needed, which will hurt many people. We criticize everything about TradFi, but now it's happening in DeFi and CeFi, saying one thing and doing another - fate is ironic.

Trader Cobie also sarcastically commented:

Bancor just issued more BNT tokens to compensate for Impermanent Loss and then canceled it when it was most needed. What's the point of protection? The reason for the suspension is the same as the original intent of designing and building Impermanent Loss protection.

Bancor held a community AMA to address this and invited Cobie to participate, but he stated that this AMA was amusing. Bancor claimed that a user was exploiting Impermanent Loss protection to avoid losses and receive excessive BNT token rewards, viewing the user's behavior as an economic attack. However, isn't this the intended design of Impermanent Loss protection?