Bancor, a veteran DeFi protocol, was heavily criticized for suspending the impermanent Loss Protection Program at a time liquidity providers needed it most.
Bancor, a Decentralized Finance (DeFi) protocol, is often credited with being the pioneer in the DeFi space. On Sunday, Bancor halted its permanent loss protection (ILP), citing “hostile market conditions”.
The DeFi protocol posted Monday’s blog post stating that the ILP Pause is temporary to protect the protocol as well as the users. The blog post said:
“The temporary measure to pause IL Protection should allow the protocol to breathe and recover. We are waiting for markets stability to ensure that IL protection is reactivated as quickly as possible.
If a user provides liquidity to a liquidity pool at a later time, the ratio of their deposited assets changes. This can potentially leave investors with less of the lower-value token.
Bancor’s protocol liquidity was used for ILP. The protocol staked its native token BNT into pools and used the collected fees as reimbursement for users who suffered temporary losses. This process burned excess BNT if the trading fees generated by a stake are greater than the cost for impermanent loss.
In 2020, the ILP function was introduced for the first time. It was further refined with the launch Bancor 3 the second week in May. The recent market turmoil that saw cryptocurrencies drop 70% from their top positions had a negative effect on the DeFi market. DeFi protocols made several important changes to address this issue.
Bancor believes that the IRL pause would allow the protocol to take a break, but many people in the crypto community are unhappy about the decision. Cobie, host and co-host of the crypto podcast Uponly Tv, criticized Bancor’s decision to pause the IRL at a time when liquidity providers most need it.
Paradigm’s research partner, Hasu, looked into the impermanent loss insurance claims of Bancor, and how they could lead to another “spiral fall.”
Hasu questioned the strategy behind ILP compensations, and claimed Bancor is losing its shell game of IL concealment. He said:
They print new BNT to offset underwater LPs, and call it IL protection. Inflation causes additional IL to all BNT pairs and further inflation. A death spiral.”
He continued by saying that the ILP program’s failure is evident in the price action of BNT, their native token. In the past two weeks, tokens of decentralized exchange (DEX), such as SushiSwap and Uniswap had fallen by almost 20% and Uniswap Uni by 66% respectively. This was due to the high inflation caused by ILP payments.