Bancor, DeFi veterans, has introduced a new impermanent liquidity solution that protects against loss to make stake taking easier and more efficient.
Bancor is an early decentralized finance protocol ( DeFi). It announced that the much-anticipated protocol upgrade, Bancor 3 has been released in beta and launched on mainnet. This brings with it many new features and improvements.
The team claims that Bancor 3’s main objective is to provide token projects with sustainable on-chain liquidity. Participants will be given enough incentives to use Bancor 3, including dual rewards, auto-compound earnings and, perhaps, the ability to instantly get 100% impermanent Loss Protection.
Impermanent loss occurs when users provide liquidity to a liquidity Pool. Investors could be left with more tokens of lower value if the ratio of their deposited assets changes later. This can lead to a very painful experience. Users are more likely to suffer permanent loss if the change is large.
Bancor says that the problem is that many DeFi projects ignore it, “just brushing under the carpet.” This ultimately leads to inaccurate APR numbers (annual rate of returns expressed in percentages) reported by some protocols.
“Many token owners have learned the hard lesson that APR figures don’t include impermanent losses; instead, they only see fees and not liquidity. However, this assumes that liquidity remains the same over time,” Mark Richardson of Bancor’s product architect told Decrypt.
Richardson stated that to get true APR you need transaction fees. This is in addition to impermanent loss of liquidity.
“Token holders are realizing that the APR they see going in is not what they get out, and have begun to withdraw from trading inside liquidity pools. He said that this is bad for trust, liquidity, and the development of DeFi.
Richardson says that in order to create truly sustainable, decentralized liquidity markets, Richardson recommends a broad, sustainable participation in liquidity pools with a variety of participants (not only market-making firms).
How impermanent loss protection works
As Richardson explained to Decrypt, Bancor’s Impermanent Loss Prevention (ILP) features impose a cost on protocol that is similar to an insurance company’s insurance costs. The cost of this feature is offset in two ways.
Bancor’s protocol owned liquidity funds ILP. The protocol stakes its native token BNT into its pools, and then uses the earned fees as compensation for any permanent loss. The protocol burns excess BNT when the earned trading fees exceed the cost of impermanent losses on any stake.
Richardson stated, “Since June last year, BNT has been in a gradually deflationary trend. This means that the protocol can reduce BNT supply while fully protecting LPs through protocol-earned fees.”
Another mechanism to fund Bancor’s ILP funding is a protocol-wide fee. This “confiscates 15%” of all trade revenue on Bancor’s network and uses the collected fees for Bancor’s governance token. It is generated every time BNT is deposited into the system by a user.
Bancor’s first ILP version was released in 2020. It claims that it is the only protocol that protects liquidity providers from such losses. Bancor V2 (technically, v2.1) further enhanced the mechanism. However, V3 introduced new refinements.
Richardson explained to Decrypt that Bancor version 2.1 offered impermanent protection. However, the protection was vested over a 100 day period. This meant that an LP had to remain in the pool for 100 consecutive days to get 100% protection. “LPs receive impermanent loss protection in 100% instantaneously with Bancor 3.
Bancor 3 users get more perks
Bancor 3 users also get a single-sided model of auto-compounding and unlimited single-sided stake.
Contrary to traditional yield farming programs, single-sided auto-compounding is not possible. Rewards must be staked in a separate rewards agreement and manually re-staked either by a third party auto-compounder (which collects a fee or by each LP) before they can be withdrawn.
Single-sided staking allows users to provide liquidity and generate yield with a single token without having to buy or pair 50/50.
“Bancor spent the last several years creating DeFi’s equivalent to a high-yield savings bank: deposit your assets and then sit back and watch as you earn. Richardson stated that Bancor 3 helps token projects and their users to safely tap into DeFi yields and creates resilient and robust on-chain liquidity markets which drive healthy token economies.”
The team claims that Bancor 3’s launch attracted more than 30 token projects, DAOs and DAOs such as Flexa (AMP), Brave (BAT), Flexa(AMP), Yearn [YFI], Enjin [ENJ], WOO Network (WOO), Nexus Mutual (wNXM), Synthetix (“SNX”), Brave (BAT), Brave (BAT), Brave (BAT), Flexa” (AMP), Flexa (AMP), Yearn]
Each project provides seed liquidity to the network or offers liquidity incentives through Bancor’s new auto compounding rewards system.