Bancor (BNT) End Impermanent Loss Protection, Blame ‘Hostile Market Conditions’

Bancor Protocol has ‘paused’ impermanent loss protection, blaming hostile market conditions for the move. 

The announcement came on Sunday, following a tough week for crypto markets and a tough week for Bancor’s native token. Bancor Network Token (BNT) is currently down 49.1% over the past 7 days at $0.521353.

According to Bancor, their decision came as a response to the ‘recent insolvency’ of ‘two large centralized entities.’ The company did not go as far as to name the two.

“Due to hostile market conditions, Bancor’s Impermanent Loss Protection is temporarily paused,” said Bancor in a Medium post earlier today. “IL protection will be reactivated on the protocol as the market stabilizes. This is a temporary measure to protect the protocol and its users.”

Last Monday, crypto lending platform Celsius suspended all withdrawals amid growing concerns for its future. Venture capital (VC) firm Three Arrows Capital is facing an insolvency crisis of its own. The struggles of these big players have helped to foment an atmosphere of fear, uncertainty, and doubt right across the market.

Bancor names names

In an AMA also released this Monday, Bancor’s Head of Research, Mark Richardson, joined the dots for those who hadn’t already done so themselves. While Bancor’s Medium post failed to name any specific players, Richardson was markedly less reticent.

“We found another Celsius wallet that was going to withdraw $10 million from the protocol and there’s also been a sort of wave of additional panic on the protocol that resulted in a very, very large amount of withdrawals piling up,” he said. “It started to look something like a bank run event where it would be difficult to imagine the protocol withstanding such a very – such a large flight of liquidity all at once.”

Richardson went on to say that one centralized entity was now regarded as a “hostile antagonist against the Bancor protocol,” because it is “creating short positions” and attempting to manipulate the price of $BNT.

It seems this once happy family of crypto whales is now eating each other alive and Richardson is less than happy about the situation.

“I am extremely disappointed with our industry that it even came to this,” he said.

FYI: impermanent loss in brief

Users are exposed to impermanent loss when staking their tokens in a liquidity pool of two or more tokens. This staking creates an automated market maker or automated liquidity pool, which users can employ to swap tokens in a decentralized way. Popular examples include Uniswap, Pancakeswap, and SushiSwap. A major pioneer of the liquidity pool system was Bancor.

While liquidity pools offer users the opportunity to earn interest or fees from their staked funds, there is some concomitant risk. If the price of tokens in the pool diverges too much, the appreciating asset in the pool can be removed and replaced with devaluing or stable assets. This maintains the balance of the liquidity pool and ensures that the value of no single asset is greater than the other asset or assets.

When a user decides to remove their staked tokens, the return they receive is measured as their percentage of the pool. (If they had 10% at the time of staking, they receive 10% of the pool on exit.)

The user may then find that the fiat value of their pool entitlement is actually lower than if they had simply hodled their tokens.

Impermanent loss does not take into account any profits that the user may have made from trading fees while their assets were staked. Therefore, it is possible to suffer an ‘impermanent loss’ and still make a profit.

Impermanent loss protection was first rolled out by Bancor in Oct. 2020 and offered a safety net for those contributing to their liquidity pools. Now, with crypto entering a bear market, that safety net is gone.

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