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Bancor comes up with Impermanent loss protection measures with its new upgrade

Photo of: Dennis Ramos
by Dennis Ramos

Bancor, a decentralized on-chain liquidity protocol has proposed a major upgrade that is touted to introduce several improvements to the platform apart from its oath to provide protection against impermanent loss. The wait had been long enough but In July Bancor finally announced its protocol upgrade and right after that it has come up with v2.1 which will bring in a plethora of improvements as well as protection measures that will boost its capabilities further. 

Bancor is a popular protocol meant for the creation of Smart Tokens which is a new standard for cryptocurrencies. These are inherently exchangeable directly through their smart contracts. Bancor has an innovative reserve method that enables automatic price discovery and continuous liquidity for tokens without the need to match two parties in an exchange. The different smart tokens interconnect to form token liquidity networks that allow user-generated cryptocurrencies to thrive. 

The protocol also is said to function in a manner similar to Uniswap because its reliance on liquidity is on the higher side. It makes use of the algorithmic market-making mechanism with the use of smart tokens that will allow for liquidity to exist and float well as well as the provision of accurate prices to maintain a fixed ratio to connected tokens.

Liquidity does not discourage holding long positions but it requires the token holders to give up their long positions so that they can also get their share of exposure to other assets located in the pool. This can expose them to something called an impermanent loss. 

In essence, the impermanent loss is a temporary loss of funds that happens during the provision of liquidity. It is usually the difference between holding an asset versus providing liquidity in that asset. It is usually observed in standard liquidity pools where the liquidity provider will provide both assets in the correct ratio.

Bancor’s v2.1 version offers two key features to AMMs, one is liquidity protection which is basically impermanent loss insurance and single-sided exposure. The officials from the protocol added that the protocol will be key in protecting the value of the tokens that are deposited irrespective of their price. The liquidity providers can accumulate protection over a period of time while earning from swap fees. This can be done with Bancor’s governance token BNT token which will be the similitude asset in every pool.

“Using an elastic BNT supply, the protocol co-invests in pools alongside LPs and covers the cost of impermanent loss with swap fees earned from its co-investments.”

It further added that DeFi farmers who give liquidity to the best pools also get vBNT tokens representing their stake. This can further be used for governance and voting. The upgrade is presently in the form of a proposal and will go to a governance vote between 14th October and 17th October. Looks like the markets have also taken well to the news of the upgrade. Bancor Network token’s price today was $1.34 and a trading volume of $88,835,775. Its price is also up by 18.2% in the last 24 hours.