Bancor Protocol is one of the pioneers in the Automated Market Maker (AMM) space. It created the first-ever AMM – omnipool, which requires all tokens to be paired against their native token, $BNT.
Bancor Protocol has actively tried to solve some problems with traditional AMMs like fragmented liquidity and impermanent loss (IL). To close this gap, Bancor has announced and deployed Bancor V3, an innovative AMM solution, with central pools and enhanced IL protection.
What Is the Current Situation of Bancor?
In a recent blog post, Bancor Protocol announces pausing their famous Impermanent Loss Protection. Although Bancor hints at a plan to recover for $BNT, its native token, some dots are left untouched. Also, $BNT is down almost 40.1% in the last week. Allowing IL to continue implies a further dump in $BNT.
Moreover, Bancor has a complex design in place to manage IL for liquidity providers. In short, whenever an investor incurs IL, Bancor mints $BNT to cover it. But we know when the token supply increases with sustained sell pressure, the price goes down. In this case, whenever Bancor prints a new $BNT, its value depreciates, which leads to more IL.
On the other hand, it’s important to mention that 3AC and Celsius have sold their BNT rewards that were accrued since January 2021, and withdrawn that liquidity from the protocol. It precipitated a liquidity crisis, and Bancor had to take some bold steps.
Is This the End of Bancor?
Bancor promises that they will re-introduce IL protection when the market stabilizes. However, the crypto market is known for its volatility, and stability is an ideal, not a reality.
The truth is, Bancor did not have any other immediate solutions to tackle this liquidity crisis and the eventual death spiral of $BNT. Maybe they should have limited withdrawals and introduce an effective cap for IL protection. Yet, writing off Bancor is not very logical. Bancor is an innovator, and just like other defi platforms, it is also suffering from negative market conditions.
Can Bancor pass the test of the bear market? Probably it can. Bancor V3 is still in the making, and two more phases – sunrise and daylight, are yet to be introduced. A solid roadmap and strong leadership are necessary for any project to survive a bear market, and Bancor has what it takes to outperform many of its competitors. Here is one of the tweets describing the Bancor situation:
.@Bancor halting Impermanent Loss Protection (ILP) was a calculated move @CelsiusNetwork needs liquidity now and so they’ve been withdrawing assets from Bancor, selling their $BNT ILP rewards, and allegedly shorting $BNT on FTX
Thus, Bancor is disabling ILP until they’re gone https://t.co/Xd0YlM5cIZ
— ChainLinkGod.eth (@ChainLinkGod) June 20, 2022
What Are the Options Available for an Investor in Bancor Now?
You can not deposit new funds to Bancor as of now. Although you can withdraw your liquidity, you will not enjoy IL protection. However, if you keep your funds with Bancor until they reactivate IL protection, you can be eligible for IL protection for the whole period.
Therefore, an investor has two options. Either remove liquidity or suffer IL. This last option can be pretty costly, given the condition of the market.
Bancor is one of the leading innovators in the AMM space, and their V3 was a big success. They have taken a logical step to protect their platform over the interest of investors. There are best practices in defi, and the recent move by Bancor is definitely not one of them. Can Bancor deal with the crisis and emerge as a winner? Only time will tell.
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