Bancor, the on-chain liquidity protocol has proposed a promising solution to the lingering issue of impermanent loss in DeFi protocols. According to the official proposal, Bancor v2.1 will facilitate liquidity protection and single-sided exposure. With these two key features, Bancor promises to offer something unique to build a sustainable and profitable protocol.
Impermanent loss is often explained as a difference between holding a digital asset versus providing liquidity in the digital asset pool. Effectively, it has become one of the prime reasons for users not wanting to participate in AMMs. Bancor v2.1 proposes a single-sided AMM with Elastic BNT Supply which will provide impermanent loss protection to the liquidity providers.
This protected liquidity pool offer holds more advantages for the BNT holders. They can choose to stake their BNT in the protected liquidity pool and generate vBNT, Bancor’s new governance token. By staking BNT tokens, the stakers can also earn impermanent loss insurance.
How does it work?
The risk of impermanent loss is a serious issue in the DeFi space and is yet to be fixed by any AMM protocol. The DeFi users are either avoiding the risk by not participating in AMMs or are hopping from pool to pool to cover their impermanent losses.
Bancor v2.1 employs a very unique approach to cover the cost of impermanent loss. According to the official blog, it uses the native BNT token as the counterpart asset in every pool. The elastic BNT supply makes it possible for the protocol to co-invest in every asset pool. With this co-investment, the protocol covers impermanent loss and swap fees.
The big value proposition for liquidity providers
With such a unique system in place, the liquidity providers can stay long on their tokens and can collect more swap fees in an AMM. Most of the protocols try to cover up impermanent losses with temporary fixes. There are – providing airdrops and liquidity mining rewards to LPs. However, Bancor is trying to permanently fix the risk of impermanent losses to liquidity providers.
More for stakers
BNT holders can choose to provide liquidity to a whitelisted (protected) pool. In return, they will receive vBNT, the new governance token. This promises that their BNT stake remains protected and also gives them voting rights for protocol upgrades. According to the official blog, 23 out of 60 token pools are already whitelisted and the BNT holders can immediately start earning liquidity protection.
Proposal approval
The community discussion of the proposal is open on gov.bancor.network, Discord, and Telegram Channels. However, the voting on the proposal will occur between October 14 – 17, 2020. Once the community approves the proposal, Bancor v2.1 will go live on mainnet within a couple of days.
BNT price reacts
It is interesting to notice that the BNT price is already reacting to the news. At the time of the press, the token is up by 12.3% in the last 24 hours.
Related topics: REN and RENBTC become Bancor V2 liquidity pools
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