Decentralized exchange Bancor Protocol halts Impermanent Loss feature after increased market volatility

  • Bancor protocol has paused its impermanent loss protection feature due to the prevailing market downturn and its knock-on effects.
  • Its case has once again shown the architectural weakness in some of DeFi’s projects.

Citing “hostile market conditions,” Bancor Network has halted its Impermanent Loss (IL) Protection to its liquidity providers (LPs). The decentralized exchange has also voted (through its DAO) to discontinue rewards on its mainstay liquidity pools.

Typically, LPs accrue mining rewards and swap fees, other than possible “HODL” rewards when the price of a token(s) shoots up. However, in the event LP tokens fall to a lower price than when they first purchased them, then an impermanent loss is said to occur.

To hedge its users against what it called “crypto’ silent killer,” Bancor implemented IL insurance in November last year.  It was one of the new features installed when it launched version 3.

Bancor Network halts Impermanent Liquidity insurance

With the current market conditions, Bancor says it has now noticed the occurrence of “anomalies, if not manipulative behavior.” Liquidity mining rewards are now double what they cost before, causing IL to the network. Additionally, compensating impermanent loss requires new BNT tokens, which only hurts their price.

Aside from that, Bancor says it has also suffered from the recent pull away of two major centralized liquidity providers. Following their insolvency, the LPs were forced to liquidate and withdraw their BNT tokens to cover their liabilities. Even more, an anonymous entity is planning to short BNT tokens on a separate exchange. 

As much as Bancor says the worst dumpings are behind, it maintains that the pause “should give the protocol some room to breathe and recover.” Meanwhile, discontinuation of the “unnecessary” liquidity mining rewards will ensure the yields exclusively come from transaction fees.

For now, the insurance pause awaits approval by the Bancor DAO. Bancor says the measure is a temporary one, promising restoration to normalcy “as the market stabilizes.”

Meanwhile, other activities on the protocol will continue as before. Users can withdraw their funds at will, but this will require them to move their assets to V3. New LPs cannot, however, make deposits to “prevent confusion” in case they are unaware of the insurance pause. 

Flaws uncovered

Naturally, crypto users took to Twitter to voice their frustrations with these decisions. @cobie said the move only showed IL insurance was somehow pointless since it disappears when most needed. @ChainlinkBrit called it out as “another house of cards protocol waiting to fall.”

The case of the Bancor protocol, yet again, brings to light the weakness in the design of some DeFi platforms. High-yield earning platforms Celsius and Babel Finance halted withdrawals, while Finblox capped them. Meanwhile, Three Arrows Capital, a major investor in some of these DeFi projects, is on the brink of insolvency.

At writing time, BNT was priced at $0.60, over 93 percent down from its March high of $9.

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