Bancor’s Latest Attempt at Combatting Impermanent Loss

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It was just back in Q2 2020, Bancor launched BancorV2. This particular upgrade on the decentralized exchange (DEX) was pretty much regarded as an overhaul of the whole Bancor exchange. The update was publicized to be able to eliminate impermanent loss. While it did make strides combatting the growing issue, impermanent loss wasn’t completely eliminated.

Now, Bancor is once again at it, announcing recently that another major update is at hand – Bancor V2.1. This latest update will introduce the impermanent loss insurance model, which ensures that liquidity providers (LPs) will get up to 100% of their preliminary capital on top of the accumulated fees. The precise percentage LPs would receive will undergo a vesting schedule corresponding to how long they have been providing liquidity. Total coverage comes after 100 days. Notably, there would be a 30-day cliff wherein no payments will be expended.

Bancor also clarified that it would pay for the insurance claim itself alongside BNT holders via on-demand production of new tokens whenever necessary. It is also worth noting that the community will vote on the exact vesting thresholds and the pools insured through governance tokens.

This particular approach of Bancor somehow mirrors Uniswap’s current implementations regarding the very issue. That being said, what separates the two is Bancor’s inclusion of a deflationary framework.  Considering that all pools employ BNT as its second token, Bancor will be able to offer single-token liquidity provision. Basically, it would just produce the same amount of needed BNT. The protocol will then incur appropriate fees as the pool’s co-investor. Whenever someone chooses to only go with BNT, the aforementioned minted supply and the costs accumulated will be disregarded and burned, which results in a restriction of the net supply. Bancor expects fee-driven deflation to remain and earn value for its token holders with more usage and low volatility periods.

Bancor, as well as the entire industry, are slowly realizing that impermanent loss is impossible to eliminate. With each newly introduced solution, certain drawbacks arise. As one problem is solved, another one pops up. It is now clear that impermanent loss is inevitable; all protocols could do is mitigate and hope to lessen its risks. Bancor hopes to do just that with their latest approach – Bancor V2.1.

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