Bancor Protocol suspends Impermanent Loss Protection

The Bancor DeFi protocol team has paused its Impermanent Loss Protection (ILP) feature due to ‘hostile market conditions’.

Due to hostile market conditions, Bancor’s Impermanent Loss Protection is temporarily paused. IL protection will be reactivated on the protocol as the market stabilizes.

More info: https://t.co/pHrdO4sTFd

We’re hosting a community AMA in 15 minutes: https://t.co/xgh8UmfNoL

— Bancor (@Bancor) June 19, 2022

“The measure to suspend IL protection should give the protocol a little time to breathe and recover. While we wait for market stabilization, we are working to reactivate the option as soon as possible,” the blog says.

ILP compensates potential temporary losses for users when depositing assets into the protocol’s liquidity pools using BNT tokens. The tokens come from rewards for providing liquidity in Bancor-owned pools or from an additional issuance.

The protocol team noted that a recent sell-off by users of rewards accrued over the past 18 months necessitated issuing new BNT.

The downward pressure on the token’s price was attributed to the insolvency of two large centralized entities, which the developers did not name. These institutions were notable beneficiaries in liquidity-mining pools as long-time providers in Bancor V2.1.

“To cover their obligations, they quickly liquidated their BNT positions and pulled large sums out of the system, while an unknown party opened a large short position on the token on an external exchange,” the team explained.

Bancor said there are no ongoing attacks at the moment; assets in the protocol are safe.

Depositing is also temporarily paused. Withdrawals are possible only via Bancor V3 without loss compensation. Users who leave assets in the liquidity pools will be able to withdraw them later with ILP reactivated, the team said.

“What’s the point of Bancor’s ILP if it just disappears when you need it most,” commented influencer Cobie.

He noted developers’ remark that the suspension of the option is linked to how they “designed and built it.”

“What is the point of impermanent loss protection if it just disappears when u most need it LOL picwitter.com/GAJyhr6Tib” — Cobie (@cobie) June 19, 2022

Hasu: “Bancor’s shell game of IL hiding is collapsing. They print new BNT to compensate underwater LPs and call it “IL protection”. The cost is transferred to BNT holders via inflation, which causes further IL to all other BNT pairs, and leads to further inflation. A death spiral.”

On June 13, amid the crypto market downturn, Celsius Network paused withdrawals, trading and transfers between accounts.

Since then, BNT’s price has fallen by nearly half—from around $1 to around $0.52 (Bitfinex).

Following the market crash, reports of possible insolvency of hedge fund Three Arrows Capital emerged. Co-founder Su Zhu did not directly confirm the rumors, but stated that they are committed to addressing the issue.

As of June 18, the volume of assets in the DeFi ecosystem fell to $70.72 billion — down 71% from the December 2021 peak.

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