DeFi protocol Bancor pauses impermanent loss protection
Bancor is gathering criticism for halting the ILP function when liquidity providers need it the most during the current market meltdown
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DeFi protocol Bancor, a pioneer in the decentralised finance (DeFi) space, halted its Impermanent Loss Protection (ILP) function. It cited 'hostile market conditions' and 'manipulative behaviour' as the primary reasons for the sudden halt.
The DeFi protocol stated in a blog post on Monday that the ILP pause is a temporary measure to protect the protocol and its users. According to the blog post, “The temporary measure to pause IL protection should give the protocol some room to breathe and recover. While we wait for markets to stabilise, we are working to get IL protection reactivated as soon as possible.”
The announcement came after a tough week for the crypto market, including Bancor's native token, BNT. Bancor Network Token (BNT) is currently down by 49.1 percent in the last seven days, trading at $0.521353. BNT was consistently dumped over the previous 18 months, causing the asset's price to plummet. BNT has lost approximately 95 percent of its peak in 2021.
When a user contributes liquidity to a liquidity pool, the ratio of their deposited assets changes later. This arrangement leaves investors with more of the lower value token, which we refer to as impermanent loss.
While most decentralised exchanges, such as Uniswap, do not protect against the temporary loss, Bancor compensates for it by awarding newly minted Bancor tokens as rewards. It is up to LPs whether they want to hold or sell these tokens in the market.
