Due to “hostile market conditions,” pioneer DeFi trading platforms, Bancor, terminated its temporary loss insurance program over the weekend. This prompted accusations that it wasn’t truly decentralized. If the value of the tokens that the liquidity providers have put on automated market makers increases in the secondary market, the liquidity providers may experience what is known as an Impermanent Loss (IL). Rather than investing their tokens into the liquidity pool, liquidity providers would profit more by just keeping their tokens.
Funding for IL protection was provided by the Bancor protocol, which staked its BNT tokens in pools, and utilized the fees to reimburse users for any shortfalls. BNT is essentially burned when trading fees earned exceed the cost of temporary loss on a specific stake.
The genesis and aftermath of Bancor’s suspension IL protection
In a blog post on Monday, the DeFi protocol stated:
“The temporary measure to pause IL protection should give the protocol some room to breathe and recover. While we wait for markets to stabilize, we are working to get IL protection reactivated as soon as possible.”
Obviously, most DeFi enthusiasts aren’t amused by that statement. Many of them feel cheated by Bancor and its claim of decentralization. Furthermore, many liquidity pool providers feel deserted at a time when the market is down and they need Bancor the most. Rubbing salt into Bancor’s wound is its rival DeFi platform, CVI. Through a series of Tweets on Wednesday, CVI and COTI taunted Bancor’s impairment loss mechanism. COTI CEO, Shahaf Bar Geffen even went as far as describing it as “flawed”.
While some people might see sense in Bancor’s decision to suspend IL protection, it may have damaged its reputation. As the platform waits for the market to stabilize, it may just have lost a significant number of users for good. Nonetheless, it will be interesting if Bancor could emerge from this unscathed.