Monday, December 11, 2023

Latest Bancor Update Gives DEFI Investors Loss Protection Solution

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The latest Bancor update gives DEFI investors a new impermanent loss protection liquditiy solution to make staking more efficient and accessible so let’s find out more about it in today’s latest crypto news.

Bancor is a decentralized finance protocol that announced that it is much-anticipated protocol update is out of beta and launched on the mainnet, bringing more features and a few improvements. According to the team, the main goal of the latest Bancor update is to create sustainable on-chain liqudity for token projects and the idea is to give participants more incentives to use the protocol including auto-compound earnings, rewards, and the ability to receive 100% impermanent loss protection.

In the DEFI world, the impermanent loss happens once a user provides liquidity to a liquditiy pool, and the ratio of the deposited assets changes at a later point which can leave investors with more of the lower value token. This can be a painful experience as the bigger the change, the more users are exposed to the loss. The problem is that most defi projects seem to ignore the issue and just brush it under hte carpet but this results in an inaccurate annual rate of return. The product architect Mark Richardson said:

“Many token holders have learned a hard lesson that the APR figures they see do not include impermanent loss; rather, they just see fees over liquidity. But that assumes that liquidity stays the same over time.”

DeFi Tokens Were, tokens, price, market,

To get true APR, Richardson explained that you would have to make transaction fees without the impairment loss over liquditiy:

“As more token holders have started to realize that the APR that they see going in is not what they eventually get out, they have started to pull back from staking inside liquidity pools. This is bad for trust, it’s bad for liquidity and it’s bad for the development of DeFi.”

To build sustainable decentralized liquidity markets, broad and sustainable involvement in the liquditiy pools is needed. Richardson explained that Bancor’s impermanent loss protection features impose a cost on the protocol and it will be offset in two ways. ILP is funded by the Bancor liquidity so the protocol stakes its native BNT token in the pools and uses the earned fees to compensate the users for the losses so when earned trading fees are bigger than the cost of the impermanent loss on the stake, the protocol is burning excess BNT. The other mechanism is a fee that confiscated 15% of all trade revenue on the network and uses the fees to buy and burn vBNT.

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