The total value locked (TVL) in Bancor, a non-custodial exchange and one of the oldest DEXes in the crypto world, is up 10x in six months, trackers on March 11 reveal.
The Exponential Rise of Bancor TVL
TVL is a metric that shows the dollar-value of digital assets a given protocol manages at any point in time.
Within the Ethereum DeFi ecosystem, Bancor presently manages $1.54 billion of tokens, up from around $175 million in July 2020. The rapid expansion of the protocol’s TVL is at the back of users’ rising interest in DeFi and innovation.
Reflecting the demand for the native token, BNT, is the parabolic rise of prices over the last few months.
Year-to-date, the price of BNT is up 33x, presently trading at $8.45, adding an impressive 217 percent in the last month versus the greenback.
Outperforming Bitcoin and Ethereum
At the same time, it has added triple-digits versus BTC and ETH.
What’s notable is that within the same period, BTC and ETH prices have been on a tear. Specifically, Bitcoin prices surged past $20k, more than doubling, peaking at around $58k, where prices are currently perched.
Accordingly, that the BNT token outmatched BTC during the same period shows the level of interest, the utility of the platform, the unprecedented demand for DeFi over the last few months.
The Rise of AMMs
While DeFi dominated proceedings, the rise of Bancor is because of the release of V2.1, introducing single-sided exposure, and impermanent loss insurance.
Launched in Nov 2020, the new, differentiated product is the fuel rocketing the protocol’s TVL. The approach adopted by Bancor is unique, diverging from those of Uniswap and Sushiswap, for instance.
💰 Lock in higher, more reliable APY with impermanent loss protection.
— Bancor (@Bancor) November 5, 2020
The innovation stems from the Automated Market Maker (AMM) model’s weakness, which allows ordinary token holders to be potential liquidity providers, supplying digital assets to liquidity pools.
As an incentive, AMM-powered protocols often offer airdrops and rewards relative to LP tokens’ amount. These incentives and rewards are meant to cushion the liquidity provider against impermanent loss.
The Impermanent Loss Problem
It is comparable to opportunity cost since once a user supplies two assets to a given pool, he/she forfeit capital gains. Instead, he/she gets exposure to another asset.
Typically, the larger the divergence, the more losses there are.
This is an undesirable aspect of AMM and double-sided asset exposure tagged by AMM models. While it may be “temporary” and only applicable when supplying liquidity to a given pool, a new approach was required.
Notably, eliminating the need to supply two assets of a pool (of which one is more volatile than the other) at a pre-determined ratio (of say 50:50) could spark demand, even allowing users who, ordinarily, won’t supply liquidity, but prefer holding, to participate.
Bancor v2.1 to Mitigate Impermanent Loss
Bancor’s approach to building a sustainable DeFi protocol suitable for all cadre of investors circled on mitigating the impermanent loss problem. Their solution was in the release of v2.1. The new update introduced insurance for liquidity providers in any approved pool and the concept of single-sided asset exposure.
Here, the protocol offers to protect the value of the digital asset deposited while concurrently introducing flexibility.
In Bancor v2.1, a liquidity provider can earn swapping fees and have the freedom of pooling out liquidity if his interest shifts, booking capital gains.
However, the take is that the LP provider has to supply liquidity for longer for their impermanent loss protection to be larger. It tags along added benefits. The longer the liquidity provision period, the higher the ROI for the user.
BNT is Central to v2.1
For every BNT deposit to an approved, protected pool, the user earns vBNT tokens. These are tokens that can be used in governance, determining how the pool can be managed while not causing a differentiation between ordinary holders and liquidity providers.
The system improves on v2, which introduced price oracles. This new arrangement–and a reason attributed to sparking interest in the project, subsequently pushing TVL higher, is their use of the elastic BNT supply.
For every deposit, the protocol co-invests. The BNT token acts as a counterparty asset in each pool. Bancor also covers for impermanent loss from swap fees earned from its co-investment.
So far, there are over 60 approved pools with single-asset exposure insurance against impermanent loss.