Bancor, a decentralized exchange on Ethereum, has paused the Impermanent Loss Protection to protect liquidity providers (LPs) as the crypto market slump continues. The DeFi protocol cited large sales of Bancor (BNT) tokens for its action. Deposits and withdrawals will not be eligible for ILP.
Bancor Halts IL Protection Protocol
In 2017, Bancor launched as one of the first decentralized exchanges on Ethereum. It later became famous for its feature of offering protection against impermanent loss, a type that is incurred when someone supplies two unrelated crypto assets to a liquidity pool.
The impermanent loss occurs when the price of any two tokens supplied to any liquidity pool diverges. Impermanent loss occurs when the value of the liquidity provider (LP)’s position is less than what LP would have had if they didn’t invest in the liquidity pool and instead held their assets in their wallet.
Most DEX doesn’t protect against an impermanent loss like Uniswap. Bancor subsidizes it by paying out newly minted BNT tokens as rewards. It’s up to LPs if they want to liquidate or hold these tokens on the market.
BNT Tokens Turmoil
The Bancor team noted that large centralized entities had recently sold large amounts of BNT tokens paid to them as IL rewards. Dune Analytics indicates that during June, there was a massive spike in the amount of Bancor tokens minted for impermanent protection features. Many of these are said to have been sold off.
The team decided to temporarily halt IL rewards to protect the BNT token from getting further depreciated. They added that this would be reactivated once the market stabilizes.
Bancor stated in a blog post,
”The need to pause IL protection is a result of the recent sell-off of emissions accumulated over the last 18 months. The temporary measure to pause IL protection should give the protocol room to breathe and help BNT recover.”
What About Other Aspects?
Analysts suggest that BNT needs some room to recover from the recent market onslaught. Although pausing ILP will upset users, there is no sign of any cryptocurrency stabilizing now or soon. Most assets have hit lows last seen in 2020. Bitcoin has dropped below $18,000, and Ethereum could dive below $1,000. This crisis has been averted temporarily. There is still a long recovery ahead.
The IL protection pausing won’t affect trading through the Bancor protocol. It is a good thing that all liquidity pools remain open and accessible for trading. However, the Bancor protocol doesn’t accept deposits currently. The direct contract interaction wouldn’t display how ILP is paused. There is no reason for people to cry foul and create unnecessary confusion when things are working as intended.
All in all, Bancor’s team’s manual intervention may prove beneficial. They have observed some anomalies in the data warranting a cautious approach. The insolvency of two large centralized companies has caused a rise in cost further. The companies received BNT liquidity mining rewards. It caused the BNT price to fall further because of the sell-off.