Bancor pauses impermanent loss protection citing ‘hostile’ market conditions

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Bancor, a decentralized finance (DeFi) protocol often credited as a DeFi astronaut, paused its non-permanent loss protection (ILP) function on Sunday, citing “hostile” market conditions.

In a blog post on Monday, DeFi noted that the ILP pause is a temporary measure to protect the protocol and its users. The blog post reads:

“The temporary measure to pause IL protection for the protocol should give some room to breathe and recover. While we wait for the markets to stabilize, we are working to reactivate IL protection as soon as possible.”
When the user gives liquidity to the liquidity pool, the proportion of the assets deposited later changes, which can leave investors with more tokens of lower value, this is known as non-permanent loss.

Bancor’s proprietary liquidity was used to fund the ILP: the protocol stored its original BNT token in blocks and used the pooled fees to compensate users for any temporary losses. The process effectively burned off excess BNT when the trading fee generated was more than the cost of a non-permanent loss on a particular lot.

The ILP functionality was first introduced in 2020 and has been upgraded with further improvements with the launch of Bancor 3 in the second week of May this year. However, the recent market turmoil that led to a 70% drop from the top for most cryptocurrencies had a negative impact on the DeFi market as well, leading to several crucial changes made by the DeFi protocols.

While Bancor hopes the IRL pause will help the protocol take a break, not many in the crypto community were unhappy with the decision. Cobie, host of the crypto podcast Aponlee TV, criticized Bancor for pausing IRL when liquidity providers need it most.

Hasu, a research collaborator at Paradigm that focuses on investing in Web3, digs a little deeper into Bancor’s protection against non-permanent claims and how this could lead to another “spiral crash.”

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Hasu questioned the strategy behind the ILP compensation and claimed that Bancor’s dummy ILP hide-and-seek game is collapsing. he added:

“They print new BNTs to compensate for underwater LPs and call it ‘IL-protection.’ The cost is shifted to BNT holders by inflation, which leads to more IL for all other BNT pairs, and leads to more inflation. A death spiral.”

He went on to add that the failure of the ILP program is visible from the price action of their native token BNT over the past two weeks, with decentralized tokens (DEX) such as SushiSwap (Sushi) and Uniswap (Uni) dropping nearly 20% while BNT posted a 66% drop in the same frame. temporal due to high inflation caused by ILP compensation.

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