Decentralized automated market maker (AMM) Bancor is set to launch new staking pools and an upgrade to its impermanent loss protection mechanism as part of its long-awaited Bancor 3 update.
Bancor was founded in 2017 and was the first DeFi protocol to introduce AMMs to the blockchain. The Ethereum-based exchange and lending platform also allows users to earn staking rewards via various liquidity pools.
In a Nov. 30 blog post introducing the upcoming Bancor 3 update, the platform announced several new features and upgrades including the Omnipool, Infinity pools, and “Instant Impermanent Loss Protection.”
Introducing Bancor 3 pic.twitter.com/TuIyUnN13U
— Bancor (@Bancor) November 29, 2021
Impermanent loss (IL) occurs on AMMs like Bancor or Uniswap when the prices of two assets in a liquidity pool diverge significantly, with one side going strongly up or down in value.
In October 2020, Bancor first introduced a mechanism to combat the issue by rolling out (IL) insurance, which guarantees that liquidity providers will receive up to 100% of their initial capital, plus fees accrued after a 100 day wait period.
As part of the Instant Impermanent Loss Protection update, users will no longer need to wait the initial 100 days as they will receive full protection from day one.
The new Omnipool feature will see the creation of a single pool to stake BNT that offers yield from the entire network, as opposed to the current method of offering yield from separate asset pair pools such as ETH/BNT.
“The Omnipool allows for all trades on the network to occur in a single transaction. In Bancor’s previous versions, trades required transfers via BNT, creating an extra transaction and added gas costs compared with competing DEXs.”
Infinity Pools will offer unlimited deposits on Bancor, and no longer require users to wait for “space to open up in a pool before being able to deposit tokens.”
Other notable updates in Bancor 3 will include auto-compounding liquidity mining rewards, dual-sided rewards to “allow third-party token projects to offer IL-free incentives on their pools” and further multi-chain and layer two support.
Related:How liquid staking disrupts parachain auctions on Polkadot
Bancor is governed by a decentralized autonomous organization (DAO) and currently offers cross-chain support to the EOSIO blockchain. The platform said that Bancor 3 will be rolled out in three stages dubbed “Dawn, Sunrise, and Daylight,” and is targeting a release in Q1 2022 pending a vote by the BancorDAO.
According to data from DeFi Llama, Bancor ranks at the thirty-second largest DeFi platform in terms of total value locked at $1.65 billion. At the time of writing, Bancor’s native token BNT has gained 2.3% over the past 24 hours to sit at $4.06 with a total market cap of at $949.4 million.
One of the original creators of DeFi is aiming to fix one of the industry’s most pressing problems.
When Bancor launched the first-ever DeFi liquidity pool in 2017, the project’s founders saw a tragic flaw in their invention: That when a token rises in price, investors are prone to lose money, fast. The issue, known as “impermanent loss”, costs users billions in crypto gains each year. Today, more than $20 billion staked in liquidity pools is affected.
Bancor released a solution in late 2020 that fully protects users from impermanent loss by insuring against the risk at the protocol level.
Now, one year later and with over $200 million earned by Bancor depositors in the last 10 months, the project is gearing up for the release of its third protocol version. Like its predecessor, Bancor V3 will fully protect users from a risk that threatens to undermine the core tenets of DeFi.
Impermanent loss (IL) is the risk that liquidity providers take in exchange for fees they earn in liquidity pools. If IL exceeds fees earned by a user when they withdraw, it means the user has suffered negative returns compared with simply holding their tokens outside the pool.
Nate Hindman, Head of Growth at Bancor, said:
“Due to the complex nature of impermanent loss, only a small handful of the most active and sophisticated users are able to reliably hedge against the risk and minimize its impact on their DeFi earnings. If staking in liquidity pools is only profitable for the most advanced users, liquidity is likely to become concentrated in the hands of far fewer actors, reducing DeFi’s resistance to censorship and manipulation.”
A recent study on impermanent loss conducted by crypto consultancy Topaze Blue found that around 50% of users staking their tokens in Uniswap V3 are suffering negative returns. In certain pools, the percentage of users who lost more from IL than they gained in trading fees was as high as 70-75%.
Impermanent loss is known as a silent killer in the industry, since it is difficult for users to notice it. The value of a user’s holdings in a liquidity pool may rise if the composite tokens increase in price, creating the illusion of profits. However, compared with simply buying and holding the staked assets in the contributed amounts, the user may still be incurring losses.
To shed more light on the issue, Bancor and DeFi analytics provider APY Vision recently teamed up to launch il.wtf. The site allows users to input their Ethereum wallet address and see how much cumulative IL they’ve suffered in their lifetime, and which pools have burned them the most. Users who share their IL on Twitter with the hashtag #BancorBailouts qualify to receive $1000 in relief. One recent post revealed a $400,585 loss from providing liquidity to 27 pools.
The push to expose users to the perils of impermanent loss and the risk it poses to decentralized liquidity markets comes as Bancor is preparing to release its upcoming V3. Core contributors will unveil the key features on a community YouTube livestream on November 29th at 8:30pm EST.
Hindman, added:
“Bancor V3 is designed to make decentralized finance as simple and safe as possible for everyday users. The soul of DeFi is on the line. We must prevent DeFi from becoming a playground for the rich and connected to extract value from protocols and dump on everyone else — and this starts with fixing liquidity pools.”
Bancor is the only decentralized staking product that allows you to earn money with single-token exposure and full protection from impermanent loss. Bancor generates millions in fees per month for users who deposit their tokens in the protocol, offering up to 40% APR on tokens like ETH, WBTC, LINK, USDT, MATIC & more. Bancor is owned by its community as a decentralized autonomous organization (the BancorDAO).
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According to a new study, approximately half of Uniswap liquidity providers underperformed a basic buy-and-hold strategy.
In one pool, the number of liquidity providers suffering negative returns was as high as 74%.
The study raises questions about the efficacy of constant function-based decentralized exchanges.
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A Bancor-backed study has found that as many as half of Uniswap V3 liquidity providers are suffering negative returns.
Study Investigates Uniswap Liquidity Provision
Liquidity providers on decentralized exchanges may be getting a bad deal despite high yield rates.
A new study conducted in collaboration between Topaze Blue and Bancor has found that approximately half of the liquidity providers on Uniswap V3 yielded negative returns compared to just holding assets. Bancor was Ethereum’s earliest automated market maker. It’s a competitor to Uniswap, one of the DeFi ecosystem’s most popular decentralized exchanges. Topaze Blue, meanwhile, is a boutique advisory firm specializing in the crypto and fintech sectors.
The study analyzed more than 17,000 wallets providing liquidity across 17 Uniswap V3 pools, which accounted for 43% of the exchange’s total value locked. It found that, while the pools generated $199 million in fee income during the sample period of five months, they incurred over $260 million in impermanent loss, leaving 49.5% of the liquidity providers with negative returns.
Impermanent loss describes the difference in value between depositing assets in dual token liquidity pools or simply holding the same assets. It refers to the value liquidity providers would have had if they passively held onto their assets instead of providing liquidity. The study found that the number of liquidity providers underperforming a buy-and-hold strategy exceeded 50% in multiple pools, including MATIC/ETH (51%), COMP/ETH (59%), USDC/ETH (62%), and MKR/ETH (74%).
Interestingly, the researchers also found no difference in profitability between “active” liquidity providers who managed or adjusted their positions more frequently and “passive” users who didn’t.
The only group that consistently outperformed a basic buy-and-hold strategy were so-called “just-in-time” liquidity providers who provide liquidity for a single block to absorb the fees and instantly remove their position. These are more sophisticated market makers who leverage automated bots to provide liquidity and represent a tiny fraction of the broader user base.
Commenting on the findings, the authors of the study said:
“Our core finding is that overall, and for almost all analyzed pools, impermanent loss surpasses the fees earned during this period. Importantly, this conclusion appears broadly applicable; we have collected evidence that suggests both inexperienced retail users and sophisticated professionals struggle to turn a profit under this model.”
Uniswap launched its V3 update in May, introducing a pioneering “concentrated liquidity” feature that allows liquidity providers to select the price range they provide liquidity for. Uniswap Labs, the team behind the project, sparked controversy in the DeFi community by protecting the update with a business source license. Several other decentralized exchanges including Curve Finance and Sushi’s upcoming Trident project have adopted their own takes on concentrated liquidity since Uniswap V3 shipped.
The study’s findings raise questions about the efficacy of constant function-based decentralized exchanges like Uniswap and Sushi. As the DeFi market matures and ever more liquidity providers realize the dangers of impermanent loss, liquidity on decentralized exchanges could dry up, leading to higher slippage and significantly reduced efficiency and usage.
Disclosure: At the time of writing, the author of this feature owned ETH, SUSHI, and several other cryptocurrencies.
This news was brought to you by ANKR, our preferred DeFi Partner.
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The information on or accessed through this website is obtained from independent sources we believe to be accurate and reliable, but Decentral Media, Inc. makes no representation or warranty as to the timeliness, completeness, or accuracy of any information on or accessed through this website. Decentral Media, Inc. is not an investment advisor. We do not give personalized investment advice or other financial advice. The information on this website is subject to change without notice. Some or all of the information on this website may become outdated, or it may be or become incomplete or inaccurate. We may, but are not obligated to, update any outdated, incomplete, or inaccurate information.
You should never make an investment decision on an ICO, IEO, or other investment based on the information on this website, and you should never interpret or otherwise rely on any of the information on this website as investment advice. We strongly recommend that you consult a licensed investment advisor or other qualified financial professional if you are seeking investment advice on an ICO, IEO, or other investment. We do not accept compensation in any form for analyzing or reporting on any ICO, IEO, cryptocurrency, currency, tokenized sales, securities, or commodities.
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In 2017, Bancor pioneered automated market makers (AMMs) to replace order books using a native reserve asset, the BNT token. After losing ground to otherdecentralized exchangessuch as Uniswap or Sushiswap, Bancor’s v2.1 showed that the project is far from over.
Re-Introducing Bancor
Understanding Bancor can be tricky because of the system’s complexity, but there is a reason why the total value locked in the protocol has skyrocketed in 2021.
Bancor’s USD monthly volume. Data fromDune Analytics
In October 2020, Bancorreleased v2.1to an enthusiastic user base. Still, it took the market some time to notice that Bancor has been working to solve some of the most significant problems users face when they stake their coins.
To understand these improvements, a broader explanation of Bancor’s system is needed.
In 2017, Bancor came up with a method to trade coins on-chain through a new system. Instead of leveraging order books, the protocol introduced pooled trading. By creating different pools of ERC-20 tokens and Bancor’s native token, BNT, traders could effectively exchange with the pool instead of each other. The more liquidity provided to the pool, the lesser the price impact for any transaction. To attract funds, liquidity providers were promised part of the swap fee from these transactions. To this day, this system is fundamentally unchanged in all of DeFi. Decentralized exchanges all function with liquidity pools used by traders to exchange currencies.
The next big innovation in decentralized exchanges was creating pools between any two ERC-20 tokens, removing the necessity for a central currency. Largely, Ethereum took on that role as it makes up$3.4 billionout of Uniswap’s $7.6 billion current liquidity. This convenience is largely why Bancor struggled to keep up with Uniswap or Sushiswap, especially during the summer of 2020.
BNT is at the center of Bancor. All liquidity pools are divided equally between an ERC-20 token and BNT. In that sense, BNT is a sort of neutral unit of exchange. Interestingly, this idea of a neutral exchange currency to facilitate global trade stems from economist John Maynard Keynes.
At the Bretton Woods conference, he proposed a supranational currency called “bancor,” which would be used internationally to settle transactions between different national currencies.
Current ranking of decentralized exchanges by total value locked. Data fromDeFi Pulse
However, Bancor’s unique system allows specific innovations which would be impossible for its competitors. In v.2.1, for example, Bancor introduced impermanent loss protection and single-sided liquidity provision.
The Project’s Advantages
When users stake funds in a liquidity pool, they expose themselves to impermanent loss. In simple terms, this means that they will become increasingly exposed to the weaker asset they provided over time. As the price of both assets change, originally supplied equally, the liquidity pool automatically updates the user’s liquidity to keep a 50/50 split in value between the two.
In ablog post, the Bancor team illustrated this issue by comparing holding LINK from April 2019 to April 2020 and supplying liquidity to an AMM like Uniswap in the same period.
LINK/ETH profit LP vs. holding. Source:Bancor
As the price of LINK quickly grew during that year, AMMs consistently sold it for Ethereum to conserve a 50/50 split of assets in the liquidity pool. While both LINK/ETH liquidity providers and holders made a profit, the fees generated by supplying funds to Uniswap were insufficient to cover the impermanent loss.
In v2.1, Bancor aimed to solve the impermanent loss (IL) issue by subsidizing potential impermanent loss. Everyday funds are staked in Bancor; users receive 1% of impermanent loss “insurance.” After 100 days, liquidity providers are entirely insured from any losses they might have suffered because their preferred asset’s price grew much quicker than the second one in the liquidity pool.
Besides this impermanent loss protection, Bancor’s BNT system is uniquely suited to allow single-sided liquidity. This means that, contrary to other decentralized exchanges, users can choose to supply only one of the two assets in Bancor’s liquidity pools. While Balancer offers a similar service, they immediately sell part of the supplied coin for the other one. Bancor, however, co-invests in pools with its native coin BNT to keep the pools balanced.
When users invest in a Bancor pool, Bancor essentially provides as much value in BNT as in the users’ token. From this invested BNT, the protocol earns swap fees and uses them to reimburse any impermanent loss incurred by the users during their time in the liquidity pool. However, when users add BNT to the pool, the protocol burns its added BNT and the fees accrued, diminishing the total amount of BNT in circulation.
Visualization of Bancor’s monetary policy and impermanent loss insurance. Source:Bancor
As Uniswap founder Hayden Adams, the creator of Uniswap,explained, users face two types of risks when they supply funds to a liquidity pool.
First, there are unavoidable impermanent loss risks in a liquidity pool between two tokens whose value is unrelated. Eventually, as the price of the two tokens diverges, users end up with different quantities of each token, changing the user’s amount of exposure to these two tokens. But, just as problematic, one takes inventory risk by supplying two tokens in equal measure while expecting much better results from one of the two.
11/
Inventory risk is price risk you take on by holding less of your wealth in your preferred store of value
If you prefer ETH, the more DAI you hold the greater your inventory risk
If you prefer DAI, the more ETH you hold the greater your inventory risk
— Hayden Adams 🦄 (@haydenzadams) March 24, 2021
With v2.1, Bancor solved inventory risk by allowing single-sided liquidity and subsidizing any impermanent loss in the liquidity pools. This system is made possible by Bancor’s unique model and can’t be replicated by decentralized exchanges such asUniswap,Sushiswap, orCurve.
To further incentivize participation, Bancor has also started offering substantial liquidity mining rewards on certain pools selected by governance. The current liquidity mining rewards for providing major cryptocurrencies such as LINK, ETH, WBTC, SNX, or AAVE hover between 10% and 20% APY while supplying BNT to these pools can pay up to 70% APY in BNT. These rewards are voted on by governance roughly every two months.
Current Bancor liquidity mining rewards.
The Shortcomings of Bancor
According to DeFi Pulse, Bancor has $1.78 billion currently staked in its smart contracts, 31% of the current biggest decentralized exchange Uniswap. In contrast, Uniswap did$1 billionin volume over the last 24 hours, according to CoinGecko. Compared to that, Bancor’s $70 million in volume only represents 7% of its competitor.
In essence, while Bancor is doing a phenomenal job at incentivizing users to provide liquidity on their platform, they do not seem to attract as much traffic and volume on their exchange. This is an important issue as volume represents liquidity provider fees. If those disappear, then the incentive to LP on Bancor disappears as well.
This lack of volume could be due to two different issues—first, the strength of network effects. Uniswap became the dominant exchange during DeFi summer and has been the go-to address for any project launching its coins. In contrast, Bancor’s whitelisting process adds a lot of security to its pools but lacks the speed and openness of Uniswap.
Anyone can make a pool on Uniswap at any time. In a sector as fast-paced as DeFi, this is an incredible advantage that can turn dangerous very quickly. Rugpulls, scam tokens, and many other issues can arise from this policy. For now, though, these drawbacks aren’t enough for the Uniswap team to reconsider its stance.
The second issue is the gas fees, which are exacerbated by the current congestion on the Ethereum blockchain. One of the most important innovations of Uniswap was gas optimization.
In a test swap operated on Apr. 9 at fast gas prices of 126 gwei, an identical swap between ETH and DAI cost $90 on Bancor compared to $41 on Uniswap. If the transaction included BNT, the gas fee on Bancor dropped to $55.
This is almost unavoidable due to the structure of Bancor. Bancor doesn’t have an ETH/DAI liquidity pool. To swap ETH with DAI, the protocol must use BNT as a medium of exchange. Due to the rise in the price of ETH and blockchain technology’s inherent limits, gas fees have become a significant issue.
Looking Ahead
Before v2.1, liquidity providers needed to supply equal parts BNT and their token of choice to Bancor’s liquidity pools. The addition of single-sided liquidity was nothing less than a game-changer for Bancor by removing this problematic barrier. The new liquidity provision system also allows for improved tokenomics and subsidizes the tricky issue of impermanent loss.
As the numbers show, the future looks bright for Bancor. Liquidity has grown, but most importantly, the amount of unique users has also seen a sharp rise. Liquidity providers have taken notice and with improved liquidity comes improved prices for traders with lower slippage. This creates a positive spiral that improves the protocol as more people use it.
The number of unique wallets benefitting from Bancor’s impermanent loss protection system. Source:Dune Analytics.
In the last few months, Bancor has also doubled down on adding features facilitating access to the protocol. In March, they added afiat rampallowing users to access Bancor directly from their fiat bank accounts.
The tokenomics of Bancor have also been given additional thought. Starting with their next update, Bancor will use 5% of all swap fees to repurchase vBNT from the open market and burn it. As vBNT is received by users when they lock BNT in the protocol, this will gradually lock an increasing amount of BNT in the liquidity pools forever, reducing the circulating supply.
While gas optimization will be a determining factor for Bancor’s future, the hottest topic in DeFi right now is layer 2 solutions.
Bancor suffers from Ethereum congestion and high gas fees like many other DeFi protocols. WithUniswap’s v3 announcement, the pressure on other protocols to offer layer 2 solutions has increased. On a call with the Bancor team, Crypto Briefing learned that this is something they’re keeping a close eye on. The team insisted on the necessity of doing it right and not rushing an incomplete solution.
More information on a layer 2 solution can be expected in the coming weeks.
Disclaimer: The author held ETH, BNT, and several other cryptocurrencies at the time of writing.
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The information on or accessed through this website is obtained from independent sources we believe to be accurate and reliable, but Decentral Media, Inc. makes no representation or warranty as to the timeliness, completeness, or accuracy of any information on or accessed through this website. Decentral Media, Inc. is not an investment advisor. We do not give personalized investment advice or other financial advice. The information on this website is subject to change without notice. Some or all of the information on this website may become outdated, or it may be or become incomplete or inaccurate. We may, but are not obligated to, update any outdated, incomplete, or inaccurate information.
You should never make an investment decision on an ICO, IEO, or other investment based on the information on this website, and you should never interpret or otherwise rely on any of the information on this website as investment advice. We strongly recommend that you consult a licensed investment advisor or other qualified financial professional if you are seeking investment advice on an ICO, IEO, or other investment. We do not accept compensation in any form for analyzing or reporting on any ICO, IEO, cryptocurrency, currency, tokenized sales, securities, or commodities.
Bancor has released a status report for its v2.1 decentralized exchange upgrade covering the performance of its decentralized exchange over the last three months.
According to the document, the total liquidity increased by almost 100% resulting in the platform earning about $1.12 million in cumulative swap fees.
Bancor’s report noted that the fee earnings were more than five times the cost required for impermanent loss compensation for liquidity providers.
Indeed, impermanent loss management was a major focus of the v2.1 upgrade as noted by Cointelegraph back in October 2020. While Bancor initially attempted an oracle-based solution, this was quickly revealed to be impractical due to front-running issues. The new approach uses economic incentives to cover the cost of impermanent loss, a phenomenon caused by the constantly-rebalancing portfolios of liquidity providers. As two tokens diverge in price, LPs suffer smaller gains and larger losses compared to a benchmark 50-50 porfolio.
At the time, Bancor revealed that it would introduce an insurance mechanism against impermanent loss in its second iteration. As part of its solution framework, the project enacted a vesting schedule for liquidity providers to incentivize long-term staking.
Under the vesting schedule, the protocol provides a 1% coverage on the liquidity capital provided up to 100 days towards covering any impermanent loss. However, liquidity providers who withdraw their funds before 30 days do not earn any compensation for losses incurred during the period.
With swap fees far exceeding insurance costs for impermanent loss compensation, Bancor noted that the platform is operating at a profit for both the protocol and BNT token holders.
Commenting on the potential impact of such a situation for idle altcoin capital, Nate Hindman, head of growth at Bancor, told Cointelegraph that more altcoin holders will be incentivized to become liquidity providers instead of adopting a buy-and-hold strategy, adding:
“With Bancor v2.1, AMM LPs can stay long on their tokens while providing liquidity, free from the threat of impermanent loss. We believe this will bring a new wave of users participating in AMM staking. As we’ve seen so far, many of these users tend to be long-term holders (instead of opportunistic yield farmers) seeking high, risk-minimized yield on their favorite tokens.”
Hindman also remarked that a workable solution for impermanent loss may also encourage projects to utilize their treasuries in supplying liquidity to AMMs. Similar to proof-of-stake rewards, this could allow projects with large token reserves to finance themselves while increasing liquidity on their token pairs.
Bancor liquidity providers will also begin earning BNT as rewards. Indeed, the protocol is launching its liquidity mining program with liquidity providers receiving BNT rewards retroactively. The BNT rewards can either be claimed or staked on the platform.
