Yesterday, the first completely decentralized voting on the Bancor protocol was concluded, with version 2.1 being activated.
1/ Bancor v2.1 passed the community vote earlier today & is now live on Ethereum mainnet!
Finally, LPs can stake with single-sided AMM exposure – while earning fees & protection from impermanent loss.
Stake at: https://t.co/fVdI1tWZvD
— Bancor (@Bancor) October 18, 2020
The vote allowed the community to decide on the activation of a single exposure to a token and to protect itself from impermanent loss when providing liquidity to a pool.
The proposal voted on included the latest developments in Bancor‘s commitment to eliminate or at least mitigate one negative aspect of liquidity pools, impermanent loss, which is the condition that occurs when there is a change in assets that the pool automatically balances to have the same value.
Because of this effect, the tokens placed in a pool will be less or more based on this variation.
Obviously, it refers to virtual loss considering that if the value of the tokens increases in comparison to the initial value that was provided as liquidity, then there won’t be problems, whereas if the tokens are withdrawn when they are below the initial value, then the loss will become effective.
To solve this problem, Bancor has adopted an elastic supply system with BNT, as all pools are paired with the BNT token.
Bancor version 2.1
In practice it looks like this:
- A user deposits 100 TKN in a pool;
- 100 BNT are minted by the protocol to match the user’s deposit;
- From the issued pool tokens, half are associated with the user’s stake and half are associated with the protocol;
- Volume goes through the pool;
- Protocol pool tokens are now worth 110 BNT (due to fees);
- An outside LP deposits 110 BNT, which are burnt in exchange for the protocol’s pool tokens;
- Note that 100 BNT were originally minted and 110 BNT were burned, removing 10 BNT from supply;
- This burned BNT offsets the cost of impermanent loss when a future LP withdraws and spreads gains across all BNT holders.
The advantages of this system are many because:
- Protection from impermanent loss and exposure to a single token are available to everyone, whether they are supplying the BNT token or using a single token;
- Liquidity protection increases over time and discourages opportunities for liquidity pool mercenaries, as the system operates on a “deposit and forget” basis;
- BNT holders receive fees both when they stake their BNT and when protocol fees are burned;
- BNT tokens allow voting within the protocol because when users provide liquidity to a pool they get the vBNT token, the governance token. With this they can vote on the relevant proposals and pools to be added to this system. There are currently about 60 pools that have impermanent loss protection.
Interestingly, this system has also been retroactively enforced in the sense that all those who have provided liquidity to a pool have obtained impermanent loss protection and single exposure protection, while it is now possible to choose with which token to be exposed in the relevant pool.
Obviously, a system that provides such important protection becomes an opportunity for all liquidity providers, as they can not only expose themselves with a single token, but the impermanent loss is also reset to zero.
In this way, in the future, we will perhaps see this protocol increase its size dramatically, especially since liquidity mining will be launched on this protocol and therefore a reward can be obtained in addition to fees.
Among other things, the price of BNT is slowly increasing and is now already above the dollar with a percentage increase of about 3%.
All that remains now is to use the relevant interface to take advantage of the protection for pools with two tokens or those for a single token.