Even though decentralized finance remains one of the more exciting verticals in cryptocurrency, there are many concerns. One protocol after the next suffers from depegging, strange behavior, paused withdrawals, or pausing impermanent loss protection. A recent change affecting Bancor has many people worried, although the decision seems to make sense.
Bancor Makes A Radical Decision
There are many reasons why people flock to Bancor in the DeFi sector. It is a prominent protocol enabling DeFi trading and staking with single-sided liquidity. Moreover, it boasts 100% impermanent loss protection to ensure users retain their portfolio value at all times. The protocol has undergone several major changes, bringing more users to Bancor and its services.
However, the team decided it was best to go back on its promise of 100% impermanent loss protection. A very radical decision, although Bancor claims it is a necessity due to hostile market conditions. A strange sentiment, as all crypto markets are going through a significant price surge. Granted, that surge comes after assets lost over 45% of their value in quick succession.
Bancor will temporarily pause its impermanent loss protection services. It is not the result of an ongoing attack on the protocol or someone stealing money, as all user assets are accounted for. Instead, the team deems it necessary to protect the protocol and its users by hitting the pause button. It is a solid example of the centralized nature of decentralized finance today, although this intervention may be the right call after everything is said and done.
All withdrawals conducted through Bancor during this pause will not be eligible for impermanent loss protection. Additionally, users who keep their liquidity in Bancor will keep earning yields and can withdraw their fully-protected value once the protection is enabled again. It is unclear when this will happen or what kind of market conditions it will require, though.
What About Other Aspects?
While the pausing of impermanent loss protection will upset many users, Bancor needs some breathing room to recover from the recent market onslaught. There is no sign of any crypto asset stabilizing now or in the future. Most assets hit lows not seen since 2020, with Ethereum dropping below $1,000 and Bitcoin going below $18,000. That crisis has been averted temporarily, but there is still a long recovery ahead.
Interestingly, the pausing of IL protection will not affect trading through the Bancor protocol. All liquidity pools remain open and accessible for trading, which is a good thing. However, the Bancor protocol currently does not accept deposits, as the direct contract interaction would not display how impermanent loss protection is paused. There is no reason to create unnecessary confusion and people crying foul when things are working as intended.
Preventing Further BNT Dumping
All in all, the manual intervention by Bancor’s team may prove beneficial. They have observed some anomalies in the data and ongoing sell-offs of reward emissions, warranting a rather cautious approach.
Additionally, two large centralized entities – who are key recipients of BNT liquidity mining rewards – have amplified the double cost of BNT further and pose substantial liabilities. A further devaluation of the BNT value brings more impermanent loss to the network, requiring intervention of sorts.
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