DeFi Protocol Bancor Pauses Impermanent Loss Protection Feature Amid Liquidity Crisis

Prominent DeFi protocol Bancor suspended its Impermanent Loss Protection program, citing “hostile market conditions” and “manipulative behavior” as the principle causes behind the motion. Assuring customers and buyers that it’s solely a brief measure, Bancor famous that each one funds on the protocol are safe, and buying and selling stays energetic on all liquidity swimming pools.

Impermanent Loss

As the months-long selloffs have proven no indicators of reversal, many DeFi protocols have fallen deep into the disaster mode as a result of liquidity strains as buyers withdraw funds from liquidity swimming pools.

Following that crypto lender Celsius froze customers’ accounts final week, decentralized automated market maker (AMM) – Bancor – introduced, on Monday, halting its Impermanent Loss (IL) Protection characteristic designed to offset the influence of IL by distributing its native token BNT to these affected.

IL happens in DeFi when the worth of the staked belongings adjustments relative to their preliminary worth throughout the deposit time as a result of exterior market circumstances. When launching its Bancor Version 3 earlier this year, the protocol refined the safety mechanism, positioning it as a particular characteristic distinguishable from different DeFi opponents.

According to the official blog post, the daring measure aiming to “protect the protocol and its users from potentially manipulative actors” can be lifted as soon as the market stabilizes once more. However, the protocol didn’t unveil a selected timeline for such an excessive measure.

The decentralized trade calmed its customers that they may proceed receiving yields for his or her staked belongings throughout the turbulent interval and withdraw funds with IL safety as soon as the characteristic is reactivated. The assertion reads:

“Withdrawals carried out throughout this unstable interval won’t be eligible for IL safety. Users who stay within the protocol will proceed incomes yields and be entitled to withdraw their fully-protected worth when IL safety is reactivated…

Deposits are at present not accepted to stop confusion through direct contract interplay the place the data on paused safety will not be seen.”

Selling Pressure

The abrupt change of insurance policies got here as a response to the rewarded BNT getting persistently dumped up to now 18 months, main the asset’s worth to stoop. At current, BNT is buying and selling at $0.53, round 95% down from its 2021 peak.

The group paused the characteristic to stop BNT from frequently plunging. This has to do with IL compensations in BNT to customers, rising the availability of such an asset and thus facilitating the token’s worth decline. In addition, the group cited “the recent insolvency of two large centralized entities who were key beneficiaries of BNT liquidity mining rewards” as partly liable for exacerbating the scenario:

“To cover their liabilities, these entities have rapidly liquidated their BNT positions and withdrawn large sums of liquidity from the system, while an unknown entity has opened a large short position on the BNT token on an external exchange.”

Liquidity Crisis

Prior to Bancor’s newest transfer safeguarding its native token, Babel Finance had already joined Celsius in pausing withdrawals as a result of liquidity strain. As the crypto trade is witnessing the worst selloffs in years, some corporations are in serious trouble financing their loans, and a flood of liquidations has occurred to famed digital asset hedge funds like Three Arrow Capital (3AC).

In Bancor’s case, the protocol mentioned it had recognized “anomalies” by way of its on-chain knowledge, suggesting that a couple of main participant has been actively shorting the token.