Bancor Halts Impermanent Loss Safeguard To Fight Off ‘Hostile Antagonist’

Bancor’s claim to be “the only DeFi staking protocol with single-sided liquidity and 100% impermanent loss protection” appears shaken


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key takeaways

  • “Manipulative behavior” from a “hostile antagonist” is causing headaches for the Bancor protocol
  • Bancor has now paused an important feature designed to shield against impermanent loss

Decentralized automated market maker (AMM) and exchange protocol Bancor has temporarily paused its impermanent loss protection feature, citing “hostile market conditions” and “manipulative behavior.”

There is no ongoing attack and funds on the protocol are secure, Bancor said in a blog post on Saturday. Trading is still active across all of Bancor’s liquidity pools.

The decision to shield the protocol from “potentially manipulative actors” was undertaken to give the protocol some “room to breathe and recover,” Bancor said in its post.

It comes as digital asset ecosystems continue to falter amid a liquidity crisis and market contagion following crypto lender Celsius’ decision to halt withdrawals and transfers from its platform.

Impermanent loss (IL) is a unique phenomenon in decentralized finance. It occurs when the value of liquidity providers’ staked assets deviate from AMM pools’ dual asset pairs, relative to pricing on external markets.

Changes to external pricing outside of a protocol’s pool aren’t automatically adjusted, leaving open opportunities to take advantage of price differentials via arbitrage. An IL is calculated by taking into account the current value of a liquidity provider’s staked asset against what the asset would be worth had it been left in a wallet or an exchange.

Bancor’s protection feature, designed to withstand IL by distributing its native token BNT to those affected, will be reactivated on the protocol once the market stabilizes, Bancor said.

Mark Richardson, Bancor’s product architect and head of research said during a Twitter Spaces discussion on Sunday evening his team had discovered “another Celsius wallet” intending to withdraw $10 million from the protocol.

It came amid a “wave of additional panic” stemming from a high number of withdrawals piling up, akin to a bank run event, according to Richardson.

“It would be difficult to imagine the protocol withstanding such a large flight of liquidity all at once,” Richarson said. The architect also pointed toward a “hostile antagonist” as attempting to profit off of Bancor’s woes by opening short positions against the platform’s BNT token.

“The ethical thing is to protect the protocol and its users against this type of antagonistic behavior,” Richardson said who pointed toward letting the situation play out or “do something about it.”

Richardson also said Bancor had activated its emergency powers to respond to its ongoing crisis, where the decision was reached to pause protections on IL as an immediate response.

The protocol’s team will now seek ratification for its decision via a proposal within Bancor’s decentralized autonomous organization, Richardson said.

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