Swap rates exceed insurance costs against temporary losses


Bancor launched a status report for your decentralized exchange update v2.1, covering the performance of your decentralized exchange over the past three months.

According to the document, total liquidity increased by almost 100%, causing the platform to earn about $ 1.12 million in accumulated swap rates.

The Bancor report noted that fee gains were more than five times the cost needed to offset impermanent losses for liquidity providers.

In fact, the management of impermanent losses was the main focus gives update v2.1, as reported by Cointelegraph in October 2020. Although Bancor initially tried an oracle-based solution, it quickly proved impractical due to front-running problems. The new approach uses economic incentives to cover the cost of impermanent losses, a phenomenon caused by the constant rebalancing of liquidity providers’ portfolios. As two tokens diverge in price, LPs experience lower gains and greater losses compared to a 50-50 reference portfolio.

At the time, Bancor revealed that it would introduce a mechanism for insurance against impermanent losses in its second iteration. As part of its solution structure, the project enacted a resource acquisition schedule for liquidity providers to encourage long-term stacking.

Swap rates that exceed impermanent losses. Source: Bancor

According to the rights acquisition schedule, the protocol provides 1% coverage on the liquidity capital provided for up to 100 days to cover any temporary losses. However, liquidity providers who have withdrawn their funds before 30 days do not receive any compensation for losses incurred during the period.

With swap rates far exceeding insurance costs to offset temporary losses, Bancor noted that the platform is operating at a profit for Bancor Network Token and Network (BNT) holders.

Commenting on the potential impact of such a situation for altcoin’s idle capital, Nate Hindman, head of growth at Bancor, told Cointelegraph that more altcoin holders will be encouraged to become liquidity providers rather than adopt a buying and maintenance strategy , adding:

“With Bancor v2.1, AMM LPs can remain in their tokens for a long time while providing liquidity, free from the threat of temporary loss. We believe that this will bring a new wave of users participating in the AMM staking. As we have seen so far, many of these users tend to be long-term holders (rather than opportunistic income farms) who seek high yield and risk minimization in their favorite tokens. “

Hindman also noted that a viable solution to impermanent losses can also encourage projects to use their treasury bills to provide liquidity to AMMs. Similar to PoS rewards, this can allow projects with large token reserves to finance themselves while increasing the liquidity of their token pairs.

Bank liquidity providers will also start earning BNT as a reward. In fact, the protocol is launching its liquidity mining program with liquidity providers retroactively receiving BNT rewards. BNT rewards can be claimed or stake on the platform.

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Thomas Miles

Cryptocurrency is the most recently discovered currency which will be likely at the help of modernization across the next few decades. With a limited control from the government, the crypto market is independent of many features of a sound market as we know it. Thomas brings these stories to us by weaving them into articles of general importance to all those looking at the fluctuations in the market, or new entries. Thomas is also the founder of Bulletin Bits and is an excellent leader. His leadership is the kind that makes him the most knowledgeable and experienced on the team. His wonderful work ethic and attitude are worthy of imitation!

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