Bancor v2.1 – An AMM-DEX Aiming To Solve Impermanent Loss!


On Oct 12, Bancor introduced the v2.1 of its Automated Market Maker (AMM) type Decentralized Exchange (DEX), a DeFi technology that it conceptualized and introduced in 2017.

Bancor v2.1 up for voting

Bancor v2.1 upgrade deployment has been put up as the first proposal for the governance DAO, to obtain community approval for the main changes planned. It’s likely approval will introduce the main features of single sided exposure and elastic BNT supply, both meant to eliminate impermanent loss. The voting started earlier on Oct 15 and will end on Oct 18.

As reported earlier, Bancor v2.1 introduces new significant features. All while complementing the features of liquidity amplification, low slippage design via optimized bonding curves and integration of Chainlink oracles to provide robust price manipulation resistance, introduced in Bancor v2. 

Initially, more than 60 pools have been designated as “white listed” or protected. It means that staking your tokens or providing liquidity to those pools will earn users the governance token vBNT. The new token can be used to signal vote on important decisions relating to the Bancor protocol. 

Bancor Next Gen Solves The Impermanent Loss (IL) Problem

The first generation Automatic Market Makers (AMMs) have had a long existing, but rarely discussed problem – Impermanent Loss (IL).

Bancor v2.1 Official Infographic
Bancor v2.1 Official Infographic

Impermanent loss (IL) is a result of arbitrageurs, fluctuation of asset prices and exposure to assets with low liquidity/trading volume etc. To incentivize the liquidity providers, AMMs have traditionally relied on clever marketing and provision of extra tokens/airdrops. Sadly, it doesn’t solve the problem, but rather sweeps it under the carpet. As a result, the liquidity providers continuously shift between pools to acquire rewards and attempt to mitigate IL. 

Graph Data Showing The Impact Of Impermanent Loss After Deposition Of WETH to LP
Graph Data Showing The Impact Of Impermanent Loss After Deposition Of WETH to LP

Bancor has introduced a more permanent solution, by using single token exposure, providing elastic BNT supply and integration with Chainlink oracles for accurate price data (part of Bancor v2) to mitigate IL. Unlike other AMMs, Bancor uses BNT as a pool’s counter-party asset. The elastic supply ensures the protocol’s co-investment alongside liquidity providers and covering the cost of impermanent loss, with overall swap fess earned on the platform.

Bancor Official Infographic Showing How Protocol Invests Alongside Liquidity Providers
Bancor Official Infographic Showing How Protocol Invests Alongside Liquidity Providers

Bancor Now Offers The Best Slippage Rates On AMMs

Bancor v2 now offers the lowest slippage rates of all Automated Market Makers (AMMs). It does so by expanding the “liquidity amplification” (previously limited to stablecoins and wrapped-asset pairs) to include “volatile assets” too and introducing high capital efficiency, by utilizing Chainlink decentralized data oracles for continuous provision of accurate and reliable price data.

 Bancor Official Blog - Amplified Liquidity: Designing Capital Efficient Automated Market Makers in Bancor V2
Bancor Official Blog – Amplified Liquidity: Designing Capital Efficient Automated Market Makers in Bancor V2

Among all six AMMs, Bancor shows the most consistent results when executing trades of all sizes, with the lowest slippage rates for both stable and non-stable coins. Only Curve has lower slippage rates, but its functionality is limited to stablecoins and wrapped assets only.

Conclusion

Bancor protocol kick-started the Decentralized Finance (DeFi) field back in 2017, after running a successful ICO and introducing a revolutionary orderbook-less automatic exchange. The team was the original pioneers of the idea and design, which was used later by so many DeFi projects, however with little advancement to the base design.

Fast forward to 2020 and the Bancor team has again raised the bar, by solving two core problems, which liquidity providers and AMMs face today. Bancor v2 is taking care of the high slippage and impermanent loss problems, through yet another ingenious design, involving a few neat tricks and optimizations.

bancor v2.1 logo
bancor v2.1 logo© Cryptoticker
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