One of the original creators of DeFi is aiming to fix one of the industry’s most pressing problems.

When Bancor launched the first-ever DeFi liquidity pool in 2017, the project’s founders saw a tragic flaw in their invention: That when a token rises in price, investors are prone to lose money, fast. The issue, known as “impermanent loss”, costs users billions in crypto gains each year. Today, there are more than 20 billion dollars in liquidity pools.

Bancor introduced a solution late 2020 to fully protect users from permanent loss. This was done by providing protection at protocol level. One year later, and with more than $200 million in deposits to Bancor over the past 10 months, Bancor is preparing for its third protocol version. Bancor V3 like its predecessor will provide full protection to users from any threat that may undermine DeFi’s fundamental tenets.

Impermanent Loss (IL) refers to the risk liquidity providers accept in return for their fees in liquidity pool liquidity pools. If IL exceeds the amount of fees earned by a withdrawal user, this means that the user is experiencing negative returns compared to simply keeping their tokens out of the pool.

“Due to the complex nature of impermanent loss, only a small handful of the most active and sophisticated users are able to reliably hedge against the risk and minimize its impact on their DeFi earnings,”
Nate Hindman was Head of Growth, Bancor.

“If staking in liquidity pools is only profitable for the most advanced users, liquidity is likely to become concentrated in the hands of far fewer actors, reducing DeFi’s resistance to censorship and manipulation,”
Hindman spoke.

Topaze Blue’s recent survey on permanent loss found that approximately 50% of token holders who staking in V3 have experienced negative returns. Some pools had a 70-75% loss rate due to IL.

Because it’s difficult to spot, impermanent losses are known in the industry as a silent killer. The value of a user’s holdings in a liquidity pool may rise if the composite tokens increase in price, creating the illusion of profits. But, when a user holds the staked assets, they may be still incurring losses.

Bancor and DeFi analytics company APY Vision teamed up recently to create il.wtf. The site allows users to input their wallet address and see how much cumulative IL they’ve suffered in their lifetime, and which pools have burned them the most. You can get $1000 relief if you share your IL via Twitter (NYSE.) A recent posting revealed that there was a loss of $400,585 from liquidity being provided to 27 pools.

Bancor will soon release V3. This push is to make users aware of the dangers and risk that impermanent losses pose to liquidity markets. On November 29, at 8:30 EST, core contributors will reveal the most important features in a YouTube community livestream.

“Bancor V3 is designed to make decentralized finance as simple and safe as possible for everyday users,”
Hindman spoke.

“The soul of DeFi is on the line. We must prevent DeFi from becoming a playground for the rich and connected to extract value from protocols and dump on everyone else — and this starts with fixing liquidity pools.”

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