The DeFi protocol, Bancor, announced that it has paused the Impermanent Loss Protection feature to protect liquidity providers (LPs) from “hostile market conditions”.
Withdrawals will not be covered by Impermanent Loss Protection, and currently deposits are stopped.
Trading is still active, and users will continue to earn yields, but withdrawals will be accessible only after IL protection is reactivated.
It will be reactivated when the crypto market has stabilized. There is no ongoing attack, and the funds on the protocol are safe. The decision to protect the protocol from “potentially manipulative actors” was made in order to give the protocol “room to breathe and recover.”
Bancor paused IL protection due to the recent sale of BNT rewards emissions that were accumulated over the last 18 months.
Impermanent loss occurs when a user contributes liquidity to a liquidity pool and the ratio of their deposited assets changes later, potentially leaving investors with more of the lower value token.
And, Bancor’s ILP features impose a cost on the protocol, similar to the insurance cost incurred by an insurance company.
The insolvency of two large centralized companies that were LPs in Bancor V2.1 has caused these costs to rise even further. They continue to liquidate their BNT positions in order to cover their liabilities.
Also, another unknown company has opened a large short position on the BNT token on an external exchange. Because of the selloff, the BNT price has fallen even further.
The Bancor DAO has voted to discontinue BNT rewards on mainstay pools in Bancor V3 and will be asked to vote on ratifying the temporary pause.
The ILP function was first introduced in 2020 and was upgraded with the release of Bancor 3.
