Another DeFi protocol took action due to poor market conditions

Bancor, one of the first DeFi protocols, has terminated its Impermanent Loss Protection (ILP) function. According to the protocol, "hostile market conditions" are to blame.

Also, according to Bancor, the suspension of ILP is a temporary measure to protect the protocol and users. Bancor he promised reactivation of protection as soon as market losses stabilize.

"The temporary measure to suspend IL protection should give the protocol some room to catch up. We are waiting for the markets to stabilize in order to reactivate protection as soon as possible. "

However, an explanation in the community, the shaken cases of Celsius and Three Arrows Capital, is not enough.

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What is Impermanent Loss

Impermanent loss can be defined as the potential loss of a liquidity provider, equal to the difference between the price of injected cryptocurrencies in liquidity and the price that cryptocurrencies would have if the user only held them. Earnings values are calculated at the time of the liquidity insertion into the liquidity pool.

If the investor does not suspend liquidity or sell tokens, it is an Impermanent Loss. This means that the value of the tokens is lower, but because there was no sale, there was no loss. Impermanent loss increases in proportion to the price difference

In this sense, ILP acts as a way to protect liquidity providers from this loss. The protocol keeps its native token (BNT) in the pools and collects fees in the form of income. Bancor will then use the fees to cover any temporary loss to users.

Bancor's DeFi protocol in a possible death spiral 

While Bancor hopes that a break in the IRL will help the protocol breathe, many in the cryptocurrency community have been dissatisfied with the decision. Cobie, host of the cryptocurrency podcast UpOnly Tv, has criticized Bancor for suspending ILP when liquidity providers need it most.

Hasu, a Web3 analyst at Paradigm, warned that the suspension could send Bancor into a "death spiral."

"From Bancor, it sounds like they are doing it as a precaution, but I'm starting to think they're in serious trouble. Their contribution reminds me of the situation of Celsius and their problems are probably similar. "

Bancor may have had too many protections against losses as the market began to suffer from volatility. Bancor would therefore have difficulty continuing to meet its liquidation obligations.

The analyst also cited an excerpt from the Bancor communiqué, in which they pointed to the "insolvency of two large centralized entities" as part of the reasons for the abolition of the ILP.

"It took a long time, but recent events have really shown me how much we need to rethink protocol design, management and token economy if we are to truly demonstrate the benefits of cryptocurrencies," he concluded.

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