Bancor, the first-ever automated market maker (AMM) liquidity pool, is planning the launch of its third upgrade, bringing a full suite of features and innovations to the decentralized finance (DeFi) space. Despite raising a $153 million initial token sale in 2017 (the largest ICO at the time), Bancor has witnessed a fall off in its market share in recent years as competitor AMMs such as Uniswap, Pancakeswap, Sushiswap, etc. grow in value and adoption rates.
Nonetheless, development on the protocol has been improving in the past few months, with the team announcing the launch of an upgraded version, Bancor V3, in the coming weeks. According to the team, the newly upgraded AMM will introduce new mechanisms to cut the cost of transactions while preventing user exposure to impermanent loss (IL) on their pooled assets.
The Bancor V3 Upgrade Launch
Announced in November 2021, Bancor V3 plans to enhance the DeFi ecosystem and staking protocols. As DeFi grows its tentacles across the traditional finance space, many investors are selecting to hold their funds in cryptocurrency to earn more return or protect themselves from inflation. Staking has transformed into “community-sourced liquidity”, powered by AMMs, offering users permissionless blockchain ecosystems to swap, earn, and supply liquidity to the market.
However, DeFi is gradually becoming harder for ordinary investors, especially in AMMs, as most investors face the issue of impermanent loss, which is becoming more prevalent in the ecosystem. Impermanent loss refers to the difference in investors losing part of their tokens staked in a liquidity pool versus holding the tokens in their wallets. To further explain, impermanent loss occurs when you give liquidity to a liquidity pool, & the deposited tokens price changes compared to when you deposit them. As the price changes, the investor suffers from impermanent loss.
It is important to note that loss happens whichever the direction of the price is, and Impermanent loss cares about the price ratio relative to the deposit time.
To prevent this, Bancor launched an upgrade in 2020 that allowed users to provide liquidity in the form of single tokens, as opposed to the pairs required by AMMs like Uniswap. This was to prevent impermanent loss from happening, and it was successful. While successful, the single token pools required every token to be paired in Bancor’s native BNT token, which doubled the transaction costs on the platform.
The Bancor V3 Impermanent Loss (IL) Solution
As explained above, Bancor V2.1 (launched in 2020) provides a separate BNT pool for each pair, which introduces more transaction costs for users. Bancor V3 will introduce the “Omnipool“, a single pool to stake your BNT and earn yield from the entire network. The single asset pool simplifies the process of earning yield via BNT, as you don’t need to move your BNT across different pools to earn the most rewards and fees.
Most importantly, Omnipool reduces the transaction costs on the network for investors. In earlier versions, traders and staking investors needed to route transactions through two pairs. For instance, to swap from ETH to USDT, you’ll need to swap from ETH to BNT then from BNT to USDT, which doubles the transaction costs. On Bancor V3, all trades will be completed in a single transaction. With single-hop trades, Bancor can attract trading fees with the same level of liquidity, making the protocol more capital efficient. Additionally, staking will also become cheaper as the protocol will make withdrawals with far fewer transactions.
Furthermore, Bancor V3 will offer full Impermanent Loss Protection from day one. In Bancor v2.1, 100% IL protection was accrued by staking your tokens in a pool for 100 days or more; now, it is achieved instantly.
Other Improvements on the Bancor V3 Upgrade
Apart from the impermanent loss solutions, Bancor V3 will also introduce other features to enhance the performance of its AMM pools. First, there are no deposit limits on the platforms anymore. The upgrade introduces ‘Infinity Pools’, allowing anyone to contribute as much as they like without waiting for space to open up the liquidity-capped space. These infinity pools also introduce the concept of “Superfluid Liquidity”. This can be used simultaneously for market-making and other fee-earning strategies native and external to the protocol.
Additionally, Bancor V3 will provide auto-compounding fees & rewards, meaning earnings are instantly re-added to the pool, improving the network’s liquidity and increasing your potential to earn more fees & rewards, with no user action required.
Lastly, Bancor V3 will also introduce dual rewards token system, whereby liquidity providers can earn other tokens rather than BNT. Both BNT and non-BNT rewards are free from the risk of impermanent loss, reducing the cost of running rewards programs for third-party protocols.