Focus on Providing Sustainable Liquidity for DAOs and Token Treasuries
In a significant development for decentralized finance (DeFi), Bancor has launched its latest version of an automated market maker (AMM) on Ethereum’s mainnet. Dubbed V3, this new platform introduces a range of enhanced features aimed at improving the experience for liquidity providers. Bancor is recognized for pioneering the concept of liquidity pools with AMMs back in 2017, a model that was later refined by Uniswap, which has since emerged as the leading decentralized exchange (DEX) in terms of trading volume.
Revamps Impermanent Loss Protection and Single-Sided Staking from V2.1
The new iteration of Bancor enhances two major innovations from its previous version: protection against impermanent loss and the ability to provide single-sided liquidity. Mark Richardson, Bancor’s Head of Research, highlighted the team’s efforts to address the common issues faced by users. One of the challenges in providing liquidity on a DEX is the potential fluctuation in value between the tokens in a trading pair, a phenomenon known as impermanent loss (IL). To achieve profitability, liquidity providers must generate enough swap fees to offset the risks associated with IL.
Bancor previously introduced an innovative IL protection feature, but it required liquidity providers to commit their funds for a minimum of 100 days to access full protection. The new V3 version reduces this requirement significantly, implementing a seven-day cooldown period for withdrawals along with a 0.25% withdrawal fee. In return, liquidity providers benefit from immediate IL coverage. According to Richardson, simulations conducted by their chief economist indicated that this new cooldown period would be effective in mitigating risks.
Single-sided liquidity provision, which allows users to add only one type of token to a pool, was previously hampered by limitations on deposit capacity within the protocol. Once the maximum capacity was reached, additional deposits required more of Bancor’s native BNT token to create space, effectively causing the protocol to function like an “exclusive club,” which hindered its growth. The introduction of “the first-ever fungible Single-Sided Pool Tokens” in V3 aims to resolve this issue. These new LP positions feature an auto-compounding mechanism, targeting decentralized autonomous organization (DAO) treasuries, enabling token teams to boost liquidity without attracting transient capital that could undermine their treasury.
Now, both DAOs and individual DeFi participants can deposit funds into Bancor pools and enjoy token incentives that automatically compound, eliminating the need for manual claims and reducing Ethereum gas fees associated with transactions. Unlike Uniswap’s V3, which does not allow for third-party liquidity incentives, Bancor’s new LP tokens can seamlessly interact with a variety of DeFi applications, making them suitable for use as collateral in platforms like Maker or for lending on Aave.
Richardson noted the fundamental differences in approach between Bancor and Uniswap, stating that Uniswap’s model does not prioritize continuous liquidity and operates more like a limit order protocol, which can lead to inefficiencies in market operations and price discovery.
