Is Bancor facing insolvency problems?

In a recent announcement, Bancor – one of the biggest decentralized exchanges, announced that they will be temporarily pausing the project’s Impermanent Loss Protection feature. The move comes during what is described by the Bancor team as “hostile market conditions” and is intended to protect the protocol and its users until the market stabilizes.

Bancor also notes that there is no ongoing attack and funds on the protocol are secure. While withdrawals performed during the period in which the feature in question is switched off will not be eligible for Impermanent Loss protection, users will continue to earn yields on the protocol and are to be entitled to withdraw their fully-protected value once the Impermanent Loss Protection feature is on.

The Bancor team claims that the need to pause the feature is a result of recent sell-off of reward emissions on the protocol that have been accumulated over the last 18 months. The BNT rewards, designed by Bancor itself, apparently depreciate the BNT value resulting in impermanent loss on the network, which is compensated with additional BNT emissions that are causing further value depreciation.

Two large so-called centralized entities (Celsius and 3AC) were key beneficiaries of BNT liquidity mining rewards by being long-time liquidity providers in Bancor V2.1. As the two companies have been facing insolvency problems recently and have been trying to recover as much funds as possible to address their problems – they liquidated their BNT positions and withdrew large sums of liquidity. At the same time, an unknown entity opened a large short position on the BNT token on an external exchange, according to Bancor.

While the Impermanent Loss Protection feature remains inactive, the Bancor team will also be halting deposits on the protocol, according to Mark Richardson – head of research at Bancor who discussed the implications of the temporary removal of the feature in a Twitter Space AMA, this is done to protect depositors while the situation remains unresolved. Bancor v2.1 will be pausing all withdrawals until Impermanent Loss Protection is switched on, however, users are able to migrate their assets to Bancor v3 and withdraw their funds without the problematic feature.