Bancor’s approach to dealing withimpermanent loss on decentralized exchanges might have significant implications for idle altcoin capital.
Bancor has released a status report for its v2.1 decentralized exchange upgrade covering the performance of its decentralized exchange over the last three months.
According to the document, the total liquidity increased by almost 100% resulting in the platform earning about $1.12 million in cumulative swap fees.
Bancor’s report noted that the fee earnings were more than five times the cost required for impermanent loss compensation for liquidity providers.
Indeed, impermanent loss management was a major focus of the v2.1 upgrade as noted by Cointelegraph back in October 2020. While Bancor initially attempted an oracle-based solution, this was quickly revealed to be impractical due to front-running issues. The new approach uses economic incentives to cover the cost of impermanent loss, a phenomenon caused by the constantly-rebalancing portfolios of liquidity providers. As two tokens diverge in price, LPs suffer smaller gains and larger losses