Bancor, decentralized exchange enabling traders to swap Ethereum and EOS tokens, has successfully launched Bancor V2. Finally, bringing new Dynamic Liquidity Pools to the forefront of the platform. These upgrades have promised to dramatically improve the overall user experience for traders and liquidity providers.
Currently, the pool contracts are in beta mode. Thus there is a liquidity cap on each pool at $1 million USD. A pool manager will remove the limits later once the contracts are safe. The main change to these liquidity pools is the introduction of external on chain price oracles. Excitingly, they use Chainlink, aiming to solve what Bancor refers to as DeFi’s dirty little secret. More recently, 1inch launched Mooniswap which also tackles the problem of impermanent loss.
Bancor V2 launches – Key Features:
- Single-token exposure: 100% exposure to a single asset.
- Staked Balance and Current Balance: each liquidity pool will now have a total amount of tokens staked (provided by liquidity providers) and also a current balance (the total amount of tokens held in the reserve.
- Dynamic Weights: the pool’s reserve weight will update automatically as a way to incentivize market participants into providing liquidity that will equalize the current balance with the staked balance. This is a new concept referred to as Liquidity Amplication and will greatly reduce slippage.
- Price Feeds: oracle driven price feeds powered by Chainlink will ensure that after arbitrage opportunities are taken. The pool price will become equal to the market price.
Currently, the only pool deployed with Bancor v2 launch is to trade BNT/LINK. Several other launch pools such as LEND, REN, renBTC, and ENJ will launch. And we would expect various DeFi token assets to follow quickly.
Solving Impermanent Loss
Decentralized Finance (DeFi) has seen a major boom throughout the industry in recent months. Especially Automated Market Maker (AMMs) platforms such as Uniswap, Curve Finance, Kyber Network, and Balancer. There is now over $692.5M USD supplied to these protocols in liquidity or staking. The rapid growth has been astounding, however, there is a major barrier that could stop AMMs achieve widespread adoption. Which is how to solve the problem of impermanent loss for liquidity providers. Who are arguably the most important actors in an AMM platform because without liquidity no traders will use the protocol. With Bancor v2 launching to mainnet we may finally have an answer.
Impermanent loss is the unique type of loss felt by liquidity providers due to crypto assets being very volatile. For example, Uniswap does not calculate the price of an asset by checking the market rate. It works off an inbuilt algorithm of supply and demand. If the price of ETH drops or increases quickly on a centralized exchange. Then the arbitrageur trading between Uniswap and the CEX always profits the most. Even though the liquidity provider is technically taking much more risk.
External pricing data with Chainlink
Bancor has taken steps to solve this problem with its new Dynamic Automated Market Makers (DAMMs). These will use oracle-driven price feeds along with a combination of incentives.
A new analytics platform will allow users to easily find which pools are providing the best returns. Bancor Data will be the name of the analytics platform. So far there is no date for its release, the team did publish a screenshot on social media. It appears to show an interface very similar to Uniswap Analytics.
The Bancor v2 launch has been very much anticipated by DeFi enthusiasts, DEX traders, and BNT token holders alike. If the design works then other existing AMM platforms will have to adopt a similar architecture. Alternatively, they risk losing the bulk of their liquidity providers moving to Bancor v2.
Stay safe and trade well!