DeFi giant Bancor (BNT) has been swept up in the Celsius collapse, forcing the protocol to reject deposits and pause its popular impermanent loss protection feature. Current funds in Bancor are safe, and trading remains active, but anyone who withdraws now is not eligible for impermanent loss protection rewards, regardless of when the funds were deposited.
Bancor says, “the recent insolvency of two large centralized entities who were key beneficiaries of BNT liquidity mining rewards” has exacerbated the problem. Bancor wouldn't name the platforms, but it's believed that Celsius withdrew significant liquidity from Bancor, dumped all of its BNT, and shorted BNT on FTX. Ouch.
When a participant in a liquidity provider pool suffers impermanent loss, Bancor mints BNT and gives it to the investor to sell to make up for the losses. This mechanism doesn't seem to work during a major downturn, as Bancor admits:
BNT rewards effectively have a double-cost:
- They depreciate the BNT value, resulting in impermanent loss on the network.
- This [impermanent loss] is compensated with additional BNT emissions, causing further value depreciation.
Bancor's impermanent loss protection was introduced in 2020, and it's clear now that the incentive program can't survive a major downturn.