Overview of Bancor V3 new features: Instant full impermanent loss protection and independent BNT aggregation pools, etc

Author: Karen

Last week, a report on impermanent loss in Uniswap V3 revealed that 80% of liquidity pools in Uniswap V3 experience impermanent loss greater than trading fee income, with nearly half of LP users having net returns worse than HODLers. Clearly, effectively mitigating impermanent loss in AMMs has become a pressing issue that needs to be addressed.

As one of the earliest proponents of AMMs, Bancor has been continuously optimizing its model design. The V1 version launched in 2017 required all liquidity pools to use BNT as the trading pair asset. Considering factors like impermanent loss (IL), the V2.1 version released in the second half of last year allowed users to stake single-sided assets and receive 100% impermanent loss protection under certain conditions.

The upcoming V3 version of Bancor will introduce more new features, such as 100% impermanent loss protection on the day of staking, a separate BNT aggregation pool (BNT Omnipool), automatic compounding rewards, dual rewards, third-party impermanent loss protection, and LP token composability. Additionally, it simplifies contracts to reduce gas costs and allows the protocol to be deployed on Layer 2.

Specifically, Bancor will launch the V3 version in three phases: Dawn, Sunrise, and Daylight. The first phase is expected to go live in January 2022, with the second and third phases launching in February and March of next year.

Impermanent Loss Protection: Instant IL Protection + Third-Party Support

Instant 100% protection against impermanent loss is the most critical feature introduced in Bancor V3. In Bancor V2.1, users could enjoy impermanent loss protection in whitelisted token-related liquidity pools; however, the protection ratio was 0% during the first 30 days, 30% on the 30th day, and then increased by 1% daily, reaching 100% protection only after 100 days of staking.

In other words, in V2.1, users needed to stake for 100 days to receive full impermanent loss protection, and it only supported whitelisted tokens. Bancor V3 allows users to receive 100% impermanent loss protection on the day of staking, thereby minimizing impermanent loss.

Moreover, Bancor's current impermanent loss protection first uses the fees generated from the liquidity owned by the protocol as the first line of defense. If the impermanent loss exceeds the fees, newly minted BNT will be used to cover it, which is why a whitelist for impermanent loss protection liquidity pools has been established. In V3, third-party projects can also provide impermanent loss protection for their token liquidity providers, allowing project teams and Bancor to share the burden of impermanent loss and support more impermanent loss protection liquidity pools.

Independent BNT Aggregation Pool: Trading Bypasses BNT

In Bancor V2.1, one side of each pool was BNT, but in V3, there will be a separate BNT aggregation pool called "BNT Omnipool" for users to stake BNT and earn rewards. BNT holders will no longer need to decide which pool to stake in; instead, they can stake directly in a separate pool to earn from the entire network. This functionality will allow the protocol to bypass BNT when processing trades between tokens, facilitating direct token exchanges. This optimization will be particularly evident when converting ETH to other ERC-20 standard tokens.

On the other hand, in the current version, while users can provide single-sided liquidity, when the BNT provided by the protocol on the other side reaches a set limit, users must provide BNT to expand the liquidity pool. In the V3 version, there will be no deposit limits. Specifically, the concepts of trading liquidity and superfluid liquidity will be introduced, where trading liquidity is used for market making, and superfluid liquidity can be used for native and other fee strategies. The scale of trading liquidity will still be determined by the DAO, and tokens exceeding trading liquidity can be used for superfluid liquidity strategies, allowing stakers to accumulate additional value.

Reward Upgrades: Automatic Compounding + Dual Rewards

Automatic compounding of trading fees and liquidity mining rewards is another significant feature of Bancor V3, whereas in previous versions, users could only manually add rewards to the pool.

Additionally, apart from BNT, Bancor V3's liquidity mining rewards will also allow third-party projects to provide rewards in related pools, enabling liquidity providers to earn trading fees and dual token rewards, all of which can be automatically compounded.

Others

LP token composability is also an important feature of the V3 version, allowing users to earn additional yields with LP tokens in other DeFi protocols, or Bancor will automatically earn yields on behalf of users in other DeFi protocols. Furthermore, Bancor has significantly simplified the V3 contracts, reducing gas costs for transactions, storage, and unstaking, and enabling the protocol to be deployed directly on Layer 2.

Conclusion

Overall, in terms of impermanent loss protection, Bancor V3 provides instant full protection for whitelisted pools on the day of user staking through the protocol itself, and allows third-party projects to share the burden of impermanent loss, maximizing the coverage of this protection mechanism to more pools. On the other hand, the newly introduced independent BNT aggregation pool, automatic compounding, and dual rewards may attract more liquidity while helping liquidity providers earn more rewards.