tl;dr Summary: Bancor version 3 is in beta; as of April 18th, 2022. With a new Omnipool architecture, Bancor 3 promises to get back into the limelight as it brings new features like Unlimited Single-Sided Staking, Instant Impermanent Loss Protection, and more.
History of Bancor
Bancor is one of the pioneers of DeFi. Founded in 2016, it released its first whitepaper on February 13th, 2017. The team behind Bancor came up with the idea to create an AMM (Automated Market Maker) which sparked the DeFi revolution.
In 2018, Bancor suffered a security breach that resulted in the attacker stealing $10 million worth of BNT (native Bancor token), $12.5 million ETH, and $1 million NPXS tokens. The company responded by freezing the BNT tokens and recovering them but lost the remaining tokens.
This event turned into a controversy as it wasn’t the attack but the ability of Bancor to freeze BNT that made the community upset as it created a single point of control/failure. To their credit, Bancor changed its operational security, removed the BNT freeze function from its protocol, hardened its entire codebase, and never suffered another attack.
Bancor invented the concept of Liquidity pools and the bonding curve mechanism that was borrowed by the likes of Uniswap and Sushiswap.
Arguably, the one thing that Bancor is known for besides being the front runner in DeFi is the first-ever model for “impermanent loss (IL) protection.” AMMs today suffer from the issue of impermanent loss in which users staking their assets in an LP (Liquidity pool) can lose money compared to simply holding them in their wallets.
According to a study done by Bancor, 49.5% of Liquidity providers (users who buy and stake their assets, a.k.a. LPs) lose money. The Defiant found that 52% of LPs utilizing Uniswap V3 were also unprofitable but due to complexities in the calculation of IL, many users are not even aware that they are losing money.
Bancor is the only AMM that protects its users against IL.
What is new in Bancor 3?
Bancor 3 takes things even further with several new changes to its existing Bancor V2 protocol.
1) Omnipool: Traditional AMM (most of the existing ones) LPs to buy a pair of tokens. For e.g., if you want to buy ETH as your base asset, there will also be a counterparty asset of USDC. This is inconvenient for LPs as they are forced to divide their asset exposure to meet the pool requirements.
Bancor V2 addresses this issue by “single-sided staking” that allowed users to provide liquidity to a pool of their choice while maintaining 100% exposure to one single asset. For example, users could now buy ETH/BNT or DAI/BNT instead.
But this added another complexity to the model. Imagine a situation where a user wants to sell some ETH and buy some DAI instead. The first step would be to get the BNT equivalent from the ETH/BNT pool and then transfer this BNT into the DAI/BNT pool to buy DAI, and this required two transactions, which would increase the overall gas fees.
In V3, there is a single pool for all BNT, so there is no need to move your BNT between different pools. All trades can now happen in a single transaction which not only reduces the gas fee but also makes the transaction faster resulting in a better user experience.
2) Infinity pools: Previously, users would have to wait for enough space to open up in a pool in order to add liquidity to it, but in V3 there is no longer a deposit limit and so users will be able to contribute as much as they want without worrying about space.
3) Instant Impermanent Loss Protection: In V2, 100% IL protection was in effect only after the tokens were staked for 100 days or more, but with V3, users will enjoy instant IL protection.
4) Auto-Compounding Rewards: In V2, users had to manually add their rewards to the pool, which cost them gas each time, but in V3, earnings are instantly re-added to the pool without any user action.
Other features include:
- Multi-chain and L2 support
- Third-party IL protection
- An upgraded front-end
All these features will be part of their Dawn release, with later updates coming as part of the Sunrise and Daylight releases.
