Why is the deficit of Bancor V3 so much worse than V2?

x3.finance
2 min readJul 24, 2022

Bancor, as the star project of ICO in 2017, created a new era of AMM, but it was surpassed by the rising star of uniswap. Facing the competition of uniswap, Bancor tried to attract lost customers with impermanent loss protection. Bancor launched the V2 version with impermanent loss protection first time proposed, and then the V3 version was launched in May this year. However, the V3 version had a huge deficit of 40 million US dollars just one month after its online.

But the V2 version did not have a serious deficit problem for a year after it was launched. What is the reason for this? Here we need to compare the difference between V2 and V3 of impermanent loss protection. The biggest change in V3 compared to V2 is the change from 100-day impermanent loss protection for 100% to instant impermanence loss protection for 100%, which is also the culprit that led to the huge deficit of V3.

As can be seen the BNT inflation calculation formula, any fluctuation will lead to the additional issuance of BNT. V2 only provides 100% impermanent loss protection for the liquidity locked for 100 days, which greatly suppresses the short-term violent fluctuations in the market resulting large number of BNT issuances. Therefore, we can conclude that if bancor wants to restore the impermanent loss protection function, it must firstly extend the lock-up period and cancel the instantly protection.

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x3.finance

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