Bancor has released a status report for its v2.1 decentralized exchange upgrade showing the performance of its decentralized exchange over the past three months.
According to the document, total liquidity is up nearly 100%, earning the platform about $ 1.12 million in cumulative swap fees.
Bancor’s report noted that fee income was more than five times the cost required for temporary loss compensation for liquidity providers.
Indeed, transient loss management was a major concern of the v2.1 upgrade as noted by Cointelegraph in October 2020. While Bancor initially attempted an oracle-based solution, it was soon revealed that this was impractical due to front-running issues. The new approach uses economic incentives to cover the costs of temporary loss, a phenomenon caused by the constantly balancing portfolios of liquidity providers. As two tokens differ in price, LPs suffer smaller gains and larger losses compared to a benchmark of 50-50 portfolio.
Bancor announced at the time that it would introduce an insurance mechanism against it temporary loss in its second iteration. As part of the solution framework, the project has established an acquisition schedule for liquidity providers to encourage long-term bets.
Under the vesting schedule, the protocol provides coverage of 1% of the provided liquidity capital for up to 100 days to cover any temporary losses. However, liquidity providers who withdraw their money within 30 days will not receive compensation for losses incurred during the period.
With swap fees far in excess of the insurance cost for temporary loss compensation, Bancor noted that the platform is profitable for both the protocol and BNT token holders.
Commenting on the potential impact of such a situation on inactive altcoin capital, Nate Hindman, head of growth at Bancor, told Cointelegraph that more altcoin holders will be incentivized to become liquidity providers rather than buy-and-hold strategy, adding:
“With Bancor v2.1, AMM LPs can stay on their tokens for a long time while providing liquidity, without the threat of temporary loss. We think this will bring a new wave of users participating in SMP restocking. As we’ve seen so far, many of these users tend to be long-term holders (rather than opportunistic harvest farmers) looking for a high, risky yield on their preferred tokens. “
Hindman also noted that a workable temporary loss solution can also encourage projects to use their treasury in providing liquidity to SMPs. As with proof-of-stake rewards, this can enable projects with large token reserves to self-fund while increasing the liquidity of their token pairs.
Bancor liquidity providers will also begin to earn BNT as rewards. Indeed, the protocol is launching its liquidity mining program whereby liquidity providers receive BNT rewards retroactively. The BNT rewards can be claimed or wagered on the platform.