Bancor updates DEX to try a new approach against impermanent loss

Bancor is updating its protocol once more to defeat the insidious issue of impermanent loss, which it earlier called "DeFi's dirty little secret."

Impermanent loss, also called divergence loss, affects exchanges based on automated market makers like Bancor or Uniswap.

The effect translates to a loss of value compared to a benchmark "Buy and hold" portfolio.

The loss was initially called "Impermanent" because if the prices return to their initial state, the loss is reverted.

Even in the optimistic scenario, divergence loss cuts into extra profits LPs would have otherwise obtained from the price swings.

Bancor has made the elimination of impermanent loss one of the key features for its second iteration.

There has also been a growing realization in the industry that impermanent loss is impossible to truly solve.

Each solution presents certain drawbacks or merely shifts the loss to somebody else.

It's introducing the concept of impermanent loss insurance, which guarantees that liquidity providers will receive up to 100% of their initial capital, plus fees accrued.

"We view this as liquidity mining 2.0 - instead of arbitrarily paying LPs to provide liquidity on our protocol, we are compensating based exactly on their individual impermanent loss incurred."