A group of investors has filed a class-action suit against the Bancor decentralized autonomous organization (DAO); its operator, BProtocol Foundation; and its founders in the United States District Court for the Western District of Texas. The plaintiffs claim, among other things, that Bancor deceived investors about its impermanent loss protection (ILP) mechanism for liquidity providers and was an unregistered security. 

According to the suit, Bancor’s v2.1 investment product, introduced in October 2020 and the second to feature ILP, operated at a deficit that the defendants were aware of and tried to cover by launching a new product, v3, which promised “some of the most competitive returns anywhere […] without asking users to take on any risk.”

Impermanent loss occurs within the automated market maker model of decentralized finance when a liquidity provider deposits assets into a pool and one of the tokens involved loses value against another in the pool. It is called impermanent because trading conditions may restore the value of the token later. The loss is not realized unless the investor withdraws the token from the pool.

Related: Zircon Finance launches mainnet to mitigate impermanent loss on Moonriver

On June 19, 2022, Bancor experienced a spike in withdrawals, leading to a “pause” in ILP. Investors could still withdraw their assets, but they experienced the losses ILP was meant to prevent. This led to “losses approaching 50%

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Author: Derek Andersen

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