Bancor 3 – Single Sided Liquidity and LP Pools
One of the new features in the Bancor 3 cryptocurrency exchange is Single Sided Liquidity (SS L). This type of liquidity allows investors to invest in a liquidity pool of only a limited number of tokens. Single Sided Liquidity can also lure new investors into the il pool by offering them protection from IL. In this article, we’ll look at LP pools and how they can improve defi liquidity in various ways.
Bancor 3 introduces Single Sided Liquidity
With the introduction of Single Sided Liquidity, Bancor hopes to put the power of DeFi back into the hands of token holders and DAOs. The v3 protocol proposes significant upgrades to its architecture and user experience. This includes single-sided staking, auto-compounding earnings, and integration with Chainlink Keepers. These improvements also bring changes to tokenomics and impermanent loss protection mechanisms.
Single Sided Liquidity (IL) is an insurance option that compensates LPs for impermanent losses. The IL protection grows at 1% per day as liquidity is deposited. Once IL coverage reaches 100%, LPs will receive full compensation. But how do you get started with Single Sided Liquidity? Here’s a look at its key features:
Features of Single Sided Liquidity
Omnipool architecture: This innovative architecture consolidates token liquidity into a single virtual vault, while minimizing gas costs. The new system eliminates the need to pair 50/50 or buy another asset to protect your assets. It also auto-compounds trading fees and protects liquidity providers against impermanent loss. It also connects to Chainlink Keepers, which automates trading and optimizes auto-compounding.
DeFi: As the first DeFi protocol, Bancor introduced automated market makers (AMMs) on the blockchain. These AMMs have become a key building block of decentralized finance and attracted $30 billion in staked funds across dozens of blockchains. Because AMMs are community-sourced liquidity providers, they also enable permissionless blockchain ecosystems. That is why Bancor continues to innovate and make this technology as widely accessible as possible.
Enhanced impermanent loss protection: Bancor is introducing auto-compounding rewards for depositing liquidity. This feature helps investors achieve a passive, “set and forget” position, without worrying about loss or impermanent exchange rates. While it’s difficult to assess Bancor, this new release promises to keep Bancor competitive. It’s hard to argue with the brand name longevity of Bancor in the DeFi space, but the V3 is likely to boost the company’s reputation even further.
LP pools allow limited number of tokens
A single-sided liquidity pool (SSLP) has several benefits. Unlike a multi-sided liquidity pool, a single-sided liquidity pool allows a limited number of tokens. The underlying blockchain technology is decentralized and aims to provide a more transparent exchange environment. The process of joining a SSLP is straightforward and requires minimal technical knowledge. Token holders are not required to join the pool in order to participate in the SSP.
When an individual or a company wants to participate in a SSLP, it first needs to sign up and connect to an Ethereum wallet. Then, they can choose to use MetaMask or another Web 3.0 wallet to deposit their tokens in the relevant liquidity pool. On Uniswap, the process is quite similar. Once the platform is connected, users can search for a specific pair, connect their Ethereum wallet, check for returns and deposit their tokens in the relevant pool.
As long as there is a high enough threshold of token votes for governance, single-sided liquidity pools are a great solution for DeFi. Another exciting area is insurance against smart contract risk. Liquidity pools power a large number of smart contract implementations. One cutting-edge application of LPs is tranching. This process involves categorizing financial goods by risk and return, and enabling LPs to select customized risk profiles.
Uniswap V3 has several changes, bringing targeted LP into mainstream DEFI. The V3 introduces tiered fees for each pool, allowing higher risks to match higher returns. It also introduces a range order, allowing traders to enter and exit pairs in a controlled manner. The range orders allow for large, orderly swaps and exit strategies. They will allow for reduced fees, which should help traders make more money.
LPs must wait at least 100 days before they can receive IL compensation, and this is called the maturity pool. However, if an investor withholds their tokens before the maturity pool, they will only receive partial compensation. For example, Joe may deposit 100 DAI and 1 ETH (worth $100) in a liquidity pool, but withdraw them at a discounted price two months later. Despite a 100-day waiting period, Joe would receive 50% of his initial capital and fees if his tokens were sold for less than $100.
Earlier versions of IL protection included a withdrawal delay. The V3 eliminates that, and replaces it with a seven-day “cooldown period” period and a 0.25% withdrawal fee. In addition, the IL protection kicks in immediately. Earlier versions had similar features, but paired pools with Bancor’s native BNT token. Once 100 days pass, a full IL protection is gained.
IL protection is a major issue for ICOs. Bancor v2.1, for example, requires a certain period of staking tokens in the liquidity pool before IL protection is fully introduced. Bancor 3 will remove both of those requirements, as well as trading fees. Moreover, IL protection will no longer require investors to stake tokens within the liquidity pool. Traders will be able to profit from the IL protection while avoiding trading fees.
The Bancor Protocol is a new solution to AMM problems. Its aim is to remove permanent losses by introducing an elastic supply token to offset risk. It provides IL insurance to all liquidity providers and diversifies the risks across multiple stakeholders. The company’s Head of Growth, Nate Hindman, is a former financial journalist who joined the firm. He believes IL protection is important for AMMs, but more testing is required to make this a successful product.
Reduced trading fees
As we have seen with other types of financial regulation, reduced trading fees for single sided liquidity are in line with the goals of the regulators. The incentive for single sided liquidity providers to offer focussed liquidity is approximately 4000X. For this reason, most users are likely to try to strike a balance between magnifying returns and staying within the fee structure. In addition, because crypto prices fluctuate, the rudimentary algorithms and low liquidity of traditional providers can be extremely costly.
On-chain liquidity is useful for multiple purposes at once. Single sided liquidity tokens from Bancor 3 may change this trend by paving the way for composable liquidity on the platform. With these tokens, LPs do not have to choose between earning yield through AMMs or earning yield through natively staking tokens. In addition to reduced trading fees, single sided liquidity also offers mining rewards.
One downside to stablecoins is their low yield. Even if they provide liquidity, they rarely result in decent trading fees. Stablecoins are constantly pegged to a fixed value with little or no profit potential. But, while stablecoins may be a viable liquidity option for certain types of traders, the reality is that every DeFi platform wants to create its own currency. Reduced trading fees for single sided liquidity may offer a more profitable option.
The Uniswap protocol V3 brings radical changes to the industry. It brings targeted LP to the mainstream DEFI. Moreover, it introduces tiered fees across pools to match the risks involved. It also allows for range orders that can facilitate big swaps with proper exit strategies. This is another key change in Uniswap. The new version of the protocol also offers users higher returns from trading fees.
Improved defi liquidity
The rapid rise of defi exchanges has brought increased interest in the cryptocurrency market. This rapid growth has also seen traditional investors look to crypto-assets for exposure. Even Tesla has jumped on board, purchasing into cryptocurrencies. As a result, defi exchanges have become increasingly popular, with their value skyrocketing into the tens of billions. But one major challenge remains: liquidity pooling. Many current liquidity pools require users to lock equal amounts of two tokens into a smart contract. The users will receive rewards based on their stake in the pool. The issue of centralized exchanges is not confined to cryptocurrency-tokens.
One way to improve single-sided liquidity is by making the value pool more flexible. A defi exchange will introduce new tokens with the intention of luring new investors into the liquidity pool. However, this strategy could reduce liquidity pools’ efficiency until the underlying blockchain technology is fully developed. Until then, investors should focus on other forms of liquidity. In addition to increasing the value pool of decentralized exchanges, improved single-sided liquidity could lure more users to make investments in the cryptocurrency market.
Uniswap V3 brings radical changes into the trading process. Targeted LP, will be brought into mainstream DEFI. Additionally, Uniswap V3 introduces tiered fees in each pool, so investors can match their risk with higher returns. Finally, Uniswap V3 also allows range orders, a type of big swap that facilitates orderly exit strategies.