Impermanent loss (IL) occurs in AMM pools when the prices of the tokens in a pool diverge in any direction. The more divergence, the greater the IL, reducing an LP’s profits from trading fees & rewards.
Bancor removes IL risk for LPs and transfers it to the Bancor protocol, which aggregates and backstops IL risk across its pools. The protocol uses fees earned from its co-investments to compensate for the network-wide cost of IL. While some pools may have high IL & low fees, others may have low IL and high fees. If there aren’t enough fees to fully compensate an LP’s IL at the time of their withdrawal, the protocol mints BNT to cover the delta.
When a user makes a new deposit, the insurance policy immediately kicks in for complete protection, subject to 0.25% withdrawal fee and a 7 day cool-down withdrawal period.
This means that even if a token moons in price, an LP is entitled to withdraw the full value of their tokens as if they held them in their wallet, so long as the LP has accrued full protection. For example, if an LP deposits 1 ETH, and the ETH price doubles, the LP can still withdraw at least the equivalent value of 1 ETH back, plus fees & rewards.
Check if you've been REKT by providing liquidity in AMMs who do not provide insurance via IL.WTF