Third-party token projects listed on Bancor can offer to protect liquidity providers in the event of a vault deficit in the pool by funding External Liquidity Protection (ELP).
Vault deficits are caused by divergence between the price of the listed token (TKN) and BNT. Learn more about vault balancing mechanics in Bancor.
In order to fund ELP and offer this protection to LPs, third-party projects deposit their tokens in an "External Liquidity Protection" contract. The ELP contract checks the value of an LP's position when the LP is withdrawing from the pool. If the pool's vault balance is in deficit, the ELP contract provides TKNs to the LP to compensate for value loss arising from the deficit.
For example, if a pool is 35% in deficit, a user withdraws 1 TKN with ELP, then they get 0.65 TKN from the pool, and 0.35 TKN from the ELP contract. The ELP is effectively offered on a "first-come, first-serve" basis.
Third-party projects can increase the chances of getting whitelisted on Bancor or getting more trading liquidity from the Bancor DAO if they agree to cover some of the liquidity protection through this mechanism.
To get your token whitelisted with External Liquidity Protection, contact email@example.com.