How to use Bancor against Impermanent Loss

With the advent of decentralised exchanges such as Bancor or Uniswap, the problem of Impermanent Loss has arisen, i.e. the difference between the values of tokens placed in a pool and having them holed in your wallet.

Around liquidity pools, systems in which a user can provide liquidity in a pool with 2 tokens in proportion to their value, an incredible market has developed, also because anyone can also list their token.

But this also brings problems, such as impermanent loss.

What is impermanent loss

Considering that pools have a 50/50 weight, this means that the value of the respective tokens must be the same, but in the case of one of the two increases, the pool automatically sells the token that has increased to buy the less valuable one so the pool self-balances itself.

This means that the total of the initial tokens we will have put in will probably be different when we decide to take them.

This loss, however, is only virtual, in the sense that if the token values increase beyond the price at which we put them, then the impermanent loss is cancelled.

To the contrary, if we withdraw the tokens under the value which we had inserted them in the pool, this loss from virtual will become real and the difference between the total of the inserted tokens and those withdrawn will be negative.

Impermanent loss, the Bancor solution

Including this, Bancor has worked hard to mitigate and eliminate this disadvantage and has recently activated version 2.1 of its protocol for this, allowing it to both protect itself against impermanent loss and to expose itself with only 1 token in a pool instead of 2.

In this guide we will see both methods. The system is the same for both EOS blockchain-based tokens and Ethereum tokens.

How to use Bancor

First we’ll have to unlock our wallet, in this case we’ll use MetaMask, while if we use EOS tokens we can use different wallets like Scatter and Anchor.

Then we’ll have to connect to the platform, here the one for Ethereum and here for EOS, and click on the „Connect Wallet“ button in the top right corner.

Once connected, the interface is very simple and intuitive. We will have 2 options:

the first is for pool protection,
the second serves instead to exploit a single token.
We start by pressing the „Stake“ button and then choose which protection we want, whether „single-sided“ or „dual-sided“.

After that we will have to choose the pool we are interested in, in our case we will put BNT/ETH and in the „dual-sided“ version we enter both ETH and BNT tokens with equal value.

In our case it is 0.4 BNT and 0.00012 ETH, while in the „single-sided“ version, we choose whether to put only BNT or only ETH.

Finally we click on the „Stake and Protect“ button and confirm the transaction with our wallet paying the relevant fee.

Finally we can see our liquidity in the „Protection“ section and also withdraw the funds from the „Withdraw“ button.

In this way we will have all the advantages of the pool, i.e. the fees and possible rewards from liquidity mining.