Bancor DAO named in a Class-Action Suit Over Impermanent Loss on the Bancor protocol

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

Apparently, Bancor saw a spike in withdrawals on June 19, 2022, leading to a temporary pause of its ILP mechanism. Although traders could still withdraw their assets, some experienced “losses approaching 50% of their LP Program investment,” the suit said.

The plaintiffs allege that Bancor’s ILP mechanism was not effective and that investors lost money as a result. They also allege that Bancor made false and misleading statements about ILP in order to attract investors. They are seeking damages for their losses, as well as an injunction to stop Bancor from continuing to operate its ILP mechanism.

Roping in the DAO, the plaintiffs argued that its founders were largely in control of governance.

Though Bancor is purportedly run by a decentralized autonomous organization (“Bancor DAO”), Defendants retain near-total control over Bancor, both directly (control over its capital, employees, and code) and indirectly (domination and manipulation of the Bancor DAO).

The class-action lawsuit against Bancor is a significant development for the cryptocurrency industry. It is the first time that a major cryptocurrency project has been hit with a class-action lawsuit over impermanent loss. The outcome of this lawsuit could have a major impact on the way that impermanent loss is handled in the cryptocurrency industry.

It is important to note that Bancor has not yet responded to the allegations in the class-action lawsuit. The company has a right to defend itself against these claims and it is possible that the lawsuit will be dismissed. However, the lawsuit is a serious development for Bancor and it could have a significant impact on the future of the project.

What is Impermanent Loss?

Impermanent loss is a loss that occurs when the price of an asset changes relative to another asset in a liquidity pool. This loss is temporary, as it will be recovered when the prices of the assets return to their original ratio. However, it can be significant, especially if the prices of the assets move significantly.

Impermanent loss is a risk that liquidity providers face when they deposit tokens into Bancor’s smart contracts. This risk occurs when the prices of the two tokens in a pool move in opposite directions, causing the liquidity provider to lose money. Bancor’s ILP mechanism was designed to protect liquidity providers from impermanent loss by automatically rebalancing pools when the prices of the tokens in a pool move too far apart.