This guide provides a technical overview of the Bancor v3 architecture, focusing on its two groundbreaking features for developers and liquidity providers: Bancor Single-Sided Staking and Bancor Impermanent Loss Protection.
Step 1: The Problem with Traditional LPs
In most AMMs, providing liquidity requires depositing two assets in a 50/50 ratio. This forces LPs to hold an asset they may not want and exposes them fully to impermanent loss (IL).
Step 2: Bancor's Single-Sided Solution
Bancor v3 fundamentally changes this.
Mechanism: A user can provide a single token (e.g., ETH) to a liquidity pool. The protocol then co-invests its native BNT token alongside the user's deposit to create the other side of the pair.
Advantage for LPs: This eliminates the need to hold a second asset, simplifying the user experience.
Implementation: To integrate, your dApp would call the deposit() function on the appropriate pool contract, specifying only a single token and amount.
Step 3: The "Holy Grail" - Impermanent Loss Protection
This is Bancor's most famous feature.
How it Works: The protocol uses fees earned from its protocol-owned BNT liquidity to compensate LPs for any impermanent loss they incur. If you provide liquidity and after 100 days your staked assets are worth less than if you had just held them, the protocol pays you the difference in BNT.
Technical Nuance: This protection is not absolute from day one; it accrues over time.
Step 4: Auto-Compounding and Governance
Bancor v3 features Bancor Auto-Compounding Rewards. Swap fees are automatically re-added to the liquidity pool, increasing the LP's position size without requiring manual transactions. The entire system is governed by the Bancor DAO, which helps answer "Is Bancor Safe?" through community-led oversight.
For all contract addresses and the full mechanics of IL protection, refer to the Full Official Documentation.
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