Understanding the basics of liquidity pools & Bancor v2.1

Liquidity pools are smart contracts that hold one or more token reserves. Designed to serve as an automated market maker (AMM) for traders, Bancor liquidity pools offer a contrast to more conventional order-book exchanges in their simplicity and transparency.

As of the v2.1 update (October 2020), Bancor introduced new features that address key challenges facing liquidity providers (LPs) to AMMs. Mainly, v2.1 addresses:

  • Involuntary Token Exposure: that most AMMs require LPs to contribute liquidity to both assets in a pool, though they might only hold one token

  • Impermanent Loss: that LPs are subject to value loss when the prices of pool assets diverge

Bancor v2.1 offers:

  • Single-sided exposure: LPs provide liquidity in a single token and maintain 100% exposure to the token

  • Impermanent Loss Protection: LPs get compensated for any impermanent loss incurred on their stake, so long as the LP has accrued IL protection