DeFi Insurance: Managing Risks of Digital Assets
Understanding DeFi insurance and its importance in mitigating DeFi risks and threats.
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A spotlight article on Bancor, its features and the differences between v2 and v3.
Cover policies are available for users of Bancor v3 from the Popular DeFi dApps diversified cover pool, available on the Ethereum chain as well as on Arbitrum.
The Bancor protocol is a blockchain protocol that allows users to convert different virtual currency tokens.
Bancor utilizes two token layers that facilitate its liquidity pools and functionality: BNT and ETHBNT. Bancor's protocol converts between different ERC-20-compatible tokens. Each smart token is linked to a reserve of one or more other tokens in a liquidity pool, which allows for the automatic conversion of tokens.
Bancor enables users to create a “basket” token that holds a list of other tokens. The pricing is determined by the relative amounts of the respective tokens in the basket. A Bancor basket can function as an ETF (Exchange Traded Fund), holding a set of assets to help you diversify your holdings, and automatically rebalance them, or it can function as an exchange to exchange tokens.
The protocol was initially developed in Israel in 2017 by Eyal Hertzog, Galia Benartzi, and Guy Benartzi. Bancor and its competitor, Uniswap, are the leaders in a new wave of decentralized financial systems.
What makes Bancor unique is its ability to provide continuous liquidity for smart tokens, even in the absence of an order book or a buyer-seller matching mechanism.
The traditional method for exchanging cryptocurrencies involves the use of centralized exchanges, where buyers and sellers meet and exchange assets. However, this method is not ideal for several reasons, including the risk of security breaches and the lack of liquidity for certain tokens. Bancor addresses these issues by using an algorithmic market maker that automatically provides liquidity for smart tokens based on their underlying reserves.
The Bancor algorithmic market maker works by using a formula that determines the price of the token based on its supply and demand. As more buyers purchase the token, its price increases, and as more sellers sell it, the price decreases. This allows for continuous liquidity, even if there are no active buyers or sellers on the exchange.
Another unique feature of Bancor is its ability to support the creation of new smart tokens without requiring them to be listed on a centralized exchange. This is accomplished through the use of Bancor's liquidity pool, which is a reserve of different cryptocurrencies that can be used to back the value of smart tokens. When a new smart token is created, it is automatically backed by a portion of the liquidity pool, providing immediate liquidity for the new token.
The Bancor Network recently launched an upgrade to its protocol, moving from version 2 to version 3. The key difference between the two versions is the introduction of an automated market maker (AMM) that is designed to improve the efficiency and stability of the Bancor network.
In version 2, Bancor relied on a single liquidity pool for each token, which limited the amount of liquidity available for certain assets. Version 3, however, introduces a new cross-chain liquidity pool that allows for the trading of tokens across multiple blockchains, increasing the pool of available liquidity and reducing transaction costs.
The new AMM also uses a dynamic fee model that adjusts based on supply and demand, encouraging liquidity providers to add funds during periods of high volatility and reducing fees during periods of low volatility. Additionally, the AMM introduces a new feature called "single-sided exposure," which allows liquidity providers to earn fees by providing liquidity for a single asset rather than requiring them to provide liquidity for both sides of a trading pair.
In summary, the Bancor protocol is unique because it provides continuous liquidity for smart tokens, supports the creation of new tokens without the need for centralized exchanges, and offers increased accessibility and reduced transaction costs to users. Its algorithmic market maker and liquidity pool make it an attractive option for those seeking a decentralized exchange with reliable liquidity.
The Bancor protocol operates using its native token, the Bancor Network Token (BNT). BNT serves as the hub token for the Bancor network and is used to facilitate the exchange of other tokens on the platform. Users can purchase BNT on various exchanges, and it can also be used as collateral to create new smart tokens on the Bancor network.
In terms of finance, the Bancor protocol is funded by a combination of private investment and token sales. As of 2021, the company has raised over $150 million in funding, and the Bancor network has facilitated over $3 billion in trades since its launch in 2017. The company generates revenue through transaction fees and other services offered on the platform, such as token creation and management tools.
Bancor maintains an active presence on several social media platforms, including Twitter, Telegram, and Discord. These accounts are used to share updates on the protocol's development, new partnerships, and other news related to the Bancor ecosystem.
On Twitter, the company has over 158,000 followers and regularly posts updates on new developments and events related to the Bancor protocol. The Telegram channel has over 7,000 members and is used to communicate with the Bancor community, answer questions, and share important news. Additionally, the Discord server is a hub for developers and users to connect, share ideas, and collaborate on the Bancor network. The Bancor YouTube channel is active, with a number of playlists and over 2000 subscribers.
Overall, Bancor maintains an active and engaged presence on social media, helping to foster a vibrant and supportive community around the protocol.
Bancor employs a range of security measures, including multi-factor authentication, cold storage for user funds, and regular security audits.
However, no technology is completely immune to security breaches, and the Bancor protocol has experienced some vulnerabilities and exploits in the past. In July 2018, the protocol suffered a hack that resulted in the loss of $13.5 million worth of user funds. The hack was possible because a wallet that is used to upgrade some smart contracts was compromised, allowing the hacker to withdraw assets in ETH, BNT, and NPXS tokens. The team was quick to react, and they were able to freeze 3,200,00 of Bancor's BNT tokens, worth approximately $10 million at that time.
Following the hack, Bancor took swift action to address the vulnerability and improve its security measures. It also worked closely with law enforcement agencies to investigate the incident and recover the stolen funds. While the hack was a significant setback for Bancor, the company's transparent response and commitment to improving its security measures have helped to restore confidence in the platform.
On June 18, 2020, a source revealed that Bancor was exploited due to a smart contract vulnerability. The team stated that they had discovered a vulnerability in the Bancor Network v0.6 contract and conducted a white-hat attack to transfer the funds to a secure address. However, two arbitrage bots were quick to trade and take advantage of the exploit, resulting in a loss of approximately $135,229.
Overall, while the Bancor protocol has experienced some security issues in the past, the company has taken proactive measures to address these vulnerabilities and improve its security posture. As with any decentralized platform, users should exercise caution and ensure they understand the risks associated with using the protocol before investing their funds.