A group of investors has taken legal action against the Bancor Protocol decentralized autonomous organization (DAO), its operator, BProtocol Foundation, and its founders in the United States District Court for the Western District of Texas.
The class-action lawsuit alleges that Bancor deceived investors regarding its impermanent loss protection (ILP) mechanism for liquidity providers and operated as an unregistered security. The plaintiffs claim that they suffered substantial financial losses due to these actions.
Deception Regarding Impermanent Loss Protection (ILP) on Bancor Protocol’s v2.1
According to the lawsuit, Bancor’s v2.1 investment product, launched in October 2020 and featuring ILP, operated at a deficit that the defendants knew of. To cover this shortfall, the defendants introduced a new product, v3, promising competitive returns without any associated risks. Impermanent loss occurs in decentralized finance when a liquidity provider’s deposited assets depreciate relative to other tokens in the pool. However, this loss is only realized if the investor withdraws the token from the pool.
Control Retained by Founders
In addition to the deception surrounding ILP, the plaintiffs claim that the founders of Bancor maintained significant control over the decentralized autonomous organization. Despite Bancor purportedly being governed by the Bancor DAO, the defendants exerted direct control over its capital, employees, and code. Furthermore, they allegedly manipulated and dominated the Bancor DAO, resulting in near-total control over the platform’s operations.
