A class-action lawsuit has been filed against Bancor DAO, its operator BProtocol Foundation, and its founders in the United States District Court for the Western District of Texas. The lawsuit alleges that the DAO misled investors about the impermanent loss protection (ILP) mechanism for liquidity providers and violated securities laws by offering an unregistered security. American retail investors reportedly lost tens of millions of dollars as a result of Bancor's allegedly "risk-free" ILP products.
The lawsuit centers around Bancor's v2.1 investment product, which was launched in October 2020 and incorporated the ILP mechanism. According to the plaintiffs, the product operated at a deficit that was known to the defendants, who then attempted to mitigate losses by launching a new product, v3. The lawsuit alleges that the defendants claimed that v3 offered "competitive returns" without any risk to users.
Impermanent loss is a common risk in decentralized finance, occurring when a liquidity provider deposits assets into a pool and one of the tokens loses value against another in the pool. This loss is not realized unless the investor withdraws the token from the pool.
On June 19, 2022, Bancor experienced a surge in asset withdrawals, which resulted in a pause in impermanent loss protection (ILP). Although investors could still withdraw their assets, they incurred losses that ILP was designed to prevent. The plaintiffs in the class-action lawsuit allege that this resulted in losses of up to 50% of their Liquidity Provider Program investment, totaling tens of millions of dollars in losses for U.S. retail investors.
In addition, the plaintiffs allege that the founders of the DAO retained control of it:
Furthermore, the lawsuit alleges that if Bancor had complied with registration and disclosure requirements, the plaintiffs and other class members would not have invested in the LP Program. The plaintiffs make six charges against the defendants, with violations of securities laws being among them.
