Bancor: An Autonomous Liquidity Mechanism for ERC20 Tokens
In many respects, the value of a cryptocurrency is drawn from its ability to effectively interact in the global ecosystem. Built into that is the coin’s ability to be easily traded in a reliable fashion. Liquid tokens are able to be transferred easily without considerably affecting the price. While liquidity is typically not an issue for larger projects, it can be a massive concern for new or small-cap projects with low adoption.
Bancor hopes to solve this issue with “Smart Tokens,” or cryptocurrencies that leverage the capabilities of smart contracts to build liquidity directly into tokens themselves. In other words, these contracts always offer to sell tokens to buyers and buyback tokens from sellers at a formula-calculated price. To achieve this, each Smart Token is configured with connector modules, which hold a balance of another connected token, like Ethereum. Through this protocol, Bancor aims to create self-sustaining liquidity networks that remove the necessity of external market makers or centralized exchanges.
Interested in Bancor? Here’s a quick rundown of the project:
Platform & Development
Bancor’s smart tokens can be purchased or sold at any time, directly through their smart contract, without the need to use an exchange or even be matched to a second party. The smart contract which operates the token essentially “own” units of one other token, called a “reserve.” These reserve tokens, such as Ethereum or Bancor (BNT), are the connector units by which Smart Tokens are purchased and sold. When investors purchase a Smart Token, they transfer the reserve token to the smart token’s contract, which in return issues new units of the smart token. Conversely, any smart token holder can choose to liquidate units and receive a reserve token in return, effectively removing these smart token units from circulation.
Established ERC20 tokens are backward compatible and can become Smart Tokens through the use of a Relay Token, which allows users to convert between either of its connected tokens through an instant two-step process of purchasing the Relay Token with one of its connected tokens and immediately selling it for the other connected token. Relay tokens hold a 50/50 ratio of the tokens it is connecting, and investors who stake their coins into a relay earn a small commission on all transactions. Enjin coin provides a good example of a Relay Token.
Smart tokens set their own price, in respect to each reserve token they hold. The price automatically increases when smart tokens are purchased for the reserve token, and decreases when they are liquidated to the reserve token. Each Smart Token maintains a ratio between its total value (total supply × unit price) and its connector (reserve token) balance, and that ratio is pre-determined by the token creators (0-100%).
CW, as detailed above, has serious implications on the long-term value curve of a token, and can usually be adjusted by token creators as their project progresses. This automatic pricing algorithm, while essential to the Bancor protocol, has been a major area of controversy among BNT investors.
Bancor is managed by the Bprotocol Foundation, which was established in 2017 in order to promote the adoption of the Bancor Protocol as a global standard for Smart Tokens. Notable investor Tim Draper is currently an advisor to the Bprotocol Foundation.
Bancor (BNT) currently has a market cap of ~$97 million with a circulating supply of 42,666,182 BNT and a total supply of 74,528,943 BNT. The total circulating supply of BNT is ever changing, BNT tokens are created when ETH is sent to their smart contract and destroyed when a user ‘sells’ their BNT back to the contract.
Bancor’s Smart Token protocol hopes to solve the global liquidity problem facing ERC20 tokens. With the backward compatibility aspect, it would not be surprising to see many smaller utility token projects look to join the Bancor network. It will be interesting to observe the long-term value growth of Bancor’s token (BNT) as more Smart Tokens are launched with BNT as a connector.
Follow us: Telegram | Twitter | Newsletter
Disclaimer: The author(s) of this article may have a position in one or more of the securities mentioned above. This article is for informational purposes only and should not be taken as investment advice. Always conduct your own due diligence before making investments.