Bancor

  • Cryptoasset Report
  • December 19, 2018

Bancor is an exchange platform utilizing smart contracts on the Ethereum blockchain and reserves of cryptocurrency to ensure liquidity between connected assets at an algorithmically determined price.

Overview

The Bancor project seeks to enable liquidity for Ethereum and EOS tokens designed for use in networks and dApps that may have little adoption and illiquid markets. The Bancor protocol allows users to create their own tokens on the platform backed by a connected reserve of cryptocurrency, typically ETH, with a set ratio between the two currencies; this occurs in a similar way to how central banks set foreign exchange rates against a reserve of currency. When an order is placed on Bancor, the price is algorithmically determined based on the traded token’s current supply and demand and the reserve currency ratio. This represents a significant departure from how exchanges conventionally function since the price impact of one’s order is factored into the price offered to the order maker. Bancor’s Tel Aviv based team has experience working with blockchain protocols and building companies, but since launching the network has failed to attract the volumes seen on other liquidity protocols.

Protocol Details

The Bancor exchange, accessible in web browsers, has a smooth user experience, including a feature allowing users to create a SmartToken by interacting with a chatbot. Once the SmartToken is issued, its value relative to other currencies will float as foreign currencies do, but the connector weight (CW), a measurement of the ratio between each connector balance and the Smart Token’s total value intended to indicate the SmartToken’s price sensitivity, will determine how much of the reserve currency one SmartToken can be redeemed for and how many more SmartTokens can be issued by adding to the reserves. This establishes a target price (denominated in reserve currency per SmartToken) that the Bancor smart contract will honor in creation and redemption. If the reserve currency increases in value relative to a third currency (such as fiat), the SmartToken will as well. To a lesser extent, the effect occurs the other way around as well, though the effect will be small if the amount of reserve tokens held is small relative to the total supply of tokens issued against it. SmartTokens themselves can also be used as the reserves of other SmartTokens, vastly increasing leverage in tokens. Originally, Bancor was accessible worldwide but in July 2019 decided to bar US citizens, citing an increase in regulatory uncertainty.

Asset Details

The Bancor Token is the first token launched on the protocol, backed by ETH from the crowdsale at a 20% (CW)—this connector weight indicates that the token’s price is less sensitive to change from short-term speculation than a token with a higher weight, and is comparable to an exchange having an order book equal in value to 20% of the token’s entire market cap. Anyone can use the Bancor Token to back additional SmartTokens. The Bancor Foundation will use some of the sale proceeds to launch more SmartTokens and support users in launching their own SmartTokens as well. If the Bancor Token is used as a reserve currency for another SmartToken, it will be accepted as part of the reserve.

The value of the Bancor Token thus depends on both the value of ETH and the value of the SmartTokens that Bancor is used to back. When the market price of ETH increases faster than Bancor’s, it becomes cheaper to get ETH through the smart contract until the supply of Bancor goes down (or the price of ETH goes down), or until the price in the smart contract matches the relative prices in the market. When the market price of Bancor increases faster than ETH’s, it becomes cheaper to get Bancor through the smart contract until the supply of Bancor goes up (or the price of ETH goes up) and the price in the smart contract matches the relative prices in the market. Conversely, when the market price of a SmartToken with Bancor as a reserve goes up faster than Bancor’s, it becomes cheaper to get SmartTokens through the smart contract until the supply of SmartTokens goes up (or the price of Bancor goes up). This also means that the value of the Bancor protocol token does not directly scale with the following: Usage of the smart contracts for trading liquidity; Arbitrage profits collected by traders; and Total users on the system (unless they use Bancor as a reserve token).