Understanding DEX Fundamentals with Bancor

The Economy on Digital Currency using Bancor Protocol V1

Background of Currency and Beginning of Digital Currency

The History of Exchanges

Before the word “bitcoin” was in circulation (a word that some might have gained an anticlimactic attitude towards), barter has been a system of exchange where goods or services are directly exchanged for the other something without using a medium for exchange (e.g., money, coins, or tokens).

Barter, as a placement for money as the method of exchange, is volatile during a monetary crisis, such as when the currency may be either unstable or unavailable for commerce. Barter has been aided by exchanges that use alternative currencies based on the labor theory of value, and are designed to prevent profit taking by intermediators. Bartering is with limitations.

Some businesses that may not directly barter with customers may swap goods or services through membership-based trading exchanges. By joining a trading network (such as a bazaar, shopping malls, Amazon.com, and etc., often charge fees), members can trade with other members for barter dollars. Each transaction is subject to a minimal fee.

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Fig. 1 shows bartering process from beginning to completion

The Standing Problem

There, you have a problem and want a solution—what if you could trade goods/service without the long lineage of manual steps, not mentioning the solution further eliminates the cumbersome money conversion?

Before diving into the full solution, we have to fully realize what has not been working properly, beyond just the delicate relationships and cumbersome procedures in barter. In foreseeing what is ahead, what is said to be not proper may lead to how the economy becomes truly broken to the point of seemed as immobile—at least in Marx’s eyes—before we can formulate a complete solution.

In his scientific socialism combined his economics and philosophy, Marx predicted that competition among capitalists would grow so fierce that, eventually, most capitalists would go bankrupt, leaving only a handful of monopolists controlling nearly all production. One of the contradictions of capitalism is competition; instead of creating better products at lower prices for consumers, in the long run, creates monopoly that exploits workers and consumers alike. The capitalist system—with its private property, money, market exchange, profit-and-loss accounting, labor markets, and so on—can benefit from a fully planned, self-managed economic system that brings an end to over exploitation and absolute alienation.

The Modern Solution Introduced

Here, we have a problem (what we see from the barter system) and we have a vision (what Marx has mentioned to us), it is time to create a solution in the digital world that we live in. During the last ten years, we have now witnessed the emergence of user-generated digital assets. For centuries, humans have been issuing and circuiting tokens in effort to cure some of the problems from barter, whether is via bonds equity orr banknotes. In 2009, Bitcoin introduced the idea of a decentralized digital currency based on cryptographic consensus, and in its wake followed a wave of new digital assets, cryptocurrencies, colloquially referred to as tokens, differing from the rest of token systems.

The Advent of Smart Contracts on Blockchain

“Smart contracts” are created to commission the exchange; once committed to a blockchain, it is guaranteed to run unchanged for as long as the underlying blockchain remains operational. Here, what we are seeing is an attempt to solve the many issues in barter but does not provide the cure to Marx’s vision of a broken economy yet. The best case scenario, a well-defined smart contracts can be best viewed as a reliable, incorruptible, and fully automated “middleman”.

In order for a token to effectively partake in the global token economy (i.e., the Internet of value), its trading volume must cross a critical barrier where these matches between buyers and sellers become frequent enough to be reliable. This reliability of exchange is known as liquidity. In the traditional financial markets, market makers solve a liquidity problem by always offering to both buy or sell a financial asset, even when there is low interest in the asset on the market. These are typically large financial institutions that leverage their significant reserves of capital to generate profit on market illiquidity and can tolerate significant illiquidity risk. The large institution profit by quoting different prices between the buyers and sellers, earning the difference known as the spread over the long haul. In the realm of blockchain, the utilization of traditional market makers to solve the liquidity problem would not only violate the movement’s spirit of cutting out middlemen, it would also constitute centralization of financial power in the hands of few major holders creating monopolization.

Tokens in Digital Contracts

Liquidity as in the Digital World

As I mention to professionals in the banking or real estate sectors, whom might be the first to raise interests and have doubtful attitude towards blockchain, that only top tokens which makes up to more than majority (~95% of the entire token market cap) and represents nearly 99% of the entire trading volume is what the future would be—the battle of tokens leads to regulatory measures self-established—there is little reason to be frantic about how it would pan out in the end when it is still a battle of the tokens. The tailend being the remaining 90% of token are of little to none significance. This stands in direct contrast to many other online ecosystems where the tailend cumulatively makes up a significant part of the total volume. Case in point, books would not be of value to carry in the labor theory of value sense would to be sold on Amazon.com.

Smart Tokens and Connectors

Bancor Network was proposed for decentralized liquidity, based on the Bancor Protocol, which leverages the capabilities of smart contracts to build liquidity directly into tokens themselves. Such tokens, Smart Tokens™, are always available to be both bought and sold directly through their smart contracts. In other words, the token’s algorithm always offers to sell tokens to buyers and buy back tokens from sellers. Each Smart Token has one or more connectors that jointed with the Smart Token to other tokens in the network. These connectors hold a balance of another token, thus establishing a relationship between the Smart Token and the tokens held by its connectors, or its connected tokens.

Smart Token connectors employ a formula to establish a price relationship between a Smart Token and its connected tokens. Connector balances are used to provide liquidity for the Smart Token and any of its connected tokens, at these formulated prices through careful check and balance in automated algorithmic equations. All Smart Tokens are ERC20-compatible tokens, meaning they function as and are compatible with any system or service which supports these now-standard Ethereum-based tokens. The result of the Smart Token standard is an Internet of value that is continuously connected because every token autonomously maintains a liquid link to the rest of the token economy.

Connectors Balance of Smart Tokens - The Continuous Liquidity Mechanism

Smart Tokens are the heart of the Bancor Protocol. They operate as regular tokens, and are in compliance with the ERC20 token standard used on the Ethereum blockchain, but include additional logics that allows users to always buy and sell them directly through their own smart contracts at prices that programmatically adjust to reflect supply and demand. Effectively, Smart Tokens come with a built-in liquidity mechanism that ensures they are continuously convertible for the other tokens. Buyers can use any of the connected tokens to purchase a Smart Token by sending them to the Smart Token’s contract, which then adds them to its connector balance and in return issues new Smart Tokens, which are automatically sent back to the buyer. Anyone may at any given time purchase a Smart Token through depositing some amount of its connected token into its smart contract. At that point, both the connector balance of the Smart Token and the Smart Token’s supply have been increased, given that new units were issued. Similarly, a seller may send back any amount of Smart Tokens to its contract, which will then remove these Smart Tokens from circulation and effectively withdraw a corresponding amount of connected tokens from the connector balance and send them to the seller.

In effect, both the connector balance and the Smart Token’s supply would have been decreased. In order to know what amount to issue to a buyer or withdraw for a seller, a Smart Token continuously recalculates its price in relations to each of its connected tokens, in reference to the supply of and demand for the Smart Token. The Bancor Formula does so by maintaining a fixed ratio (referred to as connector weight (CW)) (discussed more detailedly in later sections) between the value of the Smart Token and the value of its connector balance(s). The adaptive supply of a Smart Token (that it is newly issued when purchased and removed from circulation when sold) is an enabling feature that allows for supply to adjust to demand without dilution to unit price while allowing Smart Tokens to continuously be available for purchase.

The Bancor Formula for algorithmic pricing is central to the system’s design and potential because it enables Smart Tokens to consistently enable their reliable and predictable prices, which is essential for mass adoption of usable tokens. It is built on the idea, that each Smart Token maintains a ratio between its total value (total supply × unit price) and its connector balance.

Computational Realization of Pricing Model in Bancor

The Introduction of Connector Weight

The ratio is called the connector weight, or CW for short.

alt text [a]

The Smart Token’s total value, meaning its market cap, is equal to the amount of money one would receive through selling every token (meaning the entire Smart Token supply) at its current value (i.e., price). The price of a Smart Token is denominated in the connected token (such as, the price of BNT is denominated in ETH being its connected token).

alt text [b]

These relationships are the keys to Bancor’s pricing algorithm because they allow the system to solve for each Smart Token’s price as a function of its CW, the connector balance, and the Smart Token’s outstanding supply.

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Smart Tokens set their own prices in respect to the reserve token they each holds. The price automatically increases when more tokens are purchased, and the price decreases when they are liquidated back to being reserve token. Thus, each Smart Token maintains a ratio between the connector balance (reserve token balance) over its total value (total supply multiplies by the unite price). And, in the case of BNT, it becomes more valuable as more Smart Tokens are jointed into the Bancor Network and utilize BNT as their connector. As the BNT’s value increases, the value of each Smart Token utilizing BNT as a connect also increases.

Connector Weight in Theoretical Economics

At any given time, each connector always has an accurate record of the size of its balance and the current number of Smart Tokens in supply, so that it only needs to know the CW in order to continuously calculate the correct price for a Smart Token while both its connector balance changing (with buys/sells as well as connected token price movement) and its supply are changing (with buys/sells, which occur by sending to or withdrawing from the connector balance). The CW is expressed as a percentage greater than 0% and up to 100%, and is initially set by the creator when a Smart Token is configured. The value chosen for the CW has significant implications for the pricing of the token, and may also be changed, depending on the Smart Token’s chosen settings by the creators.

When buying or selling Smart Tokens (effectively increasing or decreasing their supply), the prices move! In fact, even the tiniest transaction moves the price of a Smart Token to a new level of value, meaning that a buyer will get a different price if she splits her order into many small transactions. To address this, when needing to calculate an actual conversion price, look at the total amount of tokens a Smart Token must return to the buyer (in new Smart Tokens issued) or seller (in connected tokens withdrawn from the connector balance) for a given amount of tokens received (of either the connected token from a buyer, or the Smart Token from a seller). The equation for determining the price of a Smart Token at any given point in time is as below:

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The equation was derived by viewing a transaction as the result of many infinitely small transactions that each impact the Smart Token’s supply and the connector balance, thus leading to a new price for each subsequent increment. The actual price for a given transaction size is the final price after each infinitely small increment of the transaction size has had its relative impact on the price. The equations are similar for both buy and sell orders, where we derive the actual amount of the Smart Token units to issue (to a buyer) or connected tokens to withdraw from the connector balance (for a seller) for a given amount of tokens received by the Smart Token contract.

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Hence, We are now able to calculate the effective price of a transaction by considering the amount of Smart Tokens converted per connected token, i.e., the price of a Smart Token in terms of its connected token.

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This effective price will be different for each transaction size, and in relation to each connector in the case of more than one. The effective price has the desired property of ten small transactions or one large transaction of the same cumulative amount leading to exactly the same cost, ideally.

As a Smart Token processes conversions, the price will converge toward an equilibrium between buy and sell volumes. For this to happen in a classic exchange model where buyers and sellers are matched to each other, there must be sufficient liquidity for two orders to be reliably matched at any time. This is not a requirement of the Bancor Protocol because Smart Tokens always process buys and sells immediately by converting them via their connector balances, thus prices are calculated continuously over time. Whereas prices are traditionally calculated for each trade independently (when a buyer and seller are matched, such as in the barter setting) causing each conversion of a Smart Token progressively and directly impacting its price. Smart Tokens are a new paradigm in token markets because they incorporate automated and decentralized agents that tirelessly fill conversion orders at prices that reflect mathematical supply and demand, which adapts to conversion sizes in real time. This introduces multiple advantages over traditional exchange-based trading:

Connector Weight in Relation to Pricing for Relay Tokens

Relay Tokens are a type of Smart Token with two connector balances, each of which have a 50% weight and can contain any amount of an ERC20 token. A Relay Token’s primary utility is to allow converting between each of its connector balances. Established ERC20 standard token can connect to the Bancor Network via a Smart Token with two connectors, making the Bancor Protocol backwards compatible with ERC20 tokens. This process allows for users to convert between either of its connected tokens on the Relay Token via an instant-two-step process, purchasing the Relay Token with one of its connected tokens and immediately selling it for the other connected token. Relay Token holds 50/50 ratio of the tokens it is connecting, and the investors would earn a small commission.

In one example of a Smart Token with two connector balances being the Relay Token holds both Enjin Coin (ENJ) and Bancor Network Token (BNT). Such Relay Token is named as ENJBNT. The steps go as first sending a BNT to the Relay Token, then it would buy an intermediate token called ENJBNT, then ENJBNT token would be exchanged again for ENJ.

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Fig. 2 shows the Relay Token relationship between BNT (50%) and a given ERC20 token (50%)

Utilization of Computational Realization of Pricing Model in Bancor

Continuous Liquidity Provided in the Pricing Model

The Bancor Protocol enables an autonomous liquidity mechanism for tokens on smart contract blockchains. These Smart Tokens have one or more connectors (connector modules) to a network that hold balances of other tokens, allowing users to instantly purchase or liquidate a Smart Token for any of its connected tokens directly through the Smart Token’s contract, at a price that is continuously recalculated to balance buy and sell volumes.

Both buys and sells shall be executing through

contract, so it shall have an unlimited volume of transactions. A user can always buy or sell even when there is none happening in the market. Since prices go up or down due to conversion size, there is always a price at which a token may be converted. This helps disconnect liquidity from trade volume.

Think of a Relay Token as a balance scale with each side representing the total supply of one connector. The way to buy tokens from one side of the scale is through adding tokens to the other side. The Relay Token does not know what the market deems a fair price for each connector, it only knows that each side of the scale represents the same amount of value. In the earlier case about the Relay Token named ENJBNT, where one connector has a balance of 1,000 ENJ tokens and another connector balance of 10,000 BNT tokens, this ENJBNT will functions with the value of 1 ENJ = 10 BNT. If any user tries to buy 1 ENJ from the Relay Token, she will need to send the Relay Token’s converter 10 BNT tokens. After that transaction occurs, the supply of the tokens in the relay changes, and now the Relay Token sees that 999 ENJ = 10,010 BNT.

Through this example, you see that every transaction changes the conversion rate between the connectors, which ensures that the balances held in the connectors cannot mathematically ever be depleted. As the supply of tokens on one side of the balance is reduced, the exchange rate between the two sides increases so that it will never actually reach zero.

As with all Smart Tokens, when a Relay Token’s calculated conversion rates differ from prices on other exchanges, arbitrageurs are incentivized to act as “liquidity movers” between the Relay Token and other exchanges, ensuring conversion rates represent the real market prices over time.

In many respects, the value of a cryptocurrency is drawn from its ability to effectively interact in the global ecosystem. Therefore, the coins should be easily traded for its fair market price. Liquid tokens are able to be transferred easily without considerably affecting the price. Note that while liquidity may not be an issue for larger projects, it can be a massive concern for new or small-cap projects with low adoption.

Adjustable Price Sensitivity in the Pricing Model

The leverage provided by a substantial connector balance and high weight makes the price of that particular Smart Token less sensitive to short term speculation or sudden turbulence caused by large orders. As mentioned above, the connector weight (CW) represents a fixed ratio between the Smart Token’s total value (its supply x its unit price) and the value of its connector balance. Each creator of a Smart Token defines this desired ratio for each connector. This ratio will be held constant by the Bancor Formula as both the connector balances and the Smart Token’s total value (sometimes referred to as “market cap”) fluctuate with buys and sells. This ratio determines how sharply a Smart Token’s price needs to adjust in order to be maintained with every transaction, or in other words, its price sensitivity. A higher ratio between the connector balance and the Smart Token will result in lower price sensitivity, meaning that each buy and sell will have a relatively softer effect on the Smart Token’s price movement. A lower ratio between the connector balance and the Smart Token will result in higher price sensitivity, meaning that each buy and sell will have a relatively stronger effect on the Smart Token’s price movement. It can be said that a higher weight leads to relative price stability of a Smart Token in relation to its connected token, and a lower weight leads to relative price volatility of the Smart Token in relationship to its connected token.

Given the relationships as provided earlier (equation [c] is derived from equalizations earlier [a] and [b]), price would be determined as follows:

alt text [c]

CW is, for the purpose of the cases we will discuss, known to be a number greater than 0% but less than 100%. And, given the connector balance is known (each connector always has an accurate record of the size of its balance), as well as the Smart Token’s outstanding supply (current number of Smart Tokens in supply). It is worth noting that CW assumes a significant role in the computation of price..

A Smart Token with a 10% connector weight (CW) is comparable to an exchange having an order book equal in value to 10% of the token’s entire market cap. This sensitivity can be adjusted via the CW and connector balance to achieve the desired profile of a given Smart Token. The demand of any one side of the balance dictates its price relative to the other side. When the supply of one connector is reduced, the price increases. This allows the market to determine the price of each side of the Relay Token.

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Fig. 3 shows how the price of a Smart Token reacts to changes in demand for different values of the CW

The illustrated cases in Fig. 3 as depicted in following:
(a) The first case is CW = 100% where the Smart Token’s price can never change in relation to its connected token balance or supply; rather tracks it completely, regardless of demand. The price is effectively pegged to its connected token balance(s) and the Smart Token becomes a proxy for that value. This can be likened to the gold standard, a monetary scheme where an issuing body commits to always exchange a currency for a certain amount of gold. For example, the US dollar was pegged to gold at a rate of $35 per ounce until 1971. This case is represented in the balance scale example of having CW = 100%, in the Continuous liquidity section, each side has 50% weighed in (the conversion rate is always changing in each transaction while CW stays the same).

(b) A second linear case is CW = 50% where the Smart Token price moves linearly with the supply (which is growing or shrinking with the connector balance). The Smart Token price decreases when demand for it is low (i.e., when greater volumes are sold than bought) and increases when demand for it is high (i.e., when greater volumes are bought than sold). This relationship is how supply and demand typically work, with the exception that a Smart Token’s supply is not fixed, dictated by demand, yet also not dilutive to the unit price when it increases.

(c) A third and non-linear case is CW between 0% and 50%, which shows a similar growth relationship between price and supply, but sees the price curve grow more aggressively with increasing supply. The chart shows the particular price curve for CW = 10%. A CW lower than 10% would react even more aggressively (sharper exponential curve) than this, and a CW higher than 10% would relatively flatten towards the linear (b) shape as it approaches 50%.

(d) The final also non-linear case is CW between 50% and 100%, where the growth relationship between price and supply sees the price curve grow less aggressively than (b), meaning the Smart Token’s price reacts less and less to changes in supply, until reaching the flat 100% relationship we see in (a). The particular chart shows the price curve for CW = 90%.

Note that in theory, it is also possible for a Smart Token to have a CW that is greater than 100%; however, this is a specific case where the token becomes cheaper as demand increase, it is not covered here.
Say a Smart Token currently has a supply of 1000 tokens, with a connector that currently holds a balance of 250 of the connected tokens, and a CW of 50%. This Smart Token can be converted into its connected token at the following price:

alt text [c]-(d)

Suppose a buyer wants to convert 10 units of the connected token into Smart Tokens. How many Smart Tokens will she receive?

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Considering the amount of Smart Tokens issued, we can now derive the effective price when converting 10 units of the connected token into the Smart Token is derived:

alt text [f]-(d)

Notice how the effective price is different from the quoted price, in this case slightly higher. The difference is due to the price slippage for this particular transaction size explained in the previous section. In other words, each infinitely small incremental unit of the 10 tokens converted lead to upward pressure on the price, by adding to the connector balance and to the Smart Token supply. Effectively, the buyer has paid for the price slippage caused by her own transaction. The buyer is able to perform these computations prior to sending her tokens to the smart contract;, thus, allowing her to accurately gauge how the price will move in response to her conversion. The predictability and uniformity of the price slippage is a key benefit of the Bancor formula.

As a Smart Token processes conversions, the price will converge toward an equilibrium between buy and sell volumes. For this to happen in a classic exchange model where buyers and sellers are matched to each other, there must be sufficient liquidity for two orders to be reliably matched at any time. This is not a requirement of the Bancor Protocol because Smart Tokens always process buys and sells immediately by converting them via their connector balances, and therefore calculate prices continuously over time. Whereas prices are traditionally calculated for each trade independently (when a buyer and seller are matched), each conversion of a Smart Token progressively and directly impacts its price. This makes Bancor’s price-determination mechanism truly asynchronous.

Zero to One

Additional Impacts of Bancor Protocol besides its Groundbreaking Pricing Model

No Built-in Fees

By default, Smart Tokens do not apply fees to the conversions they execute. The only fees incurred by users are those required to transact with the underlying blockchain (e.g., purchasing gas on Ethereum).

While Smart Token creators may set an optional usage charge, called a contribution, for conversion via their particular Smart Token, these will likely be very low as the open source nature of the protocol would allow another user to easily create a competing Smart Token offering a similar conversion ability for less. The Bancor Protocol does not require conversion fees for operating profit, rather it provides benefits from increased adoption as the network of tokens expands and the number of users grows.

In the earlier case about the Relay Token named ENJBNT, the conversation fee would be 0.2%, given each step of conversion is 0.1%.

No Spread

The Bancor Formula applies the same price calculation when handling both buy and sell orders. This contrasts with traditional exchanges where the buy price is always lower than the sell price. The difference between the buy and the sell prices, known as the spread, is what allows traditional market makers to earn a profit. As mentioned above, the Bancor Protocol does not require this profit in order to operate, and decentralized spreads may be introduced in order to encourage adoption of the network which in turn benefiting all participants.

Predictable Prices

A Smart Token’s price algorithm is completely transparent, allowing users to pre-determine the effective price of their desired conversion (e.g., buying/selling a ETH) before executing a conversion. This contrasts with traditional order-book based exchanges where a large order can cause a price to unpredictably slip to a significantly different level.

Based on ERC20

Smart Tokens are ERC20-compliant tokens (albeit with additional functionality) that seamlessly integrate with existing token applications (such as wallets or Dapps) because they comply with the popular ERC20 token standard. Further, any existing ERC20 standard token can connect to the Bancor Network via a Smart Token with two connectors, making the Bancor Protocol backwards compatible with existing ERC20 tokens.

One Step Further: Continuous Liquidity in Liquid Token

While new configurations will continue to emerge, Smart Tokens currently fall into a variety of categories: Smart Tokens with one connector, two connectors, or more than two connectors; Smart Tokens with a combined total connector weight of 100% or below 100%; and Smart Tokens with a single yet-to-be-activated connector. While all Smart Tokens share certain attributes, each of these configuration combinations has some different attributes.

Smart Tokens with a combined connector weight below 100% (and more typically below 20%) are called Liquid Tokens. These may have one or more connectors. For example, BNT is a Liquid Token with a single 10% ETH connector. Liquid Tokens may be purchased and sold for any of their connected tokens (using the Bancor Formula to determine their price in relations to their connected tokens) and have an adaptable supply which increases when bought and decreases when sold. Smart Tokens with a combined total connector weight of 100% may have one, two or more connectors. A 100% total weight Smart Token with one connector is called a Proxy Token. A 100% total weight Smart Token with two connectors is called a Relay Token. A 100% total weight Smart Token with three or more connectors is called an Array Token. Proxy, Relay and Array Tokens may be purchased and sold for any of their connected tokens (using the Bancor Formula to determine their prices in relations to their connected tokens) and have an adaptable supply which increases when bought and decreases when sold. The connected tokens in any Proxy, Relay or Array Token may be other Smart Tokens, or any standard ERC20 token with a fixed supply, allowing existing ERC20 tokens to be backwards compatible with the Bancor Network. Smart Tokens with a single yet-to-be-activated connector (i.e., a currently empty connector balance) are called Bounty Tokens, and are useful for distributing to early holders (such as community supporters) a token that will be launched or distributed in the future.

At that time, a connector balance is deposited and the Bounty Token becomes a Liquid Token, convertible for the newly connected token. Smart Tokens which are held as connected tokens by the connectors of multiple other Smart Tokens are called Network Tokens. For example, since many Smart Tokens hold BNT in their connectors in order to integrate with the Bancor Network, BNT can be called a Network Token. It is also a Liquid Token.

Relay Token with two connectors allows one connected token to be converted to the other connected through a two-step process of buying the Relay Token for one and selling it for the other. As discussed, this two-step process will allow any token in the network to be convertible for any other, provided they have at least one connected token in common, at any degree of separation. We call the common connected token a Network Token because it links many different Smart Tokens together into a single network of tokens. A Network Token functions as a “token for tokens” by rendering all Smart Tokens in its network inter-changeable for each other, according to the Bancor Formula automated price mechanism described in this paper. Increased purchases of any of the tokens in such a network will also increase the supply of the Network Token (since the supply of its sub tokens has increased via new deposits of the Network Token into the connector balance). This upward pressure on the supply of the Network Token in turn affects every other token in its network, because their own connected token balances have increased. The Network Token model creates synergetic relationships between member Smart Tokens, comparable to the way that any single successful Ethereum service drives up the value of ETH, benefiting the entire Ethereum platform and ecosystem. Numerous use cases exist for such a network model, including regional networks of community currencies, credits shared in all games issued by a video game studio, joint loyalty programs supported by a group of independent businesses, and more. A Network Token may also be part of other networks, via its own connectors.

By this understanding, each Smart Token is configured with connector modules, which hold a balance of another connected token like say Ethereum. Through this protocol, Bancor aims to create self-sustaining liquidity networks that remove the necessity of external market makers or centralized exchanges.

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Fig. 4 shows the Relay Token relationship between 50% BNT (with a 10% ETH connector) and a given ERC20 token

Conclusion about Bancor Protocol

In the future, the Bancor Protocol will also standardize Smart Token configurations with traditional fixed supplies. While it may sound precarious to allow a token to issue and remove itself (expanding and contracting its own supply), the programming for doing so runs in a publicly viewable smart contract on an immutable blockchain. Furthermore, Smart Token supply programmatically increases only when the connected token balance increases in any of its connectors via a purchase, ensuring that Smart Tokens will always be linked to some proportionate value of another token, preventing unanticipated inflation. Support will be planned for Smart Tokens to connect to tokens across various blockchains. In effect, Smart Tokens function as completely automated and decentralized market makers that, by operating in a network architecture on a blockchain, can function as effective and autonomous convertibility conduits, without relying on the existing manual trade approach and accompanying profit-seeking motive.

Today, having Bancor Protocol in place, as either a buyer or seller in the digital marketplace, the system allows you to instantly purchase and liquidate a Smart Token for any of its connected tokens directly through the Smart Token’s contract, at a price that is continuously recalculated to balance buy and sell volumes—hence, you maximize your value of return in the labor theory of values sense without the risk and cumbersome of liquidity. The future of world economy concerned by those before us suddenly can be eliminated to the extent possible through the adoption of decentralized digital currency in blockchain. Token economy is now that much Smarter!


  1. Eyal Hertzog, Guy Benartzi, Galia Benartzi, Bancor White Paper Bancor Network (2018)
  2. Bancor Network Team, Bancor Network Articles Bancor Network (2018)