Bancor is new interesting crypto protocol that aims to make it really easy for small communities and individuals to issue their own tokens, while retaining price discovery without being listed on exchanges. Intrigued? Read on.
Market Without an Exchange
The biggest feature that the Bancor protocol provides is the ability for a token to have a market but without having to be listed on an exchange. Anyone who’s been in the crypto community long enough knows how hard it can be to list smaller tokens on exchanges. This is not surprising – exchanges make their money on volumes, and if the trading volume is low, they don’t want to go through the overhead of maintaining that token.
However, the proliferation of the token economy means that many different use-cases arise, not all of them having a high trading volume. Smaller communities and individuals could theoretically issue their own tokens for local causes, but they would never garner the types of volumes established global currencies do. If exchanges don’t list them, there is no market and thus no price discovery mechanism.
This is where Bancor comes in. For the first time (that we’re aware of), Bancor provides a way to create a market for a token but without the use of centralized exchanges. It works through a smart contract on Ethereum. The full details are beyond the scope of this introductory post, so read the whitepaper.
But in a nutshell, when a token raises money, it keeps some of it in a reserve, and issues tokens. These tokens trade in the market based on their utility. The smart contract is written so it can create a supply of new tokens whenever needed, by sending ETH (or another ERC20 token) to the contract. This causes the price of the token to increase. By a similar mechanism, whenever someone converts their tokens into ETH (or another ERC20 token), the price of the token decreases.
Note that this whole mechanism is a ‘conversion’ and not an ‘exchange’. One fear is that the prices may be manipulated by whales if they hold supply via the smart contract and also via external exchanges. This also means that during distress, those who are able to exit their positions first are at a significant advantage over those who are not, since the price continues to spiral downward with selling.
A Basket of Tokens
With a full reserve, the Bancor protocol also allows for the creation and redemption of ‘ETF-like’ baskets but of tokens instead of stocks. The price arbitrageurs will make a profit by ensuring the prices stay in sync. This can provide a fairly stable mechanism for a basket of tokens created using Bancor.
Bancor will have an ICO soon. Check out their website to learn more about the project and keep up to date with their progress.
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