Crypto Asset Proliferation, Liquidity, and the Bancor Protocol

I believe crypto assets will be the future, and asset managers from around the world better heed this brave new world. Very soon, crypto assets will become a core part of a well-diversified portfolio. Some enterprising portfolio managers will allocate up to 5% of the portfolio wealth to crypto assets. Others will limit it to 1%. Slowly but surely, the movement will gain momentum. Today, all crypto-assets are valued over $100 billion, We’re already in serious money territory.

The Future of Crypto Assets

The future of crypto-assets would be the proliferation of many of them. If you think the 700 odd crypto assets today is a lot, wait till you get tens of thousands. If it benefits a few projects, it will benefit a lot of them. Today, not even 0.1% of the world population owns crypto assets. Imagine when entrepreneurs from around the world will be able to use them to build future economic value on the blockchain.

So one big problem that portfolio managers will encounter when investing in crypto assets is liquidity. No good manager worth his salt will touch a situation akin to ‘penny stock’ where there are a few buyers in town, usually looking for a quick pump and dump. In addition to liquidity, access to markets is also essential, i.e. the asset manager needs to be able to make a decision on a buy or sell for a crypto-asset and make sure his traders are able to execute that trade without a lot of slippage or excessive fees. This goes for both buying and selling these assets.

Crypto Asset Management Challenges

Crypto assets are a special breed of asset class, and today, as big as the market is, still lacks proper, regulated exchanges that can keep up with the volume. Centralized exchanges like Poloniex and Bittrex do a good job when the market is $10 billion, but we’re at an order of magnitude above this. Relying on centralized exchanges to add tens of thousands of crypto assets in the future is a fools errand. Of course, we may see a stock-market like situation where custody and trading are separated, in which case there can be tens of thousands of crypto-assets traded, just like today’s stocks. However, this brings in the problem of custody, and that is very tricky especially with crypto assets. Did we already mention that crypto assets are a special breed in and of themselves?

So what’s the solution to the liquidity problem, and how should new crypto assets ensure that they are able to meet the requirements for a liquid market that will attract money in the market required to fund their projects?

Enter Bancor

Bancor is a new crypto protocol that allows for the decentralized exchange of crypto tokens (currently only on the Ethereum platform), without requiring counterparty risk. The difference between Bancor and other types of decentralized exchanges is that there is no counterparty required, which means the portfolio manager doesn’t need to worry about who is on the other side of the trade. Only a smart contract is on the other side of the trade!

Depending on the project requirement, they can choose how deep the order-book is with the smart contract. This is calculated as a reserve ratio. For example, if a project raises 25,000 ETH and wants to keep 10% deep order books, they’ll keep 2500 ETH in the smart contract, locked away for trading purposes.

Just like regular order books, the price increase with each buy and decreases with each sell. The major point is that there is liquidity in the market without the need of a counterparty.

Newer crypto projects will be incentivized to use the Bancor protocol to issue tokens because they can attract a larger investor base. This won’t be a problem today, but will become more significant in a 5 year time frame.

Photo Credit: Nick Harris

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