Tag Archives: bancor

Crypto Drilldown

Crypto Asset Proliferation, Liquidity, and the Bancor Protocol

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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

Introducing Altcoins

Bancor Allows Anyone to Create and Trade their Own Cryptocurrency

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Bancor Crypto

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.

Photo Credit: pedrosimoes7