What is Bancor?
Bancor protocol is an initiative of the Bprotocol Foundation, a nonprofit organization based in Zug, Switzerland.
The Bancor protocol enables anyone to create a new type of cryptocurrency called a smart token, which can hold (and trade) other cryptocurrencies. This allows the smart token’s contract to serve as its own market maker, automatically discovering it’s own price(s) and providing liquidity to other currencies, thereby removing the need for a second party in cryptocurrency trades. Every smart token is always liquid at some price point.
What is the problem Bancor is solving?
The Bancor protocol represents the first technological solution for the classic problem in economics known as the “Double Coincidence of Wants Problem,” in the domain of asset exchange.
For barter, the coincidence of wants problem was solved through money, allowing people to transact asynchronously, over time and space. For money, the existing exchange model relies on the labor of market makers providing liquidity, as represented by an order book which creates market depth. This requirement for labor creates a barrier-to-liquidity, meaning that some threshold of trade activity level is required in order to retain high liquidity at the market price. This barrier-to-liquidity particularly affects small cap, custom, lightly traded currencies, such as community currencies or small business loyalty points, as examples.
The Bancor protocol proposes a new solution that removes the barrier-to-liquidity by employing an asynchronous price-discovery model enabled by asset-holding smart tokens. Smart tokens are always purchasable and sellable for the token(s) they hold in reserve. The continuous liquidity of smart tokens removes the barrier-to-liquidity and enables the emergence of the long tail of user-generated currencies. This could lead to a democratization of value creation, similarly to how blogs democratized publishing and YouTube democratized broadcasting.
Beyond enabling the long tail of cryptocurrencies, the Bancor protocol mechanism of intrinsic reserve currencies coupled with the ability of the smart contract to issue and liquidate smart tokens, also holds profound implications in use cases where the goal is not to create new credit (as is the case with most new cryptocurrencies) but rather to enable the exchange of existing currencies without a counterparty or orderbook (see “Token Changers”) or to enable the direct ownership of currency baskets, or index funds, without counterparty risk (see “Decentralized ETFs”).
What is a smart token? And how is it different from a regular ERC20 token created on Ethereum?
Smart tokens are compatible with the ERC20 standard and can be used by any software that supports this standard, such as Ethereum wallets. However, smart tokens offer additional functionality not available to regular tokens. Each smart token holds a reserve balance in one or more other ERC20 tokens, thereby enabling anyone to exchange between itself and any of its reserve token(s). The smart token’s smart contract issues new tokens (expanding the supply) to anyone who purchases it with any of its reserve tokens, and withdraws tokens from the reserves (contracting supply) for anyone choosing to liquidate the smart token. The price of a smart token vis-a-vis any of its reserve tokens is calculated as a ratio between the current smart token’s supply and its reserve balance, at the pre-set CRR (Constant Reserve Ratio.)
Please read our white paper available on the Bancor website for more detailed information about these formulas and their proofs. Essentially, a smart token’s price will always strive to balance supply and demand for the smart token, meaning that when it is being purchased, the price is climbing, and when it is being sold, the price is dropping, in relative proportion to the respective transaction sizes.
What are some of the use cases for smart tokens?
There are so many potential use cases for the Bancor protocol and smart tokens that it is similar to asking what are the use cases of Ethereum. It’s improbable that we could imagine all of them, but there are some of our favorites:
Complementary Currencies: Communities can benefit greatly from creating additional units of credit and encouraging collaboration on the local level. These currencies don’t necessarily replace national ones, but rather complement them, filling in pockets where liquidity may be missing or commerce takes place entirely locally, thus freeing up the national currency for other uses. Giving communities access to a tool they can use to efficiently buy and sell goods and services from trusted members creates real abundance for families, students, affinity groups and the cash constrained. This same use case works for online group currencies. You can read more about community currencies online and find lists of active communities, many of which are evaluating the Bancor protocol for adoption.
Business Loyalty Point Programs: Whereas individual businesses struggle to make their custom loyalty programs sticky enough for customers, issuing smart tokens which can also be exchangeable to other tokens in other networks creates tremendous value for customers who can now access many more items. This creates additional stickiness, and strengthens cooperation between businesses.
Token Baskets (i.e. decentralized ETFs or Index Funds): Created via the Bancor protocol by setting the smart token’s total CRR to 100%. This means your smart token can represent any combination of other tokens or tokenized assets, creating a decentralized, organically-balanced token basket, owned directly by its holders. For example, your smart token can hold 50% Augur REPs and 50% BCAP in its reserve, and its price will track the relative changes in Augur and BCAP values through arbitrageurs.
Content Creators: Artists can also create smart tokens that serve as the method to purchase their work or attend a show. These smart tokens serve as their own distribution medium (so the artist & buyer don’t pay a commission to any middleman), can be easily exchanged between people, and can be set up such that the price will rise as demand rises.
Crowdsales: Anyone can use the Bancor protocol to create always-liquid tokens not dependant on any exchange. Your token will be liquid from day one while still remaining compatible with the architecture of all existing cryptocurrency exchanges. By using the Bancor protocol, new altcoins can achieve greater market depth than what is typically provided by exchanges, even for the largest of cryptocurrencies, by essentially pooling all the liquidity that would normally be spread across many exchanges into a single, “global-exchange” provided by the smart contract (through its reserve). The result will be lower price volatility for customers without any counterparty risk.
Token Changers: By creating a smart token (similar to a token basket) with 100% CRR and multiple tokens in reserve, you enable anyone to instantly exchange one reserve token for another. Unlike a token basket, whose purpose is to serve as an index fund for those wanting to take a position across multiple currencies, the purpose of token changers is to exchange one token to another. A network of token changers results in something akin to a decentralized Shapeshift, where users can come to exchange any currency on the Bancor network for any other. Since Token Changers can charge fees for their conversion services, anyone who wishes to provide liquidity to the token changer (rather than just convert one token to another) gets to participate as a part-owner in a crowdsourced exchange, enjoying their pro-rata of the fees taken by the Changer for its automated conversion services (and accrued to its reserve, thereby appreciating the smart token’s value). Software companies building online wallets for tokens can now offer exchange services directly inside their applications and open up a new revenue stream overnight.
What we’re most excited about is the innovation we’ll see from the community. Historically, long tails are formed when barriers to entry are reduced. Bancor is enabling anyone to create a viable value network in their image. There are hundreds of thousands, even millions of potential digital currency entrepreneurs out there, and they will teach us about the power of the protocol and the platform.
Who’s behind Bancor?
The team behind Bancor is built of serial consumer Internet technology entrepreneurs with decades of experience working together, raising venture capital, growing companies to Internet scale, bringing products to market, reaching critical mass, mergers and acquisitions, and even a few wind downs. Some of our companies included Contact Networks (one of the first social networks in 1998 and an inspiration to Plaxo and later Facebook), MetaCafe (the largest user-generated video sharing site before YouTube with over 50 million active users), Mytopia (the first developer of multiplayer games for PDAs and Smartphones), Particle Code (a cross-platform development environment for mobile and web applications) and AppCoin (a pioneer in digital community currencies with over a million real item transactions logged.) Venture funds that we have worked with or raised from include Founders Fund, Accel, Benchmark, Highland Capital, Trinity Ventures, SK Telecom Ventures and more.
Since discovering Bitcoin in 2011, we have been fascinated by the parallels between blockchain and the Internet, and the implications for society of user-generated currencies. We’ve spent years piloting community currencies and deeply understanding the barriers to unlocking the long tail in the Internet of Money. The Bancor protocol is our solution to the fundamental liquidity challenge we discovered time and again, and has gone through years of incubation, refinement and review with industry and academic experts. You can read more about our team members on our website.
Where’s the team based? Have you built other projects in this space?
The Bprotocol Foundation is a Swiss non-profit organization, headquartered in Zug, Switzerland. The Foundation has a research and development center based in Tel Aviv, Israel.
Our team has been involved in the blockchain ecosystem in Israel since 2011, co-organizing the first meetups in the country, incubating the MasterCoin Foundation in our offices, including hosting their first hackathons, all in attempt to push forward the infrastructure for a diverse currency platform. We have been developing and deploying our own user-generated currency solutions since 2013. The Ethereum smart contract protocol provided the much needed decentralized platform for user-generated programmable currencies (tokens) that inspired us to design the Bancor protocol.
Previously, our team members have built end-user Internet applications that were used by tens of millions of unique monthly users, and have been pioneering new digital user-experiences in gaming, video and commerce since the early days of the Internet.
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