DEFINITION of Bancor (BNT)
BREAKING DOWN Bancor (BNT)
As a large number of new cryptocurrencies continues to emerge, a mechanism to allow trading or instant exchange among these various cryptocurrencies will be needed.
While the present day cryptocurrency exchanges facilitate transactions and value transfer from one type of virtual coin to the other, the limited liquidity in trading new cryptocoins remains a primary concern. Additionally, most cryptocoins are traded against the two popular cryptocurrencies, Bitcoin and Ethereum, adding to liquidity woes and offering limited choices to the cryptocoin entrants. The transaction costs can also be higher at times.
Bancor attempts to fill this gap by offering a technology that addresses the liquidity issue, allowing all kinds of virtual coins to be bought and sold instantly.
Bancor offers a novel network that is built on a new class of cryptocurrencies called Smart Tokens, and smart contracts, which are self-executing contracts with deal terms between transacting parties written into lines of code.
A standard cryptocurrency transaction occurring on the cryptocurrency exchange involves the exchange of tokens between two parties. In contrast, the Bancor protocol works on an alternative trading mechanism that uses smart contracts to create smart tokens, and it does not need an exchange of tokens with a second party.
Bancor has a built-in mechanism to convert between different ERC-20 compatible tokens. Such conversions are done on the blockchain through a set protocol and do not involve any other party or vendor like a cryptocurrency exchange. Each smart token is linked to smart contracts that hold reserves of other ERC20 tokens. The tokens are converted internally based on these reserves and depending upon the volume of user requests.
Essentially, smart tokens can be thought as coins that hold the monetary value of other compatible virtual coins. It is the same principle of a central bank holding foreign currency reserves and converting between them as required.
The Bancor protocol supports all virtual currency tokens that are compatible with the ERC-20 format. Any smart token created on the Bancor network is also ERC-20 compatible, and therefore compatible with other tokens on the network. (For more, see What is ERC-20 and What Does it Mean for Ethereum?)
Additionally, Bancor offers its own native currency token called Bancor Network Token (BNT). It is the default reserve currency for all smart tokens created on the Bancor network, and hence keeps the number of conversions needed to arrive at the end token very low while performing a cryptocoin conversion.
Internally, Bancor network uses the concept of Constant Reserve Ratio (CRR) in all smart token contracts, which eliminates the possibility the reserve value of smart tokens being depleted. The rate of conversion between various cryptocoins is fairly maintained by various formulas and algorithms internally implemented by the Bancor network.
By eliminating the need of involvement by buyer and sellers, Bancor facilitates instant cryptocurrency conversions. (See also, A Look At The Most Popular Bitcoin Exchanges.)