What Is Bancor (BNT)?
- Bancor is a decentralized financial network that seeks to provide liquidity to small- and micro-cap coins and returns for liquidity providers.
- Bancor has two smart tokens that facilitate its liquidity pools: BNT and ETHBNT.
- Bancor and its competitor Uniswap are the leaders in a new wave of decentralized financial systems.
Understanding Bancor (BNT)
According to the Bancor website, "Bancor is an on-chain liquidity protocol that enables automated, decentralized exchange on Ethereum and across blockchains." The protocol was initially developed in 2017 by Eyal Hertzog, Galia Benartzi and Guy Benartzi. Their whitepaper (dated March 18, 2018) states Bancor, "enables automatic price determination and an autonomous liquidity mechanism for tokens on smart contract blockchains."
Bancor's Crypto Liquidity Pools
Many small crypto-coins are illiquid given their market cap and whether or not they are listed on an exchange. The transaction costs can also be higher than the costs of the most liquid cryptocurrencies, like BTC and ETH.
For traders who want to deal in small- or micro-cap coins, Bancor's smart token and smart contract technology, which are self-executing contracts with deal terms between transacting parties written into lines of code, allows these kinds of coins to be bought and sold with minimal friction and fees.
A standard cryptocurrency transaction occurring on a cryptocurrency exchange, whether a centralized exchange or a decentralized exchange involves the transfer of tokens between two parties: a buyer and a seller with the exchange acting as a market maker.
Bancor Network Token (BNT)
Bancor's purpose is to remove the middleman by creating a virtual reserve currency, which they call Bancor Network Token (BNT), and an automatic exchange mechanism where prices and trading volumes are controlled automatically through the protocol.
Bancor's native reserve currency token, BNT, is the default reserve currency for all smart tokens created on the Bancor network. One of the promises of BNT's ICO was that investors in the coin would gain interest on the transaction fees as other crypto coins are converted into and out of BNT.
Bancor's protocol converts between different ERC-20 compatible tokens. Each smart token is linked to smart contracts that hold reserves of other ERC-20 tokens. The tokens are converted internally based on these reserves and depending upon the volume of user requests.
Essentially, smart tokens can be thought of as coins that hold the monetary value of other compatible virtual coins. It is the same in principle to a central bank that holds foreign currency reserves and converts 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.
Bancor's ETHBNT Airdrop
Beginning on January 1st, 2020, Bancor airdropped $60,000 worth of ETHBNT into wallets holding a minimum BNT. ETHBNT is a Bancor pool token representing shares in the ETH:BNT liquidity pool. ETHBNT collects fees from ETH-based conversions on Bancor.
The move was meant to increase liquidity by increasing providers, though it is unclear how extra liquidity was added to the Bancor liquidity pools outside of Bancor investing its fiat currency reserves into their platform.
Criticisms of Bancor
Internally, Bancor network uses the concept of Constant Reserve Ratio (CRR) in all smart token contracts, which purports to eliminate the possibility of the reserve value of smart tokens being depleted. The rate of conversion between various crypto-coins is fairly maintained by various formulas and algorithms internally implemented by the Bancor network.
The claim that Bancor guarantees liquidity is contested, however. A pseudonymous blogger "bitcoinchaser" points out that "The level of cryptocurrency liquidity that Bancor has, is relative. If there is a massive run on the token or any other token under it, its price will plummet and that 20% reserve will be wiped out in minutes. The point is that in the cryptocurrency market, any other comparable token or any new token, would be wiped out faster under similar circumstances."
Bancor's foundational claim that its superior technology can prevent a run on any individual coin -- even its own tokens -- is questionable. As its airdrop of ETHBNT shows, the liquidity on its platform is funded, at least initially, buy using fiat currency reserves. As "bitcoinchaser" argues, Bancor provides liquidity for less liquid coins, but in the event of a market panic, BNT itself may become illiquid.
Bancor isn't the only player in the liquidity pool, decentralized exchange space either. Competitor Uniswap also provides liquidity pools to small coin projects that need liquidity to grow, and an analysis of Uniswap pools argues that any negative change in the price of the underlying asset in the pool can create negative returns for the liquidity provider, outweighing the profit from fees.
Representatives of Bancor gloss over these losses and how they could undermine the exchange by referring vaguely to "arbitrageurs" who will step in to perform the magic of markets function to restore balance.
Traders Magazine put it like this:
The biggest problem faced by liquidity suppliers to pools like Uniswap is the risk of major relative price movements between the paired assets. It is therefore ideal to supply liquidity in terms of a stable asset, instead of a volatile one like ETH. This problem is exacerbated by Bancor’s dependence on its native token, BNT, which is even less stable than ETH. Moreover, transactions on Bancor are structured in such a way that they can incur high gas fees, and they are not presently planning to utilize layer 2 scaling technologies to alleviate those pains.
Though Bancor is trying to address these issues as of 2020, its native currency is down 97% from its post-ICO high of $9.70.