Bancor Protocol is a standard for a new generation of cryptocurrencies called Smart Tokens.
The Bancor protocol supports price discovery and liquidity mechanism of tokens on smart contract blockchains. These “smart tokens” hold one or more other tokens in reserve. Investors can instantly purchase or liquidate a smart token for any of its reserve tokens, directly through the smart token’s contract. The price is calculated according to a formula which balances buy and sell volumes.
The Bancor Protocol enables price discovery (determining a price of a given asset, the Smart Token) and liquidity without the need for an active counterparty via a smart contract formula that determines the Smart Token price based on a xed rate (Constant Reserve Ratio assigned at the creation of the Smart Token contract) that re ects how much a user can redeem in reserve currency held by the contract.
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The Bancor protocol will be open source and will provide an important source of supplemental liquidity by functioning as an automatic, asynchronous (not synchronized, transactions do not require two active counterparties to be executed) market maker.
Bancor uses smart contracts into which users can deposit various tokens (ETH, GNT, etc) at a xed rate called the Constant Reserve Ratio (CRR) in exchange for a derivative asset known as a Smart Token that represents a portion of the total value of the currency held by the smart contract. This provides liquidity for assets like ETH in a way exchanges cannot; since Smart Tokens are only created in exchange for deposits of the reserve currency (ETH), liquidity is ensured in that holders of the Smart Tokens are guaranteed to have the associated amount (determined by the CRR) of reserve currency waiting to be disbursed.
A Smart Token derivative can serve a number of functions but in its simplest iteration allows organizations to guarantee that they will have access to sufficient liquidity to cover their expenses without needing to rely on counterparty exchange. Smart Tokens can also act as ETFs and futures contracts in the sense that users can purchase, for example, 1 Smart Token associated with 20 ETH (or 10 ETH and 10 GNT in a separate example) and have liquid access to that ETH even in the event the price skyrock- ets and no counterparties are willing to sell their ETH on an exchange. The ability to guarantee liquidity (up to the level of reserve currency paid into the contract) is extremely meaningful for local community based currencies or smaller digital currencies that are less likely to have su ciently active exchange markets. Bancor also expects to facilitate token exchange using the protocol, providing services similar to those offered by ShapeShift via the liquidity of interrelated Smart Token contracts.
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