From Bancor Algorithm to IBO
Innovation in digital assets has never stopped. In September 2018, EOS-based sidechain FIBOS attracted a lot of attention in the industry. The project innovatively used the Bancor algorithm to raise funds and collected 900,000 EOS (about $4.6 million) within three days of the launch. It is believed that the significant increase in EOS in early September was triggered by IBO fundraising, so the application of Bancor algorithm once again entered the public eye.
Since the emergence of the Bancor algorithm, it has experienced three major application scenarios, Bancor Network, EOS RAM, and FIBOS, which are used to solve the problems of liquidity, scarce resource allocation, and Token financing. Although Bancor Network first applied the algorithm, it is more well known that it is EOS RAM and FIBOS with the same wealth effect. Everyone has heard about the Bancor algorithm, but it is still a few people who really understand its essence and deeply explore its possible direction.
This article begins with the history of Bancor, and through the analysis of the Bancor algorithm principle, shows how key influence factors in the Bancor algorithm influence to ken price, so that the reader can understand the Bancor algorithm comprehensively and vividly. Then combine the four economic models derived from the Bancor algorithm to explore possible future directions.
The history of the Bancor algorithm
When Bancor first appeared, it was a supranational currency proposal, proposed by John Maynard Keynes and EF Schumacher between 1940 and 1942, and introduced by the British proposal into the global monetary system after the Second World War. It attempts to use three representative commodities as a value anchor to issue international currencies, while other countries or institutions use Bancor as a value anchor to issue their own currency.
The name was inspired by the French bank banque or ‘bank gold’. This newly created supranational currency is primarily used as an account unit in the multilateral clearing system, the International Clearing House, for international trade. However, this program has not been implemented, replaced by the Bretton Woods system, and the US dollar has become an international currency.
In the field of cryptocurrency, before the Bancor Network did not raise funds, if you searched the Internet for information about Bancor, the content was basically about economics.
With the popularity of Ethereum, the release of Token has become very hot, which provides an environmental basis for the practical application of Bancor’s design ideas in the blockchain field. Around June 2017, the Bancor project released a white paper and completed a private placement.
The white paper discusses Bancor’s use in the field of smart pass, and gives the calculation formula for the Bancor algorithm and the system principle behind the Bancor BNT. This is the first blockchain application based on Bancor’s successful landing.
But the Bancor algorithm really enters the public view in the blockchain world because of the fiery EOS RAM.
Before August of this year, the total amount of EOS RAM has been 64G immutable. As RAM is a scarce resource that is necessary in the environment, it has been popular among many speculators. In July of this year, it appeared in three days, doubled, earned 5 times in 8 days, and 54 times in 13 days. This is a long time. The bear market has undoubtedly become a hot spot of rapid spread.
However, the hype of RAM is not long. Due to the high barriers to participation, many participants were also turned away, and the Bancor algorithm was slowly becoming less popular.
After more than a month, a developer-friendly blockchain ecosystem — FIBOS opened the EOS exchange for FO for token financing, and the exchange mechanism used the Bancor algorithm.The initial conversion ratio is 1EOS: 1000FO, and the proportion gradually decreases as the number of EOS exchanges increases.
Due to the practicality of the project itself and the emergence of new ways to raise funds, in the past two weeks, there have been abo ut 85W EOS participating in the exchange, the exchange ratio is about 1:450, this successful fundraising is called IBO, widely known. As of now, the number of EOS exchanges for the entire network has remained above 50W.
(source:fibos.rocks, date: 2018.10.10)
The essence of the Bancor algorithm:
Since participation in exchange is not a traditional exchange that matches the counterparty trading mechanism, everyone wants to figure out how the Bancor algorithm regulates the token price and tries to take the lead in buying and selling.
The basic idea of the Bancor algorithm is that buyers and sellers exchange the anchors and replace the traditional centralized exchanges with smart contracts, providing liquidity for immediate trading. For example, in the system where EOS is converted to FO, the anchor is EOS. The following is a brief description of the process of purchasing and selling FO with the FIBOS exchange system as an example:
Purchaser: Send a certain amount of EOS to the Token contract address, trigger the contract code to automatically execute the “Purchase Function Code” and obtain the corresponding number of FOs;
Vendor: Send a certain amount of FO to the Token contract address, trigger the contract code to automatically execute the “sales function code” and obtain the corresponding number of EOS.
In this process, Token holders can realize the free exchange of EOS and FO without going through the exchange and relying solely on the trading and redemption functions provided by the smart contract.
In the future FIBOS ecological project, IBO financing will require the project party to pledge FO. If the project party issues AToken, then AToken →EOS →FO, multiple smart passes are connected by common anchors. , formed a value network (Bancor Network).
Bancor’s basic formula:
The calculation formula involves multiple parameters and is explained as follows:
Token’s supply [Smart Token’s Supply], referred to as Supply;
Token price [Smart Token’s Price], referred to as Price;
Token’s total market value [Smart Token’s Total Value], referred to as TotalValue;
Reserve Balance, referred to as Balance;
Reserve Weight [Core], referred to as CW.
Calculated as follows:
CW = Balance/ TotalValue;
TotalValue = Price * Supply;
Price = Balance / (Supply * CW)
For example: If the current AToken circulation is 1000 and the price is 0.5 EOS to 1 AToken, then the total value of AToken is 500 EOS, but the reserve balance may not have 500 EOS, such as 250 EOS, then CW Then it is 0.5 (50%).
The price in the above formula is based on the overall circulation, and the actual trading process:
Token buy calculation formula:
Token_Return = Supply *((1 + EOS_Amount / Balance)^ CW — 1)
Token sells the calculation formula:
EOS_Return = Balance *(1 — (1 — Token_Amount / Supply)^ (1 / CW))
The variables are dynamically changing for both Supply and Balance, and need to be recalculated after each sale. such as:
If the current AToken circulation is 1000, the reserve balance is 250 EOS, and the CW is 0.5, then the current offer is 0.5 EOS to 1 AToken; now Bob wants to spend 750 EOS to buy AToken, bring the formula: Token_Return = 1000 *((1 + 750 / 250)^ 0.5–1)= 1000
So if Bob is going to buy 750 EOSs into Atoken twice:
The first time you spend 350, substituting the formula: Token_Return= 1000 *((1 + 350/ 250)^ 0.5–1)= 549.193
The second time spent 400, substituted into the formula: Token_Return = 1549.193 * ((1 + 400 / 600) ^ 0.5–1) = 450.806
The total amount of exchange is still 1000.
The key points and future of the Bancor algorithm:
When the Bancor algorithm is applied, the core is based on the consideration of the business environment and business needs, and adjusts the reserve ratio (CW) and total amount of money (TotalSupply). The adjustment of CW is the core factor. The impact on the issue price of the token is as follows:
When CW=0, this means that the newly issued certificate does not have any reserve for collateral (Ico mode is the case), at which point the price curve is arbitrary, or controllable, because the price and preparation of the certificate Gold amount has nothing to do.
When CW=20%, this means that 20% of the market value of the new issuance certificate needs to have a reserve for endorsement. At this time, the price curve is a concave function (0<CW<50% is a concave function).
When CW=50%, this means that 50% of the market value of the new issuance certificate needs to have a reserve to endorse, and the price curve is a straight line with a slope (meaning that the reserve amount is always 50% of the issued market value). %, equal to 2 times credit expansion).
When CW=75%, this means that 75% of the market value of the new issuance certificate needs to have a reserve for endorsement. At this time, the price curve is a convex function (50%<CW<100% is a convex function).
When CW=100%, this means that 100% of the market value of this new issuance certificate needs to have a reserve to endorse. At this time, the newly issued certificate is more like an equivalent “branding” certificate of the reserve. , like a stable currency (such as USDT, GUSD, etc.) or ETF, etc., the price curve is a horizontal straight line.
Therefore, the lower the CW value of the certificate, the greater the credit expansion of the certificate, and the higher the market value leverage, the lower the principal value can be used to push up the market value of the entire project.
Both EOS RAM and FIBOS use the Bancor economic model similar to Figure 3, where FIBOS has a CW value of 11%.
In the three main scenarios where Bancor algorithm is currently deployed, Bancor Network is used to provide market liquidity and solve the problem of long-tail token trading. EOS RAM is a good solution for the allocation of scarce resources. Fibos has improved some of the disadvantages of 1CO. Xiao Bian believes that the most accurate solution is EOS RAM. Fibos is more magnified by the wealth effect caused by the bear market atmosphere, and Bancor Network is a liquidity-focused solution.
According to the Fibos white paper, to create a healthy blockchain economic ecology, using Fibos is understandable, but using the excess mortgage mechanism similar to Bitshare and MakerDao can also solve the problem of air ICO. Which solution is good, in the final analysis, which system is highly recognized.
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