Bancor Protocol Use Case #3
Smart token basket group
If you have been in the cryptocurrency space for a while, at this point in time you probably have some friends in your network asking about how to get into crypto.
- Which tokens do I buy?
- How do I participate in a sale?
- This is confusing. Can I just give you my money?
Until this point it has been a struggle to help friends get involved with crypto. Having them set up wallets, manage private keys, and get into each token is quite a hassle. With decentralized token baskets, the creator can choose which ERC20 tokens they want to include in a basket and people can just acquire the whole basket at once.
This is a very exciting proposition and the way Bancor’s market making algorithms function in this use case opens up a whole new range of possibilities.
A user creates a token basket with five Ethereum based tokens — ETH, BNT, ICN, SNGLS, and ANT — each with a 20% Constant Reserve Ratio in the same contract. That means that the contract will always work towards maintaining these equal ratios. So let’s say the contract gets initially loaded with $1,000 of each respective token so we have equilibrium (this doesn’t mean equal number of tokens, but equivalent base value- in this case USD). Now a new depositor comes in and puts $1,000 worth of ETH only into the contract. This would raise the ETH relative to the common reserve and cause an increase in the ETH price (because of the pricing mechanism) and make it higher than market price in that contract.
This creates an arbitrage opportunity because the other 4 tokens are unweighted in the portfolio and are now cheaper. Now everyone has an incentive to purchase the lower weighted coin because it would be cheaper or sell the smart token for the higher weighted coin because it’s more valuable. The arbing opportunities last until all of the weights are rebalanced.
This happens every time someone makes a trade.
Now imagine that you have 500 tokens and a group of 10,000 dedicated users with a lot of liquidity in your group. Now you have a viable decentralized exchange complete with tons of arbitrage opportunities all the time all working towards an efficient balanced index fund market.
I could be wrong, but eventually I think it all gets connected, and Bancor becomes the de facto crypto reserve currency.
Learn more about Bancor Protocol
The Bancor protocol enables built-in price discovery and a liquidity mechanism for tokens on smart contract blockchains. These “smart tokens” hold one or more other tokens in reserve and enable any party to instantly purchase or liquidate the smart token in exchange for any of its reserve tokens, directly through the smart token’s contract, at a continuously calculated price, according to a formula which balances buy and sell volumes.
