Bancor — A new global financial system where EVERY currency can be liquid
This post was created to explain what Bancor is & why it’s awesome in a way that is understandable to everyone. You don’t need to be a blockchain expert for this one.
That said, its still a bit more complex than I’d like it to be. But Bancor has the potential to completely change the way our global financial ecosystem works, leading to a unprecedented increase in the amount and types of assets and forms of money, representing just about any source of value you can think of, being created and traded with complete liquidity & without middlemen on a global scale.
After weeks of working with and in the Bancor team, learning from the ground up how Bancor works and the impacts it can have, I’ve done my best to summarize it here.
You ever find it weird how fast blockchain tech is growing, yet how little most of the world knows about it?
We’ve got projects working on decentralizing the computing power behind the whole internet, making it possible to create governments where every citizen’s vote on every issue can be counted, enabling IoT devices that can make their own transactions (like your autonomous car paying for it’s own charge at a charging station), and changing the way the global financial system works on almost all facets.
We’re decentralizing everything from VPNs to identity to crowdfunding to the global supply chain to the world’s remittance & royalty marketplaces to replacing traditional forms of energy with user-generated green energy….yet bring up blockchain with anyone you meet in the ‘regular’ world, and they’ll almost always have almost no idea what you’re talking about.
Blockchain is, in the regular world, an unknown and unused technology.
Bancor’s grand goal is to change that.
How?
Well we’ve got a theory that, if one could make cryptocurrencies so easy to create and so fully liquid (easily tradable for any other currency) that they could represent any store of value at all, it would ignite the ‘long-tail’ of cryptocurrencies the same way youtube ignited the long tail of video… any currency, no matter how small (from company ‘shares’, to concert tickets, to personal tokens, city currencies, small-business tokens, tokens of ownership & identity, time-share tokens… etc. etc.), could be part of the global financial system.
This would fundamentally change the way the global financial system works. In the words of Bernard Liaetar, co-architect of the Euro, “Bancor creates liquidity and allows for automatic price discovery without requiring a counterparty, which is a breakthrough”. The reason is, kinda like how our inefficient solar panels only capture a small fraction of the total potential energy the sun gives the earth, the current financial system commoditizes only a small fraction of the potential value that humanity can create and exchange.
And, of course, we’ve built the blockchain-based technology that is making it possible, for the first time in the history of money, for us to unlock and make tradable those stores of human value.
How? Well the entire system revolves around something we’ve dubbed a ‘smart token’.
Smart Tokens: Money that can own money.
I’d argue that the major revolution that blockchain tech brings to humanity is the removal of the need for trusting humans by instead building immutable, trustless, transparent code. We don’t have to trust in banks to issue & manage money, we don’t have to trust governments to count our votes and represent our collective opinion, we don’t have to trust the stock markets to commoditize and trade assets.
A smart token (which is a live ERC20 token) is a bit of code that both holds money and can be used as money itself.
A bit you need to know about how smart tokens work:
When you create one, you give each of the currencies it holds (called connector currencies) a connector weight between >0% and 100%. The total connector weight must be ≤100%.
If the connector weight is, say 10% ETH, then the smart token assigns the total value of its market cap as equal to 10x the value of the ETH it holds.
If the connector weight is, say 50% ETH & 50% BNT, then the smart token assigns the total value of each connector as equal to the other, and the total value of the smart token’s market cap as equal to both added together.
So the smart token is effectively deciding price and market caps based on its own little microcosm of currencies and their connector weights.
Whenever this causes a significant enough price difference between the smart token’s assigned price and the price elsewhere (on exchanges or other smart tokens), arbitrage bots are incentivized to profit from the discrepancy by buying and selling between them until its no longer profitable (and therefore the prices are no longer different).
As you can see, the technical details are… technical (you can deep dive on tech and pricing algorithms in our whitepaper) … but the upshot of all this is that a smart token uses this connector weight to serve as its own market maker, discover its own price, and buy/sell smart tokens & connector currencies on its own.
Each currency is its own exchange, which removes the need for a second party in cryptocurrency trades.
In other words, every smart token and connector currency, no matter its market cap or trading volume, is immediately and permanently exchangeable for any other currency on the Bancor network (which can potentially include all cryptocurrencies in existence). Rather than having to find another party who wants what you’re selling in exchange for what you want, you’re trading with the smart token’s contract.
And since anyone can create a smart token (a process we’re making so easy that you can do it in minutes via a chat bot, and that right now you can do by grabbing the code off Bancor’s github), this means that any smart token (and connector currency) that anyone creates for any reason will be fully liquid, even if they’re so small you’d be unlikely to ever find another person looking to exchange them at the same time as you.
There’s four types of smart tokens, each a cornerstone of the whole network, and each with potential to completely disrupt and improve a core facet of the global financial ecosystem:
- Token Relays — Smart tokens doing a better job of currency exchange than currency exchanges
- Token Baskets — Smart tokens bringing the concept behind the world’s most popularly traded class of asset (ETFs) to the world of crypto
- Smart Tokens — Smart tokens that are themselves the ‘main’ token, enabling the explosion of the cryptocurrency long-tail by allowing anyone to easily create completely liquid tokens
- Token Networks — Smart tokens that tie all the above together into one powerful network
Update: The Bancor network is live and processing transactions. You can make trades and see all the active smart tokens at app.bancor.network.
Token Relays — The Autonomous Decentralized Currency Exchange
Anyone with a bit of coding knowledge can create a cryptocurrency… and any currency backed by a good concept can become valuable.
But unless it’s adopted widely enough to be in near-constant demand & catch the attention of the exchanges (which subject all traders to fees), that currency and all it’s value is isolated in its tiny network.
Even decentralized exchanges don’t fix this problem, since any currency that isn’t traded frequently enough to find a counterparty on them at any given time isn’t really liquid.
Which leaves us with countless potential currencies, representing countless untapped sources of human ‘value’, that aren’t worth creating simply because they’re nigh impossible to connect to the global financial ecosystem.
This is the bottleneck holding back the explosion of user-generated currencies. Without liquidity, the long tail of money can’t (and hasn’t ever in the history of humanity) thrive.
The token relays change that, making it so that any currency, no matter its size, can be liquid.
The way it does this is simple: the smart token holds two or more connector currencies, and is always available to exchange them for each other. Either for free, or for a fee (up to the creator).
A token relay that has a fee of , say 0.1%, means that every time someone uses the token relay to trade assets, 0.1% of the tokens exchanged will be kept in the smart token’s connector.
As with any smart token, anyone can purchase the token relay smart tokens themselves (instead of just trading its connector currencies). Owning a token relay token with a fee is similar to owning a share in a mini-exchange. The value of the token relay tokens grows with each fee paid (as it accumulates to the connector, putting upward pressure on the price algorithm). The owner can cash out at any time by liquidating their token relay tokens for any of the connector currencies.
The reason fee-taking token relays are still viable against their fee-less counterparts is that, as fees (and people buying the token relay itself to benefit from them) increase the size of the connector, volatility and price changes caused by each trade decrease, so that users who are exchanging large amounts of tokens may get a better rate from a fee-taking token relay with its higher market depth and lower price volatility.
Connect a bunch of token relays together in a network (we’ll get to that) & you arrive at something like a decentralized Shapeshift that any currency can be added to.
As long as any currency is anywhere on the network, it is permanently liquid in exchange for any other currency on the network.
And there you have the potential a global network of countless user-generated currencies, all built on different stores of hitherto untapped value, and all completely liquid for each each other.
Speaking of which…
Smart Tokens — The Spark To Ignite The Long Tail Explosion
Smart Tokens are to cryptocurrency what wordpress is to blogging: a tool that allows anyone to easily and quickly create their own customized cryptocurrency that will work just as well for 5 people as it does for 500 million.
They’re always liquid in exchange for their connector currencies.
This is the bottleneck breaker.
Combined with token relays providing liquidity, it is now financially and technologically viable for anyone to create…
- Complementary Currencies: Hundreds of thousands of cities and towns and local communities all across the globe could have their own internal currencies, with values built on their own internal economies and not a huge and not-in-their-control national currency. Just like how having diversity of species in a natural eco-system increases that ecosystems resilience, having diversity of micro-economies in a financial ecosystem makes that system more resistant to crashes and widespread recessions. These could be exceptionally powerful in developing countries where the fiat currency itself isn’t stable or fairly distributed.
- Community Currencies: Same idea as complementary currencies, except these can be made for online and international communities. I don’t need to tell you how huge a niche that is.
- Crowdfunding: Say an artist wants to create a graphic novel. Or a local pizzeria wants to buy a new woodfire oven. Or a musician wants to sell out her venue. Indiegogo/Kickstarter type projects. They can create a smart token that serves as the method of purchasing that work or attending that event or sharing ownership. Those who buy the smart tokens earlier will get a cheaper price, and its cost will rise as demand does. [side note, because many of you will be wondering about whales and price manipulation: all transactions are calculated as if they were an infinite amount of micro-transactions, each increasing the price of the next. This makes it prohibitively costly for price manipulation.]
- Business Loyalty Points: Right now most business loyalty programs struggle to be worth enough to keep customers loyal. But create a smart token for the loyalty program that makes points exchangeable for other assets on the global, and suddenly your points are worth a lot more than just what your business has to offer.
- Personal Currencies: There’s virtually no limit to the potential here, but my favourite example is that of a freelancer with his own personal smart token. The only way of purchasing his work is to pay him in smart tokens, each of which represents one day of his services. The cost of his smart token would represent, with near-complete accuracy, what one day of his work is worth based on how in demand it is. Others could also purchase and hold his smart tokens as a form of investing in his future success.
There are so many potential use cases for the Bancor protocol and smart tokens that it is similar to asking what are the use cases of Ethereum. It’s improbable that we could imagine all of them, but those are some favourites.
Token Baskets — Decentralized ETFs
These are built much the same way that the token relays are. They hold multiple assets as connectors at different weights, and can even be used to exchange them (with or without a fee).
However the baskets’ purpose is totally different.
Because the smart token’s market cap is always worth the total of its connector weights, you can create smart tokens that hold a variety of currencies you want to invest in, each with its own connector weight that represents the percentage of total value you want to invest in it.
If you understand ETFs, which are the most popularly traded class of asset worldwide, and are essentially a portfolio of different assets rolled into one, you probably already see where this is heading.
Say, for example, you want to invest in the budding decentralized computational power sharing economy industry. You could create a smart token with GNT, SONM, RLC, STORJ, & MAID as connectors, each with its own connector weight representing how much of the value you want to put in each. Others can buy your smart token as well, essentially piggy backing your investment and raising the value of all holders’ smart tokens.
The token basket creator has the ability to change connector weights and add/remove connector currencies, thereby keeping the token basket up to date with what they consider to be the best investment at the current time. And just like with token relays, they can add a fee that increases the value of all the existing holders of this token basket every time someone interacts with it (which means early holders will see their investment grow in value as the token basket becomes more popular).
Arbitrage bots will be continually rebalancing your portfolio to adapt to the changes in these currencies values on the market, therefore keeping your investment divided up at the percentages you set.
This could open up a whole network of token baskets & proven-successful creators who could be followed.
Token Networks — The Glue That Holds It All Together
What makes all of these tokens and smart tokens fully liquid for each other is the fact that they all share a common connector currency: i.e. the network token.
The BNT (Bancor Network Token) will be the first network token.
Token networks allow for you to exchange any smart token or connector currency for the network token, and then exchange the network token for any other currency on the network (done automatically at the lowest price possible).
In other words, this is what is making every currency liquid for each other, and is the one connector currency that every currency on the network must have in common.
It also creates network effects.
For example, the more smart tokens that use BNT as a connector (which will be the default setting for smart token creation in any Bancor developed or financed software service), the more valuable and more in-demand the BNT becomes. As the value of BNT rises, so too does the value of every smart token holding BNT in connector.
And, if you’re wondering about other Network Tokens that fork our code and remove BNT, they’re sure to exist.
However, since The bProtocol Foundation is both the most knowledgeable about the technology behind the Bancor protocol and have first mover advantage in building on it (including over a year working with a large developer team on building the first Bancor software service UX, and the upcoming seeding of token relays, high-potential complementary & community currencies, and popular token baskets with BNT), anyone forking would need the economic incentive and the ability to surpass what we’ve built, or else will have created an inferior network with little incentive for others to use it. (This can be compared to Ethereum, where the success of any solution that uses ETH appreciates Ether value, benefiting the entire Ethereum network).
Additionally, there are no real advantages to using ETH as the network token, since it is exactly as liquid as BNT (which holds ETH as its connector). In fact, the only reason to use ETH as a connector is if the token creator predicts that the BNT value will depreciate in the long term relative to ETH, which will only happen if BNT usage is declining for some reason (making it an odd choice for anyone who is issuing a smart token based on the Bancor protocol).
That right there is the reason why BNT and the Bancor protocol can’t be easily replaced simply by someone coming along and forking the open-sourced code.
The Brink of a Fundamental Change in Money
“This technical solution for currency exchange will create massive efficiencies in the new financial world which may help speed up adoption and the transition from the traditional economy we are all waiting for.” — Yoni Assia, Founder and CEO of eToro & Bancor advisor
I think he’s right in saying that Bancor may be a huge part of what is needed for blockchain technology to reach the level of adoption that changes the traditional world economy. And, if I’ve done my job right, you understand why.
Token relays do the work of exchanges with less fees and more coverage, a huge industry to disrupt.
Token baskets bring the concept behind world’s most popularly traded class of assets to cryptocurrencies.
Smart Tokens lower the barrier to creating a liquid currency to a point where countless small-cap cryptocurrencies become economically viable to create.
Token networks, and the BNT itself, tie all of the above together.
The ICO for the BNT will start on June 12, 2017 at 14:00 GMT at https://bancor.network/fundraiser
Update: Huge success. We broke world records and raise ~$153m USD in ~2.5 hours. Woot! Now to set about the task of rebuilding how money works from the ground up.
