What Is Bancor?
Bancor is a blockchain-based protocol enabling users to seamlessly exchange various cryptocurrency tokens directly, bypassing the need for traditional exchanges like Coinbase. The primary token utilized within the Bancor ecosystem is the Bancor Network Token (BNT), which, as of August 2023, ranks as the 304th most valuable cryptocurrency by market capitalization, boasting a total valuation of approximately $63.8 billion, with each BNT trading at around $0.43.
Key Takeaways
Bancor operates as a decentralized finance (DeFi) network aimed at enhancing liquidity for smaller and micro-cap cryptocurrencies while also providing returns for liquidity providers. It employs two token layers, BNT and ETHBNT, to facilitate its liquidity pools and overall functionality. Together with its rival Uniswap, Bancor is at the forefront of a burgeoning wave of decentralized financial systems.
Understanding Bancor
As described on its official website, Bancor is an on-chain liquidity protocol that facilitates automated and decentralized exchanges on the Ethereum blockchain and across various other blockchains. The protocol was conceived in Israel in 2017 by innovators Eyal Hertzog, Galia Benartzi, and Guy Benartzi. Their whitepaper, released on March 18, 2018, states that Bancor enables automatic price determination and an independent liquidity mechanism for tokens on smart contract-enabled blockchains. The term “Bancor” pays tribute to economist John Maynard Keynes, who proposed a similar supra-national reserve currency at the 1944 Bretton Woods Conference.
Bancor’s Crypto Liquidity Pools
Many lesser-known cryptocurrencies struggle with liquidity due to their limited market capitalization and uncertain exchange listings, often resulting in higher transaction costs compared to more established cryptocurrencies like Bitcoin (BTC) and Ethereum (ETH). For traders interested in small- or micro-cap coins, Bancor’s smart token and smart contract technology—self-executing contracts that codify the terms of transactions—enable buying and selling these coins with reduced friction and lower fees. Typically, a cryptocurrency transaction on any exchange involves the exchange acting as a market maker, facilitating the transfer of tokens between a buyer and a seller.
Bancor Network Token (BNT)
Bancor’s mission is to eliminate intermediaries by establishing a virtual reserve currency known as Bancor Network Token (BNT) and an automatic exchange mechanism that governs prices and trading volumes through the protocol itself. BNT serves as the default reserve currency for all smart tokens generated within the Bancor network. One of the advantages of holding BNT is that investors earn a share of transaction fees generated from the conversion of various cryptocurrencies into and out of BNT. The Bancor protocol supports conversions between different ERC-20 compatible tokens, with each smart token linked to smart contracts that maintain reserves of other ERC-20 tokens. These tokens are internally converted based on reserve holdings and user demand, allowing smart tokens to be viewed similarly to a central bank managing foreign currency reserves.
Bancor’s ETHBNT Airdrop
On January 1, 2020, Bancor initiated an airdrop of $60,000 worth of ETHBNT to wallets that held a minimum amount of BNT. ETHBNT represents shares in the ETH:BNT liquidity pool and generates fees from ETH-based conversions on the Bancor platform. This initiative aimed to boost liquidity by attracting more providers, although the exact means of enhancing liquidity in Bancor’s pools, aside from utilizing fiat reserves, remains uncertain.
Criticisms of Bancor
Bancor’s network relies on a Constant Reserve Ratio (CRR) in its smart token contracts, which aims to preserve the reserve value of smart tokens. The internal algorithms and formulas are designed to maintain fair conversion rates between different cryptocurrencies. However, the assertion that Bancor guarantees liquidity has faced skepticism. A blogger known as “bitcoinchaser” argues that the liquidity provided by Bancor is relative, warning that a sudden surge in token demand could lead to rapid price declines, potentially depleting reserves within minutes. This raises questions about Bancor’s claim that its technology can prevent liquidity issues, even during market downturns. Furthermore, the ETHBNT airdrop indicates that Bancor’s liquidity may be initially supported by fiat currency reserves. While Bancor does offer liquidity for lesser-known coins, the concern remains that BNT itself could face liquidity challenges during market upheavals.
Additionally, Bancor competes with other liquidity pool providers like Uniswap, which also supports small coin projects that require liquidity for growth. An analysis of Uniswap pools suggests that unfavorable price shifts in underlying assets can lead to losses for liquidity providers that may outweigh earnings from transaction fees. Representatives from Bancor often downplay these risks, vaguely referring to “arbitrageurs” who are expected to restore market balance. As noted by Traders Magazine, a significant challenge for liquidity providers in pools like Uniswap is the risk posed by substantial price fluctuations between paired assets. It is generally advised to provide liquidity using stable assets rather than volatile ones like ETH. This issue is worsened by Bancor’s reliance on BNT, which is even more volatile than ETH. Furthermore, the way transactions are structured on Bancor can result in high gas fees, and there are currently no plans to adopt layer 2 scaling solutions to mitigate these costs. While Bancor is attempting to tackle these challenges as of 2023, its native token has significantly decreased from its peak value of $23.73.
