To understand it, we need to look at the future of crypt currency and realize that many different tokens are going to emerge. Right as you read this post many tokens are created. And it will increase each year. And this will create a situation where each organization/company/group of people have their own internal token.
For example, if I launch a company and create some token, I do it:
- To release an ICO so that people can fund this project.
- To reward each member of this company for some results or accomplishments.
and so forth.
The problem in this situation is to trade these tokens with each other. Having random tokens to be traded for Ethereum or Bitcoin will be very hard with the current exchange systems because this new token will probably won't be listed yet on any exchange system. Also even if some exchanges did list these random tokens it would be very hard to find someone to buy them because it will be hard to liquidate this token.
And that's where bancor comes in. Its technology could solve this liquidation issue so that all kinds of tokens can be sold and liquidated at some price.
So, what is bancor: it is a protocol enables anyone to create a new type of crypto currency and these currencies will be called smart token. This smart token can hold and trade with other crypto currencies, which will allow it to serve as its own market maker, automatically discovering its own price and providing liquidity to other crypto currencies hence, removing the need for 3rd parties such as an exchange or a middleman in crypto currency trades. Every smart token is always liquid at some price.
Here is an example: If I create a random token called Ahmad-coin, and I want to buy it. I wouldn't buy it from some person or some exchange system. Instead, I would call the smart contract of Ahmad-coin and put in it some Ethereum/Bitcoin. And depending on its reserve (explained later in how it works? section) its price and value will be determined. And by removing these intermediates (people/exchange systems) I can buy and sell instantaneously. Currently, they support only ERC 20 tokens but in the future, they will support other types.
A token is created based on a formula that adjusts the price to avoid fluctuation due to buying/selling transactions. The smart contract itself will decide its price using this formula. The balance is the amount of Ether/Bitcoin or any other currency in the reserve (the lock up amount) which is locked for this specific token. CRR is the Constant Reserve Ratio: basically, it is the percentage that determines the amount in the balance against the whole market capital of this token.
For example, if I put in the balance 100 Ether and put in the CRR 0.01, it means that 100 Ether is only 1% of the whole market capital for this token. So the whole market capital will be 10,000 Ether. Both balance and CRR is set by the creator of the token. And then the price is calculated based on the supply (meaning how many tokens are in circulation). And according to the simple supply and demand rule. When someone buys the supply (on the formula) will be plus (+) so the price will go up, and when someone sells the supply (on the formula) will be minus (-) and the price will go down. And also in the process of circulation, tokens will be automatically created, just like all crypto currencies. And if someone decided to sell all the tokens that are in the balance this formula has its protection system, where it will decrease the price gradually to force the seller not to all at once. For more mathematical details check their whitepaper.
These smart tokens are always liquid regardless of trade volume and this enables countless potential currencies that normally couldn't achieve liquidity because of their trading volume is too low or the use is too specialized, to exist.
Bancor is not an exchange site over a blockchain technology. It is a protocol that allows Asynchronous price discovery and continuous liquidity. But an exchange site uses Synchronous system. So converting a smart token doesn't require matchmaking with the other currency in real time, rather it can be done by a single party directly through the token smart contract.
Image 4 source, The image of bancor visa card source, Image of bancor ICO source, Logo without writing image source, Logo with writing source, The rest of the images sourced from the offcial site.
