An on-chain liquidity protocol for asset swaps
As thousands of crypto tokens have been created and continue to be created, there is a growing need to swap between them. Traditional exchanges require there to be a willing buyer and seller for each token pair to trade (this is called liquidity). Bancor is a decentralized exchange—meaning it’s run by algorithms—that can provide this liquidity. Like Uniswap and Sushiswap, Bancor’s protocol employs an automated market maker to establish pools of liquid assets to support trades. Users who put their assets into the liquidity pools earn a portion of trading fees. Bancor has a built-in token called BNT, which is the common denominator in all the two-coin pools. Having stake in BNT also gives investors a vote in what happens to the future of the entire Bancor system.
Decentralized exchanges are global, permissionless, and anonymous. Liquidity pools make them viable places to buy and sell obscure and new tokens, or to launch tokens as part of new ventures. Though Bancor is based on the Ethereum and EOS blockchains, it can be integrated into other blockchains to provide liquidity across chains. Bancor also provides some protection against impermanent loss, which is when the price of an asset drops after a user has committed it to a liquidity pool. The BNT supply is elastic to mitigate this problem: When a user deposits a single coin—rather than a coin paired with something else—into a liquidity pool, those single coins are paired with newly minted BNT. As other people deposit BNT in the same pool, minted BNT is burned to balance the circulating supply.