In the rapidly-growing world of cryptocurrency, Bancor is a name that has been gaining traction in recent weeks. But what is Bancor, and why are people talking about it? In this article, we will give you a quick guide to Bancor, explaining what it is and how it works. We will also discuss the potential benefits of incentivizing users with fees to generate liquidity in cryptocurrency markets.
What is Bancor?
Bancor is a software platform that allows users to pool their crypto assets in exchange for a share of the fees paid when those assets are bought and sold by traders. In this way, Bancor is attempting to facilitate the operation of what’s called an automated market maker (AMM). AMMs are designed to provide liquidity to markets, but without requiring a financial institution to manage it directly.
Bancor is well-established
It’s been around since 2017, which makes it one among many more established AMMs on offer today – but don’t let its age fool you! This service has already become an important part in facilitating cryptocurrency exchanges across both Ethereum and EOS networks alike because their platform can easily adapt regardless if another coin becomes popular or not.
Put simply, AMMs like Bancor are aiming to make more niche crypto asset markets more liquid by offering incentives for users. This could have a number of benefits for the cryptocurrency ecosystem as a whole. For example, it could make it easier for new projects to get off the ground, as they would not need to worry about finding a market maker to provide liquidity.
How does Bancor work?
Bancor’s goal is to encourage users to deposit assets into pools. Each pool is made up of two tokens and a BNT cryptocurrency reserve.
When a user deposits coins into a pool, they are rewarded with a new token. This token is referred to as a pool token, and it allows the user to retrieve the original amount locked in the protocol.
When each token is traded, BNT tokens are used as an intermediary currency.
It is worth noting that Bancor allows users to lock a single token in one of its pools (as opposed to a pair). In order to access the pool on other AMMs, for example, a user may be asked to lock up pairs of tokens in specific proportions to one another.
On Bancor, a user could deposit only ETH or DAI into a pool of ETH and DAI. As an alternative, a user would have to deposit both ETH and DAI on Uniswap.
Users must, however, deposit BNT into any available Bancor pool.
Oracles
You may wonder how Bancor ensures liquidity providers can obtain the correct price for the coins they have locked on the platform.
Bancor V2 claims to solve this problem with an “oracle” solution, which is designed to relay a price from an external source into an existing system.
Bancor’s pools use this service to automatically adjust the proportion of tokens relative to their prices, allowing a liquidity provider to withdraw the same amount of tokens they deposited.
Final thoughts
Of course, Bancor is not the only player in this space, and there are a number of other AMMs currently in operation. However, Bancor’s approach of incentivizing users with fees does have the potential to generate more liquidity than its competitors. Only time will tell whether Bancor will be successful in its mission to bring greater liquidity to cryptocurrency markets.
Do you think incentivizing users with fees is a good way to generate liquidity in markets? Let us know what you think about Bancor in the comments below!
Please note that this is not financial advice and should not be taken as such. Please do your own research before investing in any cryptocurrency or digital asset. Thank you!
Jay Speakman is a technology writer based in San Francisco, California. He writes on the topics of blockchain, cryptocurrency, DeFi and other disruptive technologies. Clients include Avalanche, Be[in]Crypto, Trust Machines and several blogs devoted to blockchain gaming. He will not rest until fiat currency is defeated.
