What is Bancor?

Bancor is a blockchain-based decentralised exchange (DEX) that runs on the Ethereum and EOS blockchains, focusing on providing liquidity to small- and micro-cap coins and returns for liquidity providers.

To support token trades against token liquidity pools without matching buyers and sellers, the Bancor protocol leverages an automated market maker (AMM) smart contract. Bancor Network Token (BNT) is an ERC-20 token native to the DEX that acts as the common price token to perform trades and also offers holders voting rights in the Bancor DAO.

A brief history of Bancor

On-chain liquidity protocol Bancor was co-founded by Eyal Hertzog and Guy and Galia Benartzi in June 2017. Its initial coin offering (ICO) was one of the largest fundraising campaigns in the blockchain industry at the time. The project raised US$153 million in just three hours. By now well-established, Bancor was one of the first DEXs to employ an AMM to allow the exchange of Ethereum-based tokens. The AMM executed orders utilising on-chain liquidity pools rather than a central order book that matched buyers and sellers based on bid and ask prices.

Originally, holders of BNT and any other token (including ETH) on the Bancor Network could instantly convert their tokens for NPXS tokens, and vice versa. However, in July 2018, an attacker stole 25,000 ETH, 2.5 million BNT, and 230 million NPXS tokens from the Bancor protocol. The Bancor team was able to retrieve, freeze, or destroy the stolen BNT, but not the ETH or NPXS, and its comeback spurred debate regarding the protocol’s centralised governance, which enabled the team to control the BNT supply unilaterally.

The incident compelled the team to decentralise its platform by transferring governance to a decentralised autonomous organisation (DAO). The Bancor DAO became operational at the end of 2020. It enables BNT holders to propose and vote on protocol updates and governance problems.

Bancor stated in September 2019 that it would airdrop its entire Ethereum reserve to BNT holders. The team also changed the token mechanism to establish an inflationary scheme that would reward liquidity pools, oracles, and developers based on community voting.

Bancor V2.1 was released in March 2021, with new BNT supply and governance upgrades to solve AMM exchange concerns. The previous Bancor iteration required liquidity providers to deposit two assets, BNT and its associated token, in proportionate quantities to each pool – the usual practice for liquidity pools. However, this often results in unintentional exposure to either token so Bancor now lets users provide liquidity for single tokens.

How Bancor works

The Bancor Protocol is a network of smart contracts that function as liquidity pools. These perform algorithmic token trades to pool of on-chain liquidity. What sets Bancor apart from most decentralised and centralised exchanges is, in their own words: “Liquidity on Bancor is provided by thousands of unaffiliated users who each receive a share of Bancor’s trading fees, instead of liquidity coming from a small handful of professional market-makers.”

Users only need to provide one single token to pools on Bancor, which also offers a 100% impermanent loss protection, which is usually a risk when providing two tokens to a liquidity pool.

Adding liquidity on Bancor is permissionless (no central party controls the process, as typical for a DeFi protocol) and the protocol is simple in set-up, allowing to new users to add liquidity or trade tokens with just a few clicks.

What is Bancor used for?

Most liquidity pools on the Bancor Protocol hold BNT (Bancor’s Network Token) in reserve, as well as the supplied token by the user receiving liquidity. BNT function is as the intermediary token connecting pools in the network and across blockchains.

BNT can be staked for rewards, grants voting rights in the DAO, and facilitates cross chain conversions.

As every pool in the network holds some part of its liquidity in BNT, staking BNT adds more liquidity that is locked up in Bancor pools, each pool on the network becomes more liquid.

Pending a community vote, Bancor Protocol may activate BNT Staking Rewards. The rewards are distributed in newly minted BNT, which therefore would also cause inflation of the token. By converting some of their BNT to vBNT, users can vote in the Bancor DAO and such decisions.

Finally, Bancor uses BNT in its pools to process token trades across blockchains. In this process, BNT mints and destroys itself across chains to facilitate these cross-chain trades – currently on the Ethereum and EOS blockchains.