Frequently Asked Questions
Download PDF
Common questions
How is the Bancor protocol different than how cryptocurrencies are exchanged today?
Cryptocurrencies today are typically traded in classic exchanges which can choose to list them based on their expected trading volume. They use a bid-ask model where two parties with opposite wants must be matched to each other in order for a transaction to occur.

The Bancor protocol enables Smart Tokens™ to be continuously liquid through their smart contract (exchangeable for their reserve currency at an algorithmically calculated price) and thus do not rely on exchanges for liquidity or price discovery. Smart Tokens™ are purchased directly from their smart contracts, not from sellers, and are liquidated through their smart contracts, rather than through buyers.
How can existing small market-cap tokens benefit from Bancor?
Small market-cap and lightly traded tokens will benefit greatly from the Bancor protocol, which offers a simple and practical solution to the current liquidity problem they face.
Illiquid tokens are practically disconnected from the greater economy, rendering them less useful to their holders and thus diminishing their value, further limiting adoption. Some examples of these may be local currencies (for a specific geographic location), group currencies (for a club or community), loyalty points (for individual business or networks of businesses) and crowdsale tokens (for a project or initiative).
Is Bancor for developers only, or for end-users as well?
Bancor will launch a user interface that enables anyone, regardless of technical skills, to easily create and manage a fully functional & fully liquid Smart Token™ for any purpose.

A desktop/mobile web interface, integrated with popular messenger chatbot platforms will provide simple on-boarding as well as all the basic functionality needed for using user-generated tokens.
Bancor is also integrating its protocol with leading software developers and exchanges in the cryptocurrency space to bring the power of Smart Tokens™ directly into other popular and important applications and services.
Why would a company doing a crowdsale devote a portion of their proceeds to creating the reserve for a Smart Token™, instead of keeping all the funds for themselves?
Research has shown that assets can gain in value just for being liquid. Guaranteed liquidity has significant benefits to asset holders and this assurance is likely to encourage participation in the crowdsale. As for usage, in both community currencies and loyalty points alike, liquidity is a major driver in adoption and retention, and allows users to move in and out of the network easily, encouraging them to join in in the first place. This is similar to how many people will accept USD knowing that they are easily tradable for other assets, even if they don’t plan to trade them. There is peace of mind in liquidity, and this trust building can be the difference between a new token taking off or struggling to prove its worth.

Having said that, the Smart Token™ creator does not need to devote these funds to the reserve forever, since it is possible to set a Smart Token™ with an adjustable CRR (within a pre-set range) that would allow the issuer to withdraw some of the reserve as the Smart Token™ user base grows (and its market-cap and organic liquidity, with it).

The reserve can actually be seen as a temporary deposit, and in some cases, as a future source of additional funds (when the issuer decreases the CRR).

For the long tail of user-generated currencies that will not have a high enough trading volume to find counterparties and be easily tradeable, there is no current alternative to achieving liquidity. Bancor is the only technological solution for the Double Coincidence of Wants problem in asset exchange. We believe the benefits of endowing a new Smart Token™ with a reserve far outweigh the cost of the reserved liquidity.
How can the Bancor protocol be used for creating something that works like a decentralized shapeshift for all currencies (aka how do token changers work?)
Token changers are Smart Tokens™ with two or more tokens in reserve, totaling 100% CRR between them. Their purpose is to allow you to instantly trade any currency on the Bancor network with any other currency on the Bancor network.
Token changers can have fees, or can be free, as configured by the creator.
Say you create a token changer that has a fee of 0.1%. Every time someone uses your Smart Token™ to facilitate and exchange between its reserve tokens, 0.1% of the tokens exchanged will be added to the Smart Token's™ reserve.

As with any Smart Token™, you can actually own the Smart Tokens™ yourself. And owning a token changer with a fee is kind of like owning a share in a mini-exchange. The value of your tokens grows with each fee given (as it accumulates to the reserve, putting upward pressure on the price algorithm), and you can liquidate them at any time to cash in your investment.
Users may still gravitate towards fee-taking token changers over no-fee token changers because they are likely to have greater market depth (more people will want to provide their liquidity, via the reserve tokens, to a profit generating Smart Token™) and are thus likely to have lower price fluctuations, making it possible that you’ll actually get a better exchange rate when you use a fee-taking token changer.

Bancor’s algorithms and price-discovery UX will assist users in selecting which token changer they should use at any given time to achieve their goals.
How can the Bancor protocol be used for creating decentralized and trustless token baskets (aka ETFs)?
Smart Tokens™ can hold multiple reserves, each with an independent CRR (Constant Reserve Ratio) setting. A token basket can be defined as a Smart Token™ with two or more reserves, totaling 100% CRR. A basket, like any Smart Token™, can be purchased for any of its reserve tokens, as well as liquidated in exchange for any of them. When the basket is purchased with one of its reserve tokens, the price of the basket in that token increases, and decreases in the other reserve tokens. This behaviour creates an incentive for arbitrageurs to rebalance the token basket, in cases where the calculated prices differ significantly from outside market prices.

Token Baskets can also be used as token changers (with or without fees).
How can existing tokens benefit from the Bancor Protocol?
Any ERC20 token (smart or standard) can be set as a reserve token. While it may be challenging to migrate some existing tokens to the Smart Token™ (Bancor) protocol (e.g. tokens with a fixed supply), it is still possible to connect these tokens to the Bancor network by using them as one of the reserve tokens in a token changer. This would enable buying and selling of the existing token with no need for a counter party. Furthermore, it may be good for existing tokens to see increased demand stemming from their usage in the reserve of (smart) token changers.
Can Smart Tokens™ be traded on crypto-exchanges?
Yes, as Smart Tokens™ are ERC20 compatible, they can be traded anywhere. However, Smart Tokens™ do not need to be traded in a crypto-exchange in order to achieve liquidity and facilitate price discovery, as these are directly handled by the Smart Token's™ contract using the Bancor protocol for continuous liquidity and algorithmic pricing.
Do you have plans to support non ERC20 tokens such as BTC, XMR, etc? Could the Bancor protocol be used across different blockchains?
Yes. In the short term, this can be achieved through asset tokenization (with the inherited counterparty risk) or federated two-way pegs (with much smaller counterparty risk). This means that 3rd parties are safeguarding the assets in other cryptocurrencies, while issuing Ethereum tokens to represent them. Those tokens can be exchanged back to the original asset (cryptocurrency in this case) at any time. These tokenized (ERC20) assets can be used as token changer or token basket reserves.
Longer term, we are tracking solutions for cross-blockchain interoperability (such as Cosmos and Polkadot) and plan to ultimately ensure the Bancor protocol is a universal, blockchain agnostic solution for continuous liquidity.