Frequently Asked Questions
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Frequent misconceptions
Isn’t Bancor just a decentralized exchange?
Bancor is not an exchange. It is a protocol which allows for asynchronous price discovery and continuous liquidity. This means that converting a Smart Token™ does not require matching two parties in real time with opposite wants, rather, it can be completed by a single party directly through the token’s smart contract.

So, unlike exchanges where you have to find someone who actively wants to buy what you’re selling, Smart Tokens™ are always completely and immediately liquid regardless of trade volume. This enables a long tail of countless potential currencies that normally couldn’t achieve liquidity because their trading volume is too low or their use is too specialized. Smart Tokens™ built using the Bancor protocol form an interconnected monetary network that instantly facilitates any request to convert between tokens in the network.
If people start creating new tokens with less than 100% CRR isn’t this like allowing anyone to create their own money? Isn’t that a problem?
Money can be seen as a technology for collaboration. It works by distributing mutually agreed upon units of credit, and helping groups keep track of who did what for who and how much. Throughout history, there have been many methods in which the initial credit has been distributed (and removed from circulation.) Gold is distributed naturally, bank-notes are extended as loans, and cryptocurrencies are typically issued through crowdsales, PoW, and PoS mining.

By democratizing the creation of new, liquid tokens - a variety of policies can be implemented by different groups across different geographies, thus decentralizing the process by which new credit is extended, allowing for a diverse variety of value ecosystems.

This can be compared to the way the Internet is structured; while protocols are agreed upon (HTTP, TCP/IP, etc.), each network (e.g. ISP) may adopt a different business model, usage policies and backbone technologies.

A decentralized and interconnected monetary model can achieve higher agility, stability and access to credit, which we believe is not a problem, but a solution. We expect to see a tremendous amount of innovation and creativity, and most of all -- real value for end-users.
How can the market-cap of a Smart Token™ be higher than the total value of the reserves?
For tokens with a 100% total CRR (token changers and ETFs), the value of the Smart Token™ is equal to the value of its reserves.

However, for tokens with <100% CRR, the token’s value is greater than its reserve value. There are many examples of valuable user-generated currencies that hold no reserves, such as loyalty points (airline miles), local currencies (ithacash), and protocol tokens (Augur’s REP and GOLEM), and yet have a market cap or perceived value greater than 0. In all of these examples, new “credit” is issued, which is accepted by other parties in exchange for goods and services. The value of these currencies is derived from the willingness of other parties to accept them and not from any underlying assets.

The reserves held by Smart Tokens™ are a mechanism which enables them to provide continuous liquidity and asynchronous price discovery. Nevertheless, the token itself must be intrinsically valuable for whatever purpose it serves. The reserves are not the source of the Smart Token's™ value. Rather, they are a requirement to operate the mechanism which ensures their liquidity.
I’ve heard about tokens which are backed using a 150% or even 200% reserve, how could a 10% reserve be enough?
Some tokens are designed to be pegged to the value of external assets (such as TETHER), and in some implementations, these tokens use a > 100% reserve, combined with price oracles, as a mitigation strategy for the counterparty risk introduced by this model (aka “Stablecoins”).

The reason for holding > 100% reserves is that the value of the pegged asset (e.g. USD), might increase relative to the backing asset (e.g. ETH), in which case the reserve ratio is reduced, but as long as it is higher than 100%, the pegged token remains fully backed.

These types of tokens serve a very different purpose (representing external assets on blockchains while minimizing the counterparty risk.) In Bancor’s case, the reserve tokens serve as a mechanism to provide liquidity and price discovery, not as the backing of the Smart Token's™ value. Therefore Smart Token™ reserves can be set anywhere greater than 0% and up to 100%. This allows token creators to create new value while benefiting from continuous liquidity and automated price discovery, from day one, before the Smart Token™ has had a chance to accumulate trade volume, thus significantly lowering the barrier to liquidity and enabling the long tail of user-generated currencies to emerge.
Using a new model for price discovery sounds risky. Why do you think it will work?
When it comes down to it, the market price in both the traditional model and Bancor’s represent the equilibrium point between buyers and sellers at any given moment. In both models, a buyer’s market will drive prices up, while a sellers market will drive prices down. This common incentive alignment mechanism is the key for market price discovery and why we believe Bancor’s asynchronous price discovery model will function properly. What makes Bancor’s model different is that it doesn’t rely on trade volume for price discovery, but rather sets prices by maintaining a ratio between a reserve and the token’s supply, which can function effectively even at very low trade volumes.