Bancor Protocol Use Case #1

Utilizing the long tail of user generated currencies

Today there are only a small number of tokens on Ethereum. Various exchanges are correlated enough to create a generally stable price point between all of the tokens. As this number continues to grow, and the use cases for tokens increase in their spectrum, an objective pricing mechanism will be essential to get a general sense of a token’s potential for liquidity.

Different parties involved have various criteria to get involved in tokens. Let’s break down some of the types of users who might utilize this algorithmic pricing mechanism in different ways based on the well known adoption curve:

Core — The foundational group of users in a new community of project. These users are likely to generate smart tokens at their initial price point because they are committed to the project and are the ones who will make it expand. These people are the highest risk takers. Whether they are spending their money or time, they are entering a market at the earliest stage. Let’s say that the core users join during 0–16% of the total potential size of a community or project. This encompasses the innovators and early adopters.

Accelerator — These users come in once a project has generally established itself as a sustainable entity. This next waves of users, who is a bit more risk averse provides a fundamental layer of support to the currency. Because they chose to come in during the second wave, these users don’t get the absolute lowest price point, but can still be considered early adopters. These users might take 15–50% of the total potential of each project. This encompasses the “early majority in the adoption curve.

Supporter — Once a project has solidified it’s place, a third type of user comes into the mix. These people are more risk averse and comfortable with taking smaller potential gains with less risk of losing principal. These might be who traditionally are D round investors in the VC model or mutual funds building blue cap portfolios. In the adoption curve this is 51–100%.

One of the unique elements of having an objective pricing mechanism is that people can automatically get involved at a certain point in the curve. Let’s assume that Alice has a $250mm pool of capital to diversify into a spectrum of community currencies. She creates a smart contract that when a smart token meets specific ‘Currency Type’ parameters and certain amount in reserve, an automatic acquisition of x ETH worth of that currency occurs.

If ETH is at $500, and Alice in is putting 1,000 ETH into each project that meets the criteria, she can automatically allocate into 500 different tokens with a much less significant amount of effort. Once the numbers game of how many of each currency grow at what rates is figured out, then the success of any one particular allocation becomes irrelevant. Instead it becomes what percentage of allocations fail, and how many of the “successes” continue to grow.

This is just one of many use cases that can be achieved through the Bancor Protocol’s objective pricing mechanism and CRR.

The long tail of Ethereum tokens include blogs, YouTube channels, Facebook groups, Wikipedia articles, sub-Reddits and more. Anywhere you have a super-user class, there can be an associated token to power the content/community. Value generated through the addition of digital tokens to these forms of content is an order of magnitude larger than simply getting a “hit” on a site.

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