Overview

Thanks to the rise of cryptocurrency and Blockchain technology, lately there has been a large influx of projects empowering themselves by doing token launches to raise the funding they need to execute their vision, opposed to raising venture capital. Many of these are taking place on the Ethereum protocol.

There used to be only a few raises per month, and now there are some happening every day. Considering how we haven’t seen very functional front end Ethereum projects (until very recently — most in Alpha), I expect this upward trend to continue — especially as more people realize that they have more power to do anything they can dream of than ever before. Overreaching regulatory constraints imposed by any particular country will mainly do a disservice to the government and its citizens, opposed to the people building projects, due to the structure of these distributed networks.

The Bancor Challenge

Over the past few months, I have had the opportunity to dive into The Bancor Protocol. It is one of the platforms that will provide easy access into the Ethereum protocol, and improve the quality of many lives (which, to me, is what Blockchain ultimately is all about).

Some of the underlying mechanics are so abstract (relative to traditional finance) that it has been a struggle to actually explain what this project is due to its complexity (even to people who are supposed to be professionals at the top of their field). The point of this article is to hopefully clear some of that up. So, I’ll give a quick overview of Bancor, and then share a new way to think about the whole thing, which might be accessible to a wider audience.

What is Bancor?

The Bancor Protocol is built on top of Ethereum. On the front end, it provides a clean user interface/experience, similar to a social network, for people to:

Create community currency tokens on Ethereum

Perform a crowdsale

Make token baskets (pools of tokens that are represented by one token)

Deploy single-party token exchange mechanisms like token changers

…all through a chatbot on Telegram or FB Messenger (I think this is pretty epic).

Now, the backend of the protocol is where things get really unique. Bancor provides each token created on the protocol with unique functionality, which makes them, in Bancor terms “Smart Tokens”. These Smart Tokens are special for a few reasons:

There is an inherent price discovery mechanism that provides each token with a price without the need for a market to determine its value on an exchange

Each token has a reserve in its smart contract which allows for a predetermined percentage of liquidity to always be accessible to token holders — this allows people to buy/sell without a party on the other side of a transaction

The token creator can decide which tokens will be accepted into the contract to build the reserve

The Bancor Protocol token (the one that is being generated for the upcoming sale) will provide support to other cool smart tokens built on top of the platform

“Guardian” capabilities, where you can choose trusted friends to back up your wallet in case private keys are lost

So, Bancor could be considered the ultimate liquidity protocol, because all tokens are liquid all the time, no matter how much interest is present on the buy side of an order book. The price of the token rebalances with every block in relation to the amount stored in reserves and the reserve ratios (the price would go down if a bunch of people sold at once, but you’ll at least get something back, unlike other tokens).

Maybe that makes some sense. If not, it’s cool. Again, that’s the point of this article. Let’s start the transition towards a new perspective.

Let’s Talk About Liquidity

Here is a dictionary definition for liquidity:

“The availability of liquid assets in a market or company.From early 17th century: from French liquidité or medieval Latin liquiditas, from Latin liquidus”

Okay, I always learned to not use the word you are defining in the definition, so let’s define liquid assets:

“Assets held in cash or easily converted into cash”

Again still defining part of the word as the definition, but at least more helpful. Let’s replace “cash” with “ETH”, “Assets” with “Ethereum based tokens”, and remove “held in cash”, which leaves us with:

“Ethereum based tokens easily convertible into ETH”

Anyone who trades on exchanges like YoBit, C-CEX, Cryptopia, and sometimes even Polo/Bittrex, has probably experienced the pain of not being able to exchange their position back into a base currency (like BTC or ETH) at the right moment. It’s unfortunate when there are moon-bound opportunities presenting themselves, and you can’t go along for the ride.

Maybe if you aren’t a crypto trader you’ve tried to sell a house, a piece of art, or a ticket to a music festival, but at that time there is no market for what you are selling. Until you find a buyer, you are stuck with that thing. Bancor eliminates this issue. As previously mentioned, you don’t need a second party to execute the transaction due to the reserve and price discovery algorithms.

Matter and Smart Token States

A close friend was reading up on Bancor and came to the conclusion that Bancor is hard to describe, and that the mantra must be:

“Simplification. Simplification. Simplification.”

I totally agree. A good ELI5 (Explain Like I’m 5) is crucial to any abstract monetary frameworks proposed in this emerging paradigm.

He also proposed a unique way to think about Bancor, and the “states” of what goes on inside the protocol at a high level. I had to let what he said sit for some time before really understanding how interesting of a lexicon it actually provides.

Let’s start with matter. What’s matter?

“Physical substance in general, as distinct from mind and spirit; In physics it is that which occupies space and possesses rest mass, especially as distinct from energy

– From Latin mater — mother”

Matter and mater have a lot of correlations.

The Three States + Chaos

Matter generally has three states. Let’s take something we all know about — H2O. It’s a drink. It makes other drinks cold. It produces steam. Sometimes you can swim in it. It’s essential to life. H2O has three states, which most of us probably remember from elementary school and experience regularly:

Solid : Ice

Liquid : Water

Gas : Steam

We are going to apply these states of matter to Bancor Smart Token functionality, but first here are some things the dictionary and I think of when contemplating these states:

Solid

Storage. Foundation. Base. Stable.

“Firm and stable in shape; dependable; reliable”

Changes into liquid upon heating

Late Middle English: from Latin solidus; related to salvus ‘safe’ and sollus ‘entire.’

Liquid

Adaptable. Modular. Flowing. Efficient.

“A substance that flows freely but is of constant volume”

Changes into gas upon heating and solid upon cooling

Allows everything to flow smoothly and efficiently. Mobile and functional.

Late Middle English: from Latin liquidus, from liquere ‘be liquid.’

Gas

Airy. Etheric. Adventurous. Expanding.

“An air-like substance which expands freely to fill any space available, irrespective of its quantity”

Changes into liquid state upon cooling

Origin — “mid 17th century: invented by J. B. van Helmont (1577–1644), Belgian chemist, to denote an occult principle that he believed to exist in all matter; suggested by Greek khaos ‘chaos’, with Dutch g representing Greek kh.”

Let’s define chaos. It will be helpful as we proceed:

Complete disorder and confusion Behavior so unpredictable as to appear random, owing to great sensitivity to small changes in conditions. The formless matter supposed to have existed before the creation of the universe. Greek Mythology the first created being, from which came the primeval deities Gaia, Tartarus, Erebus, and Nyx.”

Using the chaotic origins of gas, and focusing on the bolded definition, we can say that solid would be the least chaotic state, with liquid somewhere in the middle.

Linking States To Smart Tokens

So now we have an interesting lexicon that everyone can relate to. Next we can apply this to Smart Token states:

Solid — Since solid is the most stable, I think it would be fair to say that in the Bancor Protocol, the portion most closely related to ice, or solids, would be the tokens in the reserve. This foundation is what (partially) justifies/prices the value of the Smart Tokens, and ensures that they actually have inherent value. So, the higher the reserve ratio, the more “solid” the Smart Token is.

Liquid — The tradable Smart Tokens themselves must be the water state. They are what allows this system of value to be tradable and move between parties. So, the number of tokens currently in existence expresses how “liquid” that Smart Token is. “How much water is in the pool?”

Gas — When molecules are in their gaseous state, they enter and fill empty space. To me, this is the point of a new business or a token launch. There is (or should be) a need (or space) for a particular thing. So the gaseous state is linked to the funds in a Bancor Smart Token when a crowdsale happens that is not stored in the reserve. We could in a sense call it the “venture capital” because it will venture out to fill the space. This would include an operating budget, cover expenses, marketing, and other items until a project can be completely sustained by its revenues or community.

Liquidity vs. Fluidity

So we’ve already addressed liquidity, and understand how Bancor inherently creates a lot of it. Now that we have also broken down the forms of money that comprise the whole of a Smart Token through this new lexicon, I want to introduce a new term that expresses the overall utility of Bancor’s Smart Tokens in a functional way.

Fluidity:

The ability of a substance to flow easily – Smooth elegance or grace

The thing that most interests me about this protocol is the utility of currency once it is in a Smart Token contract. It is hyper-functional and serves multiple purposes in the different states at the same time. The currency can also move between states very efficiently. This, to me, is flow. It’s fluid. Reserves don’t inhibit, but support growth. Active capital raised through a sale isn’t a liability, but fuel. The tokens make value transfer seamless and unobtrusive.

So, this is why it seems that, to me, Bancor is more than just a liquidity protocol, but more accurately a fluidity protocol. Seamless transitions between states allows for gas to turn into solids, or operations to turn into reserves during times of uncertainty or stability at the click of a button (or message to a bot). When many new users are coming in, new Smart Tokens are generated at a higher rate, which increases both the reserves and operating capital. The Smart Tokens themselves let the community continue to function, and provide a representation for who owns how much.

Unlike storing funds in a bank account, taking out loans, and “trusting” bodies like the FDIC, the power is completely in the hands of the people in the network.