The Bancor Protocol is made up of a network of smart contracts (called “liquidity pools”) designed to perform algorithmic token trades and pooling of on-chain liquidity.

What sets Bancor apart from most decentralized and centralized exchanges is 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.

This is because adding liquidity on Bancor is permissionless (no central party can block or control the process) and easy for everyday users (add liquidity and earn fees in a couple clicks).

Guide: How to add Liquidity to Bancor

Most liquidity pools on the Bancor Protocol hold BNT (Bancor’s Network Token) in reserve, as well as the the listen token receiving liquidity. BNT serves as the intermediary token connecting pools in the network and across blockchains. For example, a trade from DAI to BAT follows the path: DAI > BNT > BAT.

Why use BNT instead of a blockchain asset?

There are key advantages to using a protocol token like BNT, instead of a blockchain asset like ETH, in liquidity pools.

Here are a few:

1) Network Effects:

Staking on Bancor directly increases demand for BNT. Since every pool in the network holds some part of its liquidity in BNT, as more liquidity is locked up in Bancor pools, each pool on the network becomes more liquid.

As liquidity providers (LPs) join the network, existing LPs benefit not only because the liquidity of the protocol increases but also because the value of their ownership increases.

In systems based on ETH, adding liquidity to a pool does not have a direct effect on other pools on the network, since demand for ETH is tied to its usage in many networks.

2) Staking Rewards:

Pending a community vote, Bancor Protocol may activate BNT Staking Rewards. Users who stake their BNT in Bancor pools will receive BNT staking rewards via newly minted BNT (i.e., BNT inflation). These rewards will increase the profitability of staking inside Bancor pools, and create a strong incentive for users holding BNT to become liquidity providers on the network.

3) Governance

Following the launch of the BancorDAO, BNT will be used to vote on key attributes of the Bancor Protocol.

4) Cross-Chain Conversions:

Using BNT in Bancor pools allows Bancor to efficiently process token trades across blockchains. BNT mints and destroys itself across chains to process these cross-chain trades (currently live on the Ethereum and EOS blockchains).