Cryptocurrencies allow people to exchange digital assets in a decentralized manner, which means that they do not act like banks. Banking institutions often have one central authority making most of the decisions related to the financial operations. In the crypto universe, the market is set by the users, the people involved in the transactions, and there is no governmental agency.
All transactions confirmed and performed in cryptocurrencies are backed with the blockchain technology, a ledger that saves the timestamp and other details of the operation in the form of smart contracts. These agreements cannot be modified and last the rigors of time.
Cryptocurrencies are here to stay, and the incredible amount of tokens, ranging from Bitcoin, Litecoin, Dash, Ripple, Ethereum, and numerous others, are a testimony of their current value and place in our financial landscape. However, most of those platforms present a couple of problems: the inception of new units of a particular token, and their liquidity.
Liquid assets: what do they mean to you?
The term liquidity is nothing more than the ease or degree to which individual assets, in this case, a digital one, can be exchanged (bought or sold) in the market with relative quickness, so it does not lose its value and without affecting in any way its price. When talking about market liquidity, it refers to the level in which a market allows these assets or resources to be acquired or sold at stable costs.
While real estate and other properties are widely considered the opposite of liquid assets, cash is arguably the most liquid one. Cryptocurrencies have all kinds of advantages over cash and regular banking transactions, but the liquidity issue is still looming and yet to be solved.
Enter Bancor. The Bancor Protocol, The Merkle explains, represents a standard for the creation of Smart Tokens, which are cryptocurrencies based on the blockchain technology with added convertibility features, achieved through their smart contracts.
Automatic price calculation with Bancor
By using a connection method that no other system or platform implements, Bancor allows the performance of formulaic price calculation and, as a result, liquidity for all the tokens that comply with the protocol.
Bancor accomplishes liquidity because of its versatile system. The “connection” scheme provides access to liquid assets without the need for the two parties to match in exchange.
These connections ensure that token liquidity networks are formed and developed, which permits cryptocurrencies that people generate to have relative and varying levels of success in their respective markets.
Bancor is based on the principles of decentralized exchanges, but with an added and improved price discovery mechanism through smart contracts. That way, with Bancor cryptocurrency liquidity, will increase whether an exchange lists the tokens involved or not.
Decentralized exchanges compared to Bancor
There are centralized exchanges, which offer ease of use and advanced functionalities but represent a security risk for your funds, and there are decentralized exchanges. The latter are independent, as they are exchange markets that do not depend on third parties or any external service to hold the people’s assets.
In decentralized exchanges, the trades are of the peer to peer variety, which means that they are conducted directly and exclusively by users in an automated process; either by creating assets/proxy tokens or by using a decentralized multisignature escrow method.
In a centralized market, the customers deposit their digital assets, and the exchange releases an IOU (short for I Owe You) command, which can be traded on the specific platform when the receiving end of the transaction makes a withdrawal and the funds are converted back into the digital asset or cryptocurrency, they represent.
On the other hand, Bancor implements the use of a smart contract for users to deposit a set or list of tokens at a fixed rate, or the Constant Reserve Ratio (CRR.) They receive, in exchange, the Smart Tokens associated with the Bancor Protocol.
The Smart Token is a portion of the value of the digital asset that the smart contract holds, which adds a liquidity dimension that decentralized exchanges, for all their benefits and advantages, can’t yet offer. People who have Smart Tokens have the warranty that there is an associated amount of reserve assets in the “queue” waiting to be released.