Welcome to this post, where we are going to see how bancor works, a protocol to provide liquidity and exchange cryptocurrencies in a decentralized way on the Ethereum network.
Bancor is a platform focused on being able to provide liquidity to other protocols, in addition to its trade function, but it stands out for its focus on solving the main problem of providing liquidity, the impermament loss. This is the aspect that makes bancor different from other similar protocols on Ethereum.
What is Bancor
The Bancor Protocol is a fully on-chain liquidity protocol that can be implemented on any smart contract-enabled blockchain. The Bancor Protocol is an open source standard for liquidity pools, which in turn provide an endpoint for automated market making (buying / selling of tokens) against a smart contract.
The protocol at the moment is only on the Ethereum network, but we may see it on other networks in the future. The main difference that brings bancor, are its liquidity pools, where you can place only a single token, as if it were staking, avoiding impermament loss at all times.
It also has other aspects such as the staking of your token, in a DAO format for voting and governance of the protocol. And a trade function like any DEX.
Let’s see the main and most interesting part of Bancor, the pools without impermament loss, although it has its limitations and sometimes they are not available as we will see now.
In earn, first you will see information about the total liquidity in the protocol, the price of the platform token, BNT, the commissions generated and the total amount of BNT staked, which is really high. Below you can see the tokens with the best interest.
One of the main problems for protocols and liquidity users is impermament loss. For the protocol, because it is difficult to attract new users without high %, and for the users because they are exposed to a loss of value if one of the tokens drops in price.
In this case the pools are one token with BNT, the platform token. For example, BTC-BNT, USDT-BNT, ETH-BNT, DAI-BNT, and so on with all pairs. The main problem with these LP Tokens, is that if the BNT token drops in value, and you have the USDT-BNT pair, which usdt not move in price, you are going to suffer impermament loss and therefore it is not so attractive with such volatile tokens. If we look at the price of BNT, we can see that it has been varying and if you have placed this LP, you can be affected by the movements of BNT and lose a significant amount of your liquidity.
The way that Bancor solves this problem, is by being able to put in an LP, a single token. And this token is not converted into an LP, but your token is kept alone, so you mitigate the risk of impermament loss. For example, you can place in USDT-BNT, only USDT and you avoid the risk that the LP has of impermament loss. On the other hand, being an LP or liquidity pool, there should be a 50-50 balance, which means that if you place a lot of USDT and not so much BNT, you should add more BNT to be able to keep adding USDT to the pool.
This is the main problem, if we go to the most popular pairs and with really very good % at the moment, with DAI at 26%, USDT with 29% or USDC at 27% and click on stake and earn, you will see below in space available how there is 0. And below, the amount of BNT that is required to be able to add the token back to that pool. So, you will have to wait for other users to add BNT to be able to participate in these pools, as they are in high demand.
You can activate a notification, when there is space to provide liquidity in DAI, USDT or USDC which are the options with less risk and with a high % compared to other protocols. You will be able to see that the % you receive for placing BNT is higher, since it has more risk as it is more volatile and fluctuates more in price.
To start staking, it is as simple as clicking on the plus symbol. Here in stake amount, indicate the amount you want to deposit in the pool, click below, and confirm in your metamask wallet. In this simple way, you will already have your tokens staked in Bancor generating a good annual %.
In earn, portfolio you will be able to control your positions and claim the rewards generated by your staking tokens. I recommend you to activate notifications and keep an eye on their twitter account for when you can provide liquidity in the most demanded pools, and that have better % compared to other protocols.
In trade you can exchange your tokens for any other token in the Ethereum network. In the same way that other DEX like Uniswap work. In addition to having the function of using limit orders, which will allow you to place a position at a lower price and the order is executed without having to be aware of performing the operation when the price falls.
The operation is very simple, indicate the token above that you want to use, and below the token you want to get. Indicate the amount and click on trade, confirm in your wallet and that’s it. You will already have your tokens exchanged. This option can be useful if you want to exchange your BNT for another token or vice versa.
In DAO we find the option to staking with our BNT, and get vBNT, a very similar function to what we can find in Curve with staking. Staking BNT will allow you to vote in new proposals of the protocol, besides receiving a part of the commissions that the protocol obtains with the staking of your BNT.
You can withdraw your BNT tokens at any time if you do not want to stake them and not participate in the voting of new proposals in the protocol. To stake them, just click on stake tokens, indicate the amount and click on stake vBNT. Confirm in your wallet and that’s it.
I hope this has helped you to know in more detail how Bancor works, one of the main protocols in the Ethereum network. Remember that if you don’t have an account with binance, you can create one below.