Why BNT Is Crucial to the Bancor Network
People often ask about the utility of BNT, Bancor’s Network Token. Why not use ETH, EOS or another blockchain-level token instead of BNT?
In short, BNT is a utility token for token creators, who use BNT to:
- automate fast, fair and affordable conversions of a token; and
- enable instant conversions of a token across different blockchains.
To achieve this functionality, token creators connect to the Bancor Network by staking an amount of their tokens and BNT in a smart contract which they own and manage. Each smart contract in the Bancor Network serves as an on-chain liquidity pool which receives and dispenses tokens at algorithmically-calculated rates. BNT is the common token within each liquidity pool through which conversions are processed. For instance, a conversion from DAI to BAX would convert DAI for BNT and then BNT for BAX — with the user experience being an instant, on-chain conversion from DAI to BAX.
Using BNT as a common token in every liquidity pool allows users to perform instant token-to-token conversions without a counterparty — including cross-blockchain conversions.
As this is a new paradigm, before we dive into the mechanics, let’s first define some key concepts:
Token Creators — Anyone can be a token creator. They may be the operator of a network that has issued its own token, an individual or a local community. A token creator can be the original issuer of the token, or they can be someone who simply wants to provide “continuous liquidity” to an existing token.
Continuous Liquidity — A token which is continuously liquid can be converted without a counterparty — that is, without another person on the other side of the conversion who is willing to buy or sell it. Even if there is not a single person in the world buying or selling the token, someone can still convert the token if it is continuously liquid.
Liquidity Network — A network of open-source, decentralized smart contracts which are programmed to receive and dispense tokens at algorithmically-calculated rates based on the dynamic supply of tokens in the network, enabling autonomous convertibility between tokens connected to the network.
Network Token — Tokens connect to a Liquidity Network through a Network Token. The Network Token is what allows any token to be converted to any other token in the network, in no more than two “hops”. These “hops” between tokens occur automatically behind the scenes, so that users can execute token-to-token conversions within a single user action.
Automated Market Makers (AMMs) — In a Liquidity Network, AMMs buy and sell tokens according to prices calculated by a predefined formula programmed into a smart contract. AMMs effectively replace order books(human-mediated & unpredictable) with code (machine-mediated & predictable).
Cross-Chain Conversions: The act of converting a token based on one blockchain into a token based on a different blockchain. For instance, converting an ERC20 token into an EOS-based token, and vice versa.
Ok, now back to the mechanics.
As mentioned, token creators connect to the Bancor Network by staking an amount of their tokens and BNT in a smart contract, creating the on-chain liquidity pool. Conversions are executed against this on-chain pool using an automated market maker to price tokens and facilitate conversions.
Without BNT staked in each liquidity pool, the liquidity pools on Bancor would have no common token through which to automate conversions — which are effectively performed via algorithmic token transfers between the pools. But why must the common Network Token be BNT? Why not use ETH or another popular token?
Crucially, BNT operates concurrently on multiple blockchains, thanks to its ability to issue and destroy itself simultaneously on multiple chains. This allows the Bancor Liquidity Network to be blockchain agnostic — that is, it can run on any blockchain and enable instant cross-chain conversions between them.
Interoperability between blockchains is one important reason why Bancor does not use ETH, EOS or any other blockchain-level token as the Network Token in the Bancor Liquidity Network. Doing so would restrict the network to only one blockchain, dramatically reducing its reach, flexibility and independence. For instance, if the Bancor Network used ETH as its Network Token, the network would only be able to process ETH-based token conversions. Furthermore, if Ethereum (or any other blockchain) experienced a critical setback or decline, the Bancor Network would be adversely affected.
Today, the Bancor Network can perform non-custodial conversions between Ethereum and EOS, allowing instant and secure value transfer between these two popular chains without users having to give up possession of their private keys or their tokens at any time. Tomorrow, the Bancor Network may connect to any number of blockchain ecosystems. BNT is the bridge through which these non-custodial cross-chain conversions can occur, massively increasing its utility.
Since 2017, more than 1.2M transactions have occurred through BNT across 40K+ user wallets, totaling more than $1.5B in token conversions. Around 10% of BNT’s total supply is staked in Bancor Network liquidity pools facilitating these conversions, making BNT one of the most active utility tokens in the world.
Bancor’s mission is to enable user-generated currencies to thrive, including new or niche tokens which may not be easily convertible on traditional order books. We’ve been experimenting with pool-based automated liquidity since the summer of 2016, launching the first Liquidity Network in June 2017. Years later, we’re thrilled that this new model for liquidity has led to billions in conversion volume, via the open-source Bancor Protocol, while inspiring numerous entrepreneurs and development teams to follow in Bancor’s footsteps and launch Liquidity Networks of their own. This is the beauty of blockchain’s open-source revolution.
Bancor’s technologies — including BNT — are for the first time in history empowering a “long-tail” of currencies with continuous liquidity, ensuring that users can easily create and convert custom tokens at any time — without reliance on trade volume or exchanges. As we see more and more tokens emerge to address a widening array of use-cases, the utility of BNT will continue to grow, as communities utilize the token to plug into Bancor’s cross-chain liquidity network.