Bancor Protocol: Continuous Liquidity and Asynchronous Price Discovery for Tokens through their Smart Contracts

The problem the paper names

A small token may have no natural counterparty at the moment someone wants to trade. Bancor's proposal is a contract that always offers a price against its reserve, so discovery does not wait for two humans.

What the design proposes

• A smart token names a reserve and a reserve ratio.
• Buying the smart token deposits reserve and mints supply. Selling does the reverse.
• The price is a function of supply and reserve, not of an order book.

How the mechanism is specified

• The reserve ratio determines how violently the price moves as supply changes.
• Connectors between reserves are how the paper imagines paths across tokens. Each hop depends on its own reserve.
• Continuous liquidity is not liquidity at a good price. The formula will quote even when the reserve is nearly exhausted.

What this page does not treat as proven

• Later Bancor products, insurance mechanisms and governance are not the 2017 formula.
• A reserve ratio chosen for marketing rather than for inventory risk will be discovered by the inventory.
• The paper does not make a thinly traded token into a deep market. It makes a formula.

Why a venture studio still reads it

Read Bancor alongside Uniswap v2 when a team says 'automated market maker' without writing an invariant. The two papers are not the same curve, and the difference is the business.