Most recent update: [ June 6, 2022]
No securities regulatory authority has expressed an opinion about the Crypto Contracts or BNT, made available on the VirgoCX Platform, including an opinion that BNT is not itself a security and/or derivative.
What is the Bancor Network?
The Bancor Network is a decentralized protocol meant to facilitate the transaction of one cryptocurrency to another. What makes the Bancor Network so interesting is that it is designed to run on both the Ethereum and EOS blockchains, allowing seamless transitions from one or the other. Its derivative coin, the Bancor Network Token (BNT), is used primarily as an intermediary during currency-to-currency transactions, with percentages of the transaction fees being rewarded to the network’s liquidity providers. The token, as it exists on both blockchains, can be either an ERC-20 or EOS token.
In decentralized finance (DeFi), a protocol like Bancor is known as an automated market maker (AMM), which is a type of mechanism that provides liquidity without the need for a financial institution to manage it directly. Bancor is notable in that it is the pioneer of AMMs, being established well before DeFi had become a mainstream concept, and inspired other protocols like Uniswap to build on its foundations.
Who created the Bancor Network?
The Bancor Protocol was introduced via whitepaper in February 2017 by Israeli founders Galia Benartzi, Guy Benartzi, Eyal Hertzog, and Yudi Levi. The protocol’s designation was chosen as a nod to economist John Maynard Keynes, who coined “Bancor” as the name for a supra-national reserve currency he proposed as part of his “International Clearing Union” concept at the Bretton Woods conference in 1944.
How does it work?
Unlike using an exchange, Bancor’s protocol allows users to convert digital tokens instantly and directly. Notably, this is advantageous for smaller, niche altcoins with limited liquidity as Bancor facilitates their transactions with minimal difficulty and fees. To power this functionality, the protocol relies on BNT; this smart token acts as a virtual reserve currency that removes the middleman for transactions. The protocol links these tokens to smart contracts that hold reserves of other compatible tokens, which are then converted automatically depending on the volume of transaction requests.
To encourage users to contribute to the automation of the protocol, the Bancor Network rewards users that provide liquidity with BNT tokens. One of the core advantages that Bancor provides that other AMMs do not is that liquidity providers need only to lock in a single token in one of its pools in order to access that particular pool, rather than locking up a pair; for example, if one wanted to access the ETH/EOS pool, they would only need to stake tokens in one or the other, and the protocol instead deposits BNT to match the other token in the pair. With this form of single-sided liquidity, it allows liquidity providers to commit long-term to a single asset and continually earn portions of transaction fees and mining rewards. Furthermore, it helps protect the liquidity provider from any loss that may occur should that pool lose value.
To ensure that liquidity providers are always retrieving the correct price for the coins they have staked through the platform, Bancor utilizes oracles, which are off-chain communicators that relay information from external sources into the network. Using this technology, Bancor can independently adjust the amount of tokens relative to their price, allowing liquidity providers to consistently retrieve an equal value of tokens from when they were deposited.
The Bancor Network Token has an elastic supply – what this means is that the supply is constantly changing to maintain the liquidity levels in all of the protocol’s pools. Its smart contracts burn or mint tokens as needed in order to maintain equilibrium; when a liquidity provider stakes an amount of BNT tokens for an equivalent amount of ETH in a pool, for example, then the protocol burns BNT from the circulating supply in order to maintain balance.
Consequentially, BNT cannot be mined as it is constantly being created and burned during token conversions. Its value exists primarily as a medium for these transactions, and can easily be converted into ETH or EOS, which can then be utilized by a user to exit into fiat. BNT is traditionally an ERC-20 token, but as it runs natively on both blockchains, an EOS-based mirror token exists to reflect its ERC-20 counterpart.
BNT is used both for network rewards and for governance. Rewards are chiefly gained through providing liquidity as stated above, but can also be gained through mining rewards. As BNT cannot be mined in the traditional sense, these mining rewards actually come from the BNT liquidity mining program, in which the network’s decentralized autonomous organization, the BancorDAO, votes on a particular pool from which stakers wish to receive rewards from. These pools encompass a wide range of tokens including ETH, MATIC, USDC, and more. Once a vote has been passed, the selected pool is active on the program for a minimum of 12 weeks, after which the DAO can vote to extend or switch to a different pool. And, of course, the BancorDAO also facilitates votes towards the overall development and direction of protocol.
To build on the rewards process, Bancor’s 3.0 update now lets users earn rewards on the entire Bancor network from providing liquidity onto a single asset, further simplifying the incentive process by eliminating the complications of having to move your BNT from one pool to another.
Despite its long tenure, Bancor is regarded highly for its security and transparency. Its smart contracts and network security are regularly audited by Peckshield and OpenZeppelin, and the reports are publicly viewable on GitHub. It also boasts one of the highest scores on DeFiSafety, being awarded a 90% safety rating in 2021. Furthermore, Bancor encourages its community to contribute to its network security by issuing a bug bounty for each of its version updates, in which anybody can report vulnerabilities in the network directly to the developing team.
Drawbacks and Risks
One of the primary drawbacks that adversely effect the value of BNT is that the industry is now filled with competitors that offer similar services, primarily with giants like UNI and SUSHI. While it is noted that BNT has different goals and provides its users with different ways to earn rewards, its competitors command a large portion of the market. To exacerbate this, BNT primarily operates on the Ethereum blockchain, meaning that users are often at the mercy of surging gas fees during high-volume periods.
Another risk that is found with algorithm-based tokens with a relative value is that negative changes in the underlying asset of the pool can create negative returns for the liquidity provider, potentially outweighing the profit from fees. Bancor’s single-sided liquidity and inherent impermanent loss protection does mitigate this for the most part, but investors should still perform their due diligence and gain a full understanding of the network’s functionality before diving in.
Before listing BNT on the VirgoCX Platform, VirgoCX performed due diligence on BNT and determined that BNT is unlikely to be a security or derivative under Canadian securities legislation. VirgoCX’s analysis includes reviewing publicly available information on the following:
- The creation, governance, and location of BNT and/or its primary development team;
- The supply, demand, maturity and liquidity of BNT; and
- Legal and regulatory risks associated with BNT.
Statutory Rights under Securities Legislation
VirgoCX is offering Crypto Contracts on crypto assets in reliance on a prospectus exemption contained in the exemptive relief decision Re VirgoCX Inc. dated May 30, 2022 (the Decision). Please be aware that the statutory rights in section 130.1 of the Securities Act (Ontario), and, if applicable, similar statutory rights under the securities legislation of each other province and territory in Canada, do not apply in respect of the Crypto Fact Sheet to the extent a Crypto Contract is distributed under the prospectus relief in the Decision.
To learn more about the Bancor Network and its virtual reserve currency BNT, check out these useful resources below:
Bancor Network’s Official Whitepaper
Bancor on Kraken
Bancor’s Gemini page, provided by co-founder Eyal Herzog
Bancor on Investopedia
Bancor on Cryptobriefing