How Bancor works
Bancor is made up of liquidity pools, with each pool containing a combination of BNT tokens and one other cryptocurrency. The liquidity pools are how Bancor offers cryptocurrency trading.
Anyone can deposit their cryptocurrency to Bancor and become a liquidity provider. In return, they earn interest based on the amount they deposit. Users can deposit either of the cryptocurrencies in the liquidity pool, but interest rates are much higher for those who deposit BNT.
Users can also trade any of the cryptocurrencies available on Bancor. When a trade occurs, BNT acts as the intermediary token connecting different pools and blockchains. For example, if you want to trade Ethereum for USD Coin, it would go from ETH to BNT to USDC.
There's a small transaction fee on every trade. The transaction fees are used to pay liquidity providers.
Everything on Bancor is managed by smart contracts. These smart contracts fetch prices when people want to trade crypto, execute trades, and control the protocol's liquidity pools.
Connections
Bancor has worked with many companies and DeFi projects over the years. Here are a few of the ones worth knowing about:
- Changelly, a cryptocurrency exchange, was one of the first platforms to offer BNT when it added the token in June 2017.
- Lending protocol Aave (AAVE -0.35%) teamed up with Bancor in 2020 to release a hackathon challenge. It also integrated with Bancor that year and launched a liquidity pool there.
- Kyber Network (KNC +0.36%), a liquidity hub for DeFi platforms, started working with Bancor in 2019. The two created a bridge to integrate Bancor's liquidity pools on to Kyber Network.
- Multiple fiat gateway providers (MoonPay, Banxa, Simplex, Ramp, and Mercuryo) have integrated with Bancor. They allow Bancor users to buy and sell crypto with fiat money.
Can I make passive income with Bancor?
You can make passive income with Bancor, and it's one of the protocol's biggest benefits. When you deposit cryptocurrency to Bancor's liquidity pools, it pays you interest. Your deposit can be BNT tokens or any of the other types of cryptocurrency that Bancor supports.
To earn interest on Bancor or use any of its other services, you need a blockchain wallet. Connect your wallet to the Bancor app, and then you can deposit your funds to a liquidity pool.
Unique risks
Among the biggest risks with AMMs are vulnerabilities in their smart contracts. If a smart contract has any issues, it can be exploited by hackers to steal funds from the exchange.
Bancor doesn't have a perfect track record. In July 2018, a wallet it used to upgrade smart contracts was compromised. Criminals used the wallet to steal about $23.5 million in cryptocurrency.
The exchange was able to freeze $10 million in stolen BNT tokens, but the rest of the stolen items were other types of cryptocurrency that it had no control over. Bancor reported that the stolen funds were from a reserve balance and that no customer-owned wallets were compromised.
Another incident occurred in June 2020 when Bancor discovered that it had released a smart contract with a security vulnerability. To prevent users from losing funds, Bancor had to hack itself to migrate at-risk funds to a secure location.