Bancor Network (BNT): What is it, and how does it work?

9 Mins read
Bancor Network (BNT) What is it, and how does it work

The last few years have seen a proliferation of decentralized finance (DeFi) protocols looking to leverage billions of dollars worth of crypto assets held by institutional and retail investors. One such platform is Bancor Network (BNT).

Indeed, Bancor Network is one of the most well-known projects focused on decentralized applications (dApps) and the conversion of tokens. While it’s had a rough time with legal challenges and a widely publicized hack, it remains a platform worth considering.

The protocol shows great potential, especially after recent upgrades to the network and the increased utility of its native ERC-20 token, the BNT. 

This article will give you everything you need to know regarding Bancor, including its history, how it operates, its unique features, and the role of the BNT token.

What is the Bancor Network?

Bancor was a pioneer in the DeFi sector. It’s a blockchain-based platform that allows users to exchange cryptocurrency amongst themselves without the interference of third parties.

The protocol was developed in 2017 by brother and sister Guy and Galia Benartzi. It was built using more than $153 million raised from nearly 11K investors, including American venture capitalist Tim Draper.

Galia Benartzi, Bancor Network Co-Founder. Source: Wikipedia

It’s part of the Bancor Foundation, headquartered in Zug, Switzerland. The network is backed by a diverse team of professionals with years of experience scaling blockchain and fintech startups.

Bancor became the first Automated Market Maker (AMM) on the Ethereum network and has since played a catalytic role in the evolution of DeFi, decentralized exchanges (DEXs), and AMMs.

However, much like the rest of the industry, Bancor’s initial model had several glaring weaknesses:

  • Impermanent Loss: This is the loss incurred when the price of a crypto asset you’ve deposited changes between the time of deposit and withdrawal. The loss generally results from depositing two different crypto assets in an AMM-based liquidity protocol.
  • Involuntary Token Exposure: This is when liquidity providers are exposed to the price movements of multiple tokens in a liquidity pool, causing them to lose their long positions on their best-performing tokens.
  • Slippage: This is the difference between an order’s anticipated price and the price at which it’s actually executed. It mostly happens when market orders are placed during periods of high volatility. It can also occur when a large order is filled, but there isn’t sufficient volume at the selected price to keep the bid at its present level.

In 2020, at the height of the DeFi craze, Bancor released a new and improved version of the protocol dubbed “Bancor v2.” The latest version addressed the weaknesses of the old model by introducing features such as impermanent loss insurance and single-side exposure, which we’ll discuss later.

Bancor allows users to make near-instant trades without the need for intermediaries. The process is completed within the Bancor wallet, using BNT tokens to facilitate trades. This approach has enabled the platform to provide users with automatic liquidity for trades while allowing Bancor to remain completely decentralized.

Since starting in 2017, the platform has processed more than $1.5 billion worth of token swaps. The network has over 100 liquidity providers serving as nodes, helping secure the platform and provide millions of dollars in liquidity by staking BNT tokens.

How Does the Bancor Network Work?

The Bancor Protocol is unique, and to better understand how it works, we’ll need to take an in-depth look at two aspects of the platform: its crypto liquidity pools and the BNT token.

Bancor Crypto Liquidity Pools

Essentially, the Bancor protocol enables token liquidity via a network of interconnected smart contracts. Each contract, known as a Bancor liquidity pool, functions as an AMM, executing on-chain, peer-to-contract token trades and earning a fee on each transaction.

To complete trades, centralized exchanges (CEXs) use order books to match buy and sell orders in a bid/ask model. This system generally works well when there are enough buyers and sellers of a token. 

However, it tends to assume a certain level of volume and interest in a token. If a token has a low volume at any time, it becomes difficult to buy or sell. Additionally, individual transactions can cause unpredictable price swings, reducing the token’s usability and adoption.

Bancor’s liquidity pools eliminate a token’s dependence on transaction volume and guarantee constant liquidity for tokens because they no longer rely on matching buyers and sellers and instead use on-chain “reserves” as ever-available liquidity sources.

For all trades on Bancor pools, the pricing is solely determined by the platform’s bonding curve formula. The price paid per token unit rises in tandem with the order, while the price paid per unit falls as the size of the liquidity pool increases.

Because the size of a liquidity pool and the size of an order are known before a transaction is submitted, the cost of a trade can be computed clearly and deterministically. In this sense, Bancor’s smart contract-managed liquidity pools provide an algorithmic replacement for inconsistent human-mediated market makers. Therefore, low token volume and erratic order books don’t need to worry traders as much.

Staking liquidity on Bancor. Source: Bancor Network

This innovative market-making approach has proven to be a sea change in the DEX space. Traders now have guaranteed on-chain liquidity with straightforward pricing, eliminating the need for a counterparty. Token holders can also convert idle holdings into productive assets by providing liquidity to these pools and earning returns on swap fees imposed on trades routed through Bancor.

This has resulted in the creation of a new asset class, known as “liquidity positions,” from pooled market-maker liquidity, allowing for broader, more lucrative participation in market-making.

BNT (Bancor Network Token)

BNT is a Bancor-protocol-specific ERC20 token. It’s based on the Ethereum network and is extremely useful throughout the Bancor ecosystem. It’s also the standard reserve currency for all Bancor-developed smart tokens. 

The token is also available on exchanges other than Bancor. Furthermore, it’s compatible with any liquidity pool powered by either Ethereum or EOS because it runs on both networks.

Every token on the Bancor platform is linked to the BNT token, for example, ETH/BNT, LINK/BNT, and so on.

Users can stake their BNT into any trading pair pool on the Bancor network to earn rewards and a portion of trading fees. You can maximize your rewards by simultaneously staking BNT and another cryptocurrency such as Ether (ETH). By staking BNT, you are entitled to 70% of the rewards. Staking ETH or any other cryptocurrency in the pair, on the other hand, yields only 30%.

In the most recent iteration of Bancor, users who stake BNT in so-called “protected liquidity pools” are issued a new token called the Bancor Governance Token (vBNT). Protected pools are pools that have been whitelisted through a voting process by Bancor users. There are currently more than 60 of these protected pools consisting of the most popular cryptocurrencies, including Basic Attention Token (BAT), DAI, Loopring (LRC), Chainlink (LINK), and USD Coin (USDC).

Holders of vBNT can vote on proposed changes or updates to the Bancor platform.

Bancor Vortex

Vortex is a solution enacted in February 2021 that enables Bancor users to provide liquidity in BNT to borrow funds while earning a yield from swap fees.

Vortex reimagined the existing vBNT system, giving the token more utility in addition to governance.

The added functionality Vortex gives vBNT tokens means users can exchange them for actual BNT tokens. This feature turns Vortex into a no-liquidation loan platform that enables a liquidity provider to get future incentives right away. The loan eventually pays itself because the principal will keep accumulating exchange fees.

Vortex has no liquidation because vBNT and BNT are essentially the same tokens. As a result, any change in the value of BNT is closely mirrored by vBNT.

Vortex also features a flat-fee token supply management system for buying and burning vBNT. This system transfers 5% of total protocol swap revenue to the vBNT Burner Smart Contract, making vBNT a scarcer asset. In the long run, this process becomes deflationary and beneficial to the Bancor ecosystem.

The flat burn rate will be gradually reduced over a period of time, with a final target of 15%. It’s expected that as trade volumes increase, so will the burning of vBNT. Each vBNT token burned denotes a BNT token permanently locked into the network. This process raises the scarcity of BNT and, in turn, supports the long-term growth of the platform’s total locked value (TLV).

BNT Tokenomics

The figures below were accurate as of this writing:

Total Supply: 198,857,636

Circulating Supply: 198,857,636 (100% of total supply)

Market Capitalization: $83,365,535

24hr Trading Volume: $3,994,821

Price: $0.42 per BNT token

Other Bancor Network Features

Bancor Network’s latest upgrade. Source: Bancor Network

Now that we’re done with the main aspects of the Bancor network, let’s take a closer look at what features Bancor v2.1, arguably one of the most significant updates for the Bancor network, has to offer.

Impermanent Loss Protection

As stated earlier, impermanent loss occurs when the prices of the tokens in an AMM pool diverge in any direction. The greater the divergence, the greater the impermanent loss.

The new Bancor upgrade transfers impermanent loss risk from liquidity providers to Bancor’s exchange protocol, which aggregates and backstops impermanent loss risk across its pools. 

To compensate for the network-wide cost of impermanent loss, the protocol uses fees earned from BNT co-investments in pools. Some pools have a high impermanent loss and low fees, while others have a low impermanent loss and high fees. If there aren’t enough fees to fully compensate a liquidity provider’s impermanent loss when they withdraw, the protocol mints BNT to make up the difference.

When a user makes a new deposit, the insurance coverage provided by their impermanent loss policy grows at a rate of 1% for each day the stake is active and matures to full coverage after 100 days.

Following this period, any impermanent loss suffered during the first 100 days—or any time after that—will be covered by the protocol at the time of withdrawal.

Withdrawals made before the 100-day maturity date only qualify for a portion of the impermanent loss compensation. However, no impermanent loss compensation is offered for stakes withdrawn within the first 30 days. In such cases, the liquidity provider incurs the same impermanent loss as a standard automated market maker.

Single-Sided Liquidity

While most AMMs require liquidity providers to take on exposure to multiple assets, Bancor v2.1 allows users to provide liquidity with a single token while maintaining 100% exposure to the token. 

Single-sided liquidity allows liquidity providers to stay long on a single asset and earn returns for hodling, in addition to swap fees and mining rewards. 

Swap fees are automatically compounded in the pool and paid out in the tokens staked. On the other hand, hodling rewards can be manually re-staked to the protocol to compound yield.

In single-sided liquidity, users first provide liquidity to a pool in the form of BNT or a risk asset of their choice, such as ETH, LINK, or wBTC. In the case of non-BNT deposits, the protocol will co-invest BNT in its pools to match the asset deposited. For instance, if a user deposits $10,000 in wBTC, it causes the protocol to emit $10,000 of BNT tokens into the wBTC pool.

The protocol-invested BNT will remain in the pool, earning fees until the associated stake (i.e., user-deposited wBTC) is withdrawn. At that point, the protocol will burn the BNT it has invested and its accrued fees.

If a BNT token holder contributes BNT to the pool, protocol-invested BNT may also be burned. In this instance, the user-deposited BNT replaces the protocol’s position in the pool by burning an equivalent amount of protocol-invested BNT.

Liquidity Mining Rewards

In Bancor v2.1, the protocol’s governing body may select pools for the BNT liquidity mining program. Currently, the program has 15 pools: ETH, wBTC, LINK, USDC, DAI, USDT, SNX, AAVE, UNI, GRT, ALPHA, ENJ, ROOK, MATIC, and wNXM.

Each pool is assigned a fixed number of minted BNT tokens distributed among the pool’s liquidity providers. Pools are initially voted into the program for at least 12 weeks of rewards, after which Bancor’s decentralized autonomous organization (BancorDAO) may vote to extend pool rewards every 30 days.

To compound their yield, liquidity providers may re-stake their single-sided rewards to the same or different pools.

Cross-Chain Token Swaps

The Bancor Network offers a streamlined user experience for quick token swaps across multiple blockchains via the Bancor wallet. Unlike CEXs such as Coinbase, Bancor’s cross-chain conversion process allows users to keep control of their funds and private keys.

Bancor employs a formulaic price calculation system known as “token connectors,” which allows a wide range of tokens to be linked without the two parties to a transaction having to be directly matched.

This service is currently available for Ethereum and EOS, but plans are in the works to expand multi-chain liquidity to other blockchains in the DeFi ecosystem.

Bancor Network’s Advantages and Disadvantages


  • Avoidance of impermanent loss for liquidity providers.
  • Supports a wide variety of token pairs on Ethereum and EOS. At last count, there were more than 8,700 token pairs accessible to trade on Bancor Network.
  • Allows single-sided deposits, eliminating the need for counterparties.
  • It offers lucrative rewards, especially for deposits made using BNT.


  • Newbies may find the platform hard to use.
  • No support for fiat deposits.
  • It doesn’t offer a platform for technical trading.


Bancor is not the only DEX project offering AMM trading and token swaps, but it’s unquestionably the oldest and most established. The innovative platform is reimagining the AMM economy by providing liquidity for a wide range of tokens and eliminating intermediaries from token swaps.

Furthermore, Bancor v2.1 has proven effective in mitigating impermanent loss while introducing single-sided liquidity, cross-chain token swaps, and lucrative liquidity mining rewards.

These developments demonstrate that the platform encourages users to explore passive earning strategies in the crypto space while boosting DeFi liquidity. As a result, Bancor’s daily usage and transactional volumes may continue to rise.

Naturally, it’s advisable to do your own research into not only Bancor but as many platforms offering similar services and benefits before settling for any.

Leave a Reply

Your email address will not be published. Required fields are marked *