A few years ago, the cryptocurrency market majorly relied on centralized exchanges such as Binance, Changelly, Coindirect, and others for continually improving liquidity, high trading volume, and fast settlement.
However, crypto developers have been busy with the parallel world of decentralized exchanges (DEX), built in the form of trustless protocol.
During the fall of 2017, there was a change in momentum for the crypto world. A blockchain protocol company named Bancor raised 150 million dollars in its ICO six months after its token generation event. As if that wasn’t enough, on November 3, 2018, a year after Bancor Protocol was released, Hayden Adams created Uniswap, which beat Bancor in 2020 by generating about 3 million dollars daily for liquidity providers.
If you are a liquidity provider or a crypto trader, you need an on-chain liquidity protocol for automated and decentralized exchange on Ethereum or across all blockchains. In this guide we will do a comparison of the duo, the David and the Goliath, of the decentralized exchange world of crypto.
Bancor Protocol (The Goliath)
The name of the protocol was inspired by economist John Maynard Keynes. He had an idea in the 1940s named Bancor. The idea was to create a unit of account that could track the liabilities of flows and assets. Thus, the Bancor Network expanded on this idea by enabling flow to exchange cryptocurrency without the need for exchange from both parties. Doing this, the Bancor Network hopes to increase the liquidity of cryptocurrencies and their interoperability.
How Does the Bancor Protocol Work?
The Bancor Network banks different worlds of cryptocurrencies. It hopes to add more liquidity to the coins with its network. For example, a smart contract will enable you to exchange an ERC-20 token such as BAT for another token with the aid of the Bancor Protocol. With this, no other party is needed, nor is any exchange required to help with the process.
Besides, the Bancor Network is prepared for the future if there are numerous tokens but no buyers or sellers. The Bancor Network could make the trade for you on its platform. Also, it has a new mobile wallet that allows the conversion of EOS tokens as well. Its aim is to increase interoperability between different blockchains and their relevant tokens.
Bancor Business Model
Bancor relies on its own token, Bancor Network Token (BNT), to generate fees. These fees are generated by the Bancor Protocol and are accumulated over time based on the value of BNT. Although Bancor can aid in creating any ERC20<>ERC20 with any number of assets, BNT still ranks as one of the most common intermediaries used to perform swaps on the network.
During the early days of Bancor, it faced criticism for being a non-ETH protocol token, creating unnecessary friction since BNT is not as strong of a reserve asset as ETH. However, liquidity providers, especially AMMs, understand that this is not an ideal option for the forced impact of tokens on any assets. (ETH or BNT).
In addition, BNT contributes to Bancor Network’s governance. It aids in the decentralization increase of the protocol as BNT holders can vote for the protocol upgrade using the BancorDAO.
When Bancor V2 was rolled out, it came with other distinct features from other DEXs and AMMs like its “David” Uniswap. Bancor V2 can be used to program AMM pools that unlock novel features, e.g., high capital efficiency, token exposure, and impermanent loss mitigation that reduce cost, friction, and risk for liquidity providers and traders.
The “David” Uniswap
In 2018, Hayden Adams created the Uniswap protocol. The underlying technology of Uniswap was believed to have been inspired by a post from the Ethereum co-founder, Vitalik Buterin.
Uniswap technology makes it super easy for people who are interested in the market to join in. Besides, it has led to tremendous growth in the liquidity pools, allowing for a higher volume and larger trades. In short, Uniswap simplified the algorithm and ripped out the token. Also, it incentivizes the community when they add more liquidity over time, and it costs a fraction of the gas to trade.
How Does Uniswap Work?
Uniswap is unique in many ways, but what stands out the most is its model called “Constant Product Market Maker.” Instead of the traditional architecture of digital exchange that uses an order book, it ditches the popular variant model called Automated Market Maker (AMM).
Speaking of automated market makers, smart contracts hold liquidity pools (liquidity reserves) for traders to trade against. These reserves are usually funded by liquidity providers. In return (profit), traders pay a fee to the pool, distributed according to their share.
On the other hand is the Uniswap Model, Constant Product Market Maker. With this model, a market cannot specify the prices they are willing to sell or buy ETH. In this case, Uniswap pools all the liquidity together and makes markets with its own algorithm.
The algorithm is built so that it can always provide liquidity no matter how tiny the liquidity pool or how large the order size. It employs a trick of increasing the price of the coin as the quantity desired increases. Larger orders are at the detriment of this system, but the system doesn’t have to worry about running out of liquidity because it always works.
Uniswap Business Model (How they make money)
You are about to be shocked by this fact. Uniswap doesn’t make any money. That doesn’t mean the founders don’t love wealth, but it is built with a decentralized protocol backed by Paradigm. The fees in totality go to the liquidity providers. None of the founders have a share in the trades that happen through the protocol.
As of this writing, the transaction fee that liquidity providers get in return is 0.3% per trade. Automatically, these are added to the liquidity pool, but all providers can redeem theirs at any time. A provider’s share of the pool determines his fees.
However, the rollout of Uniswap V2 that was launched in May of this year attracted a cut from the fees for the development of Uniswap.
Uniswap is a decentralized exchange protocol built on Ethereum that enables any individual with an Ethereum wallet to exchange tokens without the need of any central party. The exact definition can be given to Bancor, but Bancor has grown its wings across multiple blockchains while Uniswap focuses on the exchanges that happen only on the Ethereum blockchain.
Vladimir Pyrozhenko is an expert in building and launching products and companies, fundraising, accelerating growth, and scaling businesses. He’s the leading Blockchain Technology Consultant at the ReVerb ICO marketing agency.