Hello Spyder12,

Thank you for your comment. As this is a new concept, it can sometimes be confusing, which is exactly why we appreciate feedback such as yours as it helps us to improve the system and our messaging.

Firstly, we are most certainly not trying give coins/tokens an artificial value by simply making them a derivative of something that has market value. Rather, we are leveraging the new reality of decentralized smart-contract enabled blockchains, in which for the first time in history, software agents can hold money in a trust-less environment. This enables us to address the "Double Coincidence of Wants Problem" in currency/asset exchange in a new and novel way. If a token created using the Bancor Protocol has no utility or value in and of itself, the reserve will not provide value, in fact it will very quickly be drained and the price of the token vis-a-vis the reserve currency will collapse to near zero.

As a background analogy, before the advent of writing, a Double Coincidence of Wants problem existed in the domain of information exchange between humans. You needed to be in the same place, at the same time, to share information. You could solve this problem with labor (passing information by word of mouth) but eventually writing provided a technological solution separating the moment information is produced and consumed. The same Double Coincidence of Wants exists in Barter, where the chances of finding someone with exact opposite wants in real-time is low. Money provided a technological solution, enabling the buying and selling to happen at different times with the money acting as a tool enabling barter over time and space.

However, in the domain of currency exchange, we still have a Double Coincidence of Wants, where a bid/ask is required. Exchanges/orderbooks/speculators providing matchmaking/liquidity have been the mechanism ("labor") to address this issue for the past few hundred years. However, with the advent of the Computers -> Internet -> Blockchain -> Smart-Contracts, we can now for the first time, provide an alternative, technological, solution to the Double Coincidence of Wants in the domain of currency exchange. That is the purpose of the Bancor Protocol, which proposes an alternative mechanism for real-time matching of bids and asks, while preserving basic market fundamentals of supply and demand. Essentially, each token created with the Bancor Protocol has a built-in (intrinsic) automated market maker in the form of the Smart-Contract which operates in a transparent, predictable and immutable fashion.


The price is not simply set by a mathematical formula, rather, a mathematical formula is being utilized in order to adjust the price, based on the buying and selling activity of the token, reaching an equilibrium where the two are balanced. When a buy/sell order for the token is made, the formula performs a continuous calculation that is essentially like breaking up the order into infinitely small pieces, each resulting in a new price, similar to how continuously compounded interest is computed.