Epicenter - Learn about Crypto, Blockchain, Ethereum, Bitcoin and Distributed Technologies - Eyal Hertzog: Bancor and the Rise of User-Generated Currencies

Episode Date: August 4, 2017

Bancor is a simple, but hard-to-understand protocol that enables price discovery and liquidity even for assets that aren’t actively traded. Co-Founder Eyal Hertzog joined us to explain how the Bancor protocol works and why they think it will play a key role in enabling a massive wave of small, but interconnected user-generated currencies. We dissected the workings of the protocol, its radical implications as well as the takeaways from their record-shattering, but controversial crowdsale. Topics covered in this episode: Eyal’s background in early internet startups The origin story of Bancor Why asset markets suffer from the double coincidence of wants problem The benefits of Bancor-based Smart Tokens How Bancor and BNT can create a liquidity network Why BNT benefits from network effects What went well and what didn’t go well about the Bancor Crowdsale Why Eyal thinks the price floor was a good idea Episode links: Bancor protocol Bancor Whitepaper Response to “Bancor is Flawed” – The Bancor Protocol Bancor at Coinfest 2017 in Amsterdam - YouTube Bernard Lietear, EURO architect discusses Bancor This episode is hosted by Brian Fabian Crain and Meher Roy. Show notes and listening options: epicenter.tv/194

This is Epicenter, Episode 194 with guest Eyal Herzok. This episode of Epicenter is brought you by Shapeshift.io, the easiest, fastest, and most secure way to swap your digital assets. Don't run a risk of leaving your funds on a centralized exchange. Visit Shapeshift.io to get started. Hello and welcome to Epicenter, the show which talks about the technologies, projects, and startups driving decentralization and the global blockchain revolution. My name is Brian Fabian and Crane. I'm Meheroy. Today we'll talk to A.L. Hexsoc, who is the product architect and co-founder of Bangkok.

Bankor has done one of the most successful ICUs this year in the cryptocurrency space, raising around $150 million. We'll talk about community currencies and how their protocol can lead into a world of smart tokens that don't need conventional exchanges to directly. A.A. Welcome to the show. Hi. So before we get out into bank, tell us a bit about your work history.

What have we done previous before you entered the blockchain space? I'm old. I was born in 74. So you do the math. And I was seven when I started programming on computers. It was like a hobby, had a lot of fun with it, started to sell some software when I was 16, and then joined a unit in the Israeli intelligence, in the Israeli military.

And I've been there for four years. By the end of the four years, I was like an administrator of like a thousand computer network and the one that needs to solve all the problems with no internet. So that was a really good school, four years of school as a programmer and as a team leader in computer network. computer network transitioning to Windows and transitioning to SQL servers and TCP IP.

I then joined a startup that was sold to Cisco after 18 months, class data systems. And then after ICQ was sold to AOL for $400 million in cash, you know, everyone, it was an Israeli company and everyone in Israel were like thinking about studying their own. own internet company. So I started a company called contact.com, which was a social network. There was no web apps. So that was a downloadable app that would connect to your outlook and Palm Pilot, if you remember that. And it was just connecting to all your friends and sharing your information with your friends and status, but that was an actual app for Windows. And then, you know, it was a hot internet startup. We raised like $60 million, but then the

internet crashed. On April 2000, the entire market crashed. It was impossible to raise more money for internet startups. And the company just, you know, died after a while. It was the end of that. And then I started another company called Meta Cafe in Israel. And MetaCafee was also an app for video sharing using peer-to-peer, like, you know, automatically sharing between people using peer-to-peer transfers, like the most popular visa in the world. the world. The biggest hits, but you know, that was because the bandwidth was very expensive. But then it got cheap, so we created a website. And we released very, like the same time that YouTube did, more or less, their website. And we actually grew much faster than YouTube's to like,

you know, one or two millions users per day, like 50 million users a month that was like top hundred websites in the world. But, you know, our biggest mistake was that. that we really focused on bringing you the hit videos. It was more like Reddit videos or dig videos. It was not YouTube. It was the greatest hits, the most viral. Because we didn't understand at the time that 99.9% of the traffic would be on the long tail of videos.

Because people would see videos like the one that we're making right now, people that are into blockchain, would spend much more time with this kind of niche content. There's a small group of those people, but as much, as more niche it is, the more passionate people are about it, like a soccer team or something like that. And we didn't figure that out, the whole long-tail thing. And when I then, after Meta Cafe, you know, it was sold eventually.

I came back to Israel. and eventually, you know, I started to use videos on myself and finding up about Bitcoin because I was watching a podcast in 2011. And when I saw Bitcoin, I got excited because of very different reasons. So first of all, because I was watching alternative media, I heard about all this, you know, Federal Reserve, Jackal Island, you know, kind of stories of how money is created and how central bank works. So I had that background before I learned about Bitcoin.

And I also had a background about decentralized system and file sharing, a decentralized system in file sharing and how it's really hard to kind of deal with those kind of system. I mean, they're unstoppable in their nature. And with that background, when I founded about Bitcoin, I saw the first successful user-generated currency. And for me, that was like the big, aha. There is a currency which is traded all around the world that someone, no one even know who is, made. This is like someone making a video all around the world that no one knows who is. This is possible only in the world of YouTube. It is not possible in the world of TV.

It is the ability for user-generated anything, whether it's user-generated blogs or user-generated videos or user-generated currencies or user-generated discussion groups like Facebook groups. All those things create long-tails. Because you have those people that can, you know, create the content themselves. It's like Wikipedia in that sense. There's a long tail of users that will do that. And when it's easy to create a currency, and that's the big revolution of blockchain,

it made it possible to issue a currency for very low cost. That's an instrument that was not possible. It was not possible to issue a currency at a very low cost until very, very recently. Banks could do that. Before that, royalties did that with coinage. But blockchain is like the YouTube of money in that sense. It brings disability to everyone. And that was what I got excited about.

But, you know, Bitcoin was just one single currency. So the first company that, you know, I started with, some other people was called Appcoin, and what we did there is just our own platform for multiple currencies that have their own integrated marketplaces. And we deployed those currencies in different communities. And like the first communities that we tried on, it was an Israeli mom's community

with like 30,000 young moms in Israel. And we gave them this digital currency and a wallet. And the digital currency was like kind of, of mentally pegged to the shekel. You could not exchange it for the local currency, the shekel, but it was mentally pegged for that. And you would get this currency when you sign up, you'll get a little bit, it will be issued when you, you know, kind of publish something that you're selling for the currency, when you bring a friend to the system. This is like event where the currency is issued. And that grew so fast. Like all the community like of mom used it. And we got to

to a situation where we have a thousand transaction per day in the system for moms buying products and services from each other using their own currency. And we thought ourselves, so there's something here. I mean, we just gave them this tool,

this monetary tool, this monetary technology and they did amazing things. But over a long period of times, I'm talking about a year or so, we saw that there is a problem with liquidity. not just liquidity between the currencies. I mean, that's nice and everything,

but more about liquidity to the rest of the world, to the real world, because as the community matures, it requires that liquidity. And that liquidity could not be achieved for small currencies, because in order to have liquidity, there's a barrier to liquidity in the world today. And liquidity is very important because, I mean,

if you think about every currency as like a network of, value transfer, which is like a local network. Liquidity is the internet. This is kind of the lines that connects between those networks, making like one big giant financial network across the globe. And liquidity is like the connective tissue. And there is a barrier to liquidity because if you are a small currency or a small-scale asset, you're not going to attract for-profit market makers in order.

to create the liquidity that will allow people to buy your asset or sell your asset when they want to without affecting the price too much. I mean, how do you measure liquidity? How much do you affect the price when you sell or buy some percent of the supply? Right? I mean, there's a way to measure it. And that was kind of the problem we identified. And when we saw years later, I mean, we were like, we didn't. have a solution and we winded up Upcoin and then when we saw Ethereum

we we figure out that something else like you know is possible we didn't figure out what exactly but it does like that was a feeling that there's something there and and as we started working on Ethereum we started to kind of

think in that way and I think this is a very important thing that people that do not build stuff on Ethereum they do not think that way. It's like you've never being, you know, you never build an web app. So you only know how to build like desktop

software. So you know, you're not even thinking like browser, JavaScript, I mean, you don't think this way. You don't. And Ethereum is even more extreme because you're kind of writing models to some other computer that you cannot change.

The whole idea is that this global computer, acts like a trustee that you give a contract to. And after you gave the trustee a contract and you pay him the fee and say, you know, do what the contract says, you cannot ask the trustee to change the contract. I mean, you can only act within what the contract says. So it's a whole state of mind.

And then we understood that maybe Ethereum could be the basis for the solution of the liquidity problem that we discovered. And the solution was the banker protocol. which basically, you know, in the most simple sense, solves the liquidity problem and removes completely the liquidity risk, makes liquidity something that you just adjust. You choose what level of liquidity you want, and you're always going to have that level of liquidity,

as the liquidity is expressed. And when you have that solution, then you don't need to have market makers coming to your market and providing that. You have that on your own within your token. And the way that it works is by maintaining reserves of other tokens. Those reserves can be compared to the order books in exchange, to the market debt. And whenever you want to buy a token, you can pay with a reserve and get the token or return the token and get the reserve back.

And whenever you do that, the price changes. And then it's kind of six equilibrium over time. And the nice thing, it works together with existing exchanges through arbitrage. So the prices are always kind of adjusted to the real world exchanges. And if you look at B&T, the currency that Bankor has created, it is completely aligned and synced with all the other exchanges through arbitrage. So people can buy the currency or sell it through the contract. They can buy the token, sell it through the contract with ether,

but they can also do that in exchanges. We've already started talking about Banker a little bit now, and we want to dive deeper into how exactly Bankrupt works, so people understand that. But maybe to introduce Bankor, one of these terms that you guys have used a lot or one of these problems is this double coincidence of ones which i think is quite an important term to kind of understand what banker is about so can you just explain to us what is that and why is it when do we see this problem in

the world so you know it's very uh it's a very ancient concept uh and it's a it's a very simple one It wants money sold for butter. I mean, you know, with butter, you have a problem of double coincidence of once because I need to have what you want and you need me to have what you want. And we have this double coincidence that meets in a certain times, a certain place, and then a transaction can be made. But that is a rare event because it needs to kind of match between us. And money can solve that problem because I can, you know, sell what I have. have for money to anyone at any time and then I can get what I want for money from someone else at some other time.

So money is like the technology that solves a double coincidence of once for butter, for exchanging stuff, this intermediary. You can think about writing as the technology that solves that for human communication. So before writing, there was talking, but then it needed a double coincidence of once of me kind of talking, you listening, and we are in the same place and the same time doing that. But writing has enabled us essentially to talk to the paper and listen to the paper at different times, different places,

and solve the double coincidence of one at that domain. But we still have that problem with asset exchange. Because whenever you go to an exchange, you need to be matched with someone with exact, opposite wants that from you. And this is like the orders, the market makers and the market takers. The order book and the incoming order

and the matching that is taking place that through that, you have the ability to convert one currency to another. But this ability to convert require labor. It requires those market makers. that are for-profit to be there and to work. Like, you know, like a car requires a driver. But you can have a driverless car.

So if you have technology that can replace that labor, and that technology is a smarter, more advanced token. But that's kind of the way that Banker addresses the double coincidence of wants in asset exchange by not requiring to match a buyer and a seller through a technology that calls smart token. That is an extremely important point. We are saving on the human labor of market makers using an automated system in some form.

So one other concept that I find, I find in your writing and your speaking that is worth fleshing out before jumping into, to Bank Cor is that at Bankor, like you were espousing this view, even through your startup Appcoin of your bank or you are kind of esposing this view that there is going to be a long tail of currencies, right? So, like you said, like with your startup meta cafe, you realize that there is like a long tail of videos, which means like if you plot as a graph, the most popular video, it might have

three billion views, the next most popular two. billion. And then if you plot graphs, something like epi-scent, they might have just 5,000 views on an episode, and they might be videos with like 500 views. So the things that are million views and lower are sort of the long tail. They are enormous

numbers of them with like very small number of views. And in your talks, you say that like these small videos with like very small number of views, but very large numbers of them. So you multiply a very large number of videos. So you

multiply a very large number of videos multiply very small views. That total views is much bigger than the views that the very large videos with very large views generated in Agnigate. So most of the views are actually videos with very less views but huge numbers of them. And like you're also

taking this concept and you're sort of postulating that in the future this is going to be true of cryptocurrencies, cryptocurrencies right? Tell us about this long tail and why you say the long tail of cryptocurrency is going to be important. I've been watching many phenomena of the long tail in the internet, which is the age of transfer of information, which is different than what we're experiencing now, which is the age of transfer of value on the internet. But here, previously in the age of information, the long tail was apparent in videos. but not just in videos, but also very much in blogs, in podcasts, in discussion groups, subredits.

I mean, there is such a long-tail phenomenon developing in so many different spaces online. And the reason that it happens in many of those cases is because there are three-tier ecosystems. Now, Twitter ecosystem is a concept that we've been kind of evolving in the recent years when we see platforms that have a specific platform and then a specific class of super users that those super users, they create spaces and have like privileges on spaces that end user come to. So many of those systems like Reddit, you know, you can create your own subreddit and you moderate your subreddit and other users that are coming for your subreddit more than they come for Reddit. Facebook groups is another example. Wikipedia is another example. You have a whole class

of admins in Wikipedia that have more permissions to kind of manage the spaces where other interact. And if you think about it, ICOs is an example. Because every, every, you think about it, ICOs is an example. because every ICO is the token generator, like the foundation, if you will, that kind of create this token and all the users of that token. So we already see token-based businesses happening around us. And if we're just talking about this use case of tokens-based tokens for businesses, we can take just that concept to a very, very long tale because there's a very long tale of businesses in the world. I mean, what is a business that can benefit from a token?

Maybe it can be even a small coffee shop that has like a small loyalty point. And, you know, many of them do have loyalty programs, and they can do that using currency. And that currency can be liquid if you want. because you don't have now a barrier to liquidity. You have automated continuous liquidity that is as good as you want it to be.

So this is an example we see just here, a long till created. And I think that this is just tapping very small part of the potential because there's so much more areas of businesses that have not gone into the crypto space.

Most of the activity we see are teams building technology for blockchains. This is and I think that already there we are seeing the use of currency. I mean, that's the killer app of Ethereum. Think about what people are using Ethereum

as a user-generated currency platform. This is what, this is like the killer app. There's no other. I mean, In this is nice, you know. But, but, you know, the killer app, what now gives Ethereum the prices that he's seeing, I think, is that there is an ecosystem of developers and some of them big-shot developers, many of them, like in your show, that's just making the jump and building stuff on Ethereum.

Developer adoption is by far the most important measurement of any platform. The most important KPI, by far, by far. And that's what Ethereum has. And it has that around creating token for the most part at this point. So I think we're seeing it forming. And, you know, I've been in this kind of long-tail of currency's vision for a long time. But, you know, it took a long time for that to start happening. And I think it will see it more and more.

So, I mean, like, one of the key differences between, like, videos, right? And currencies. So even in, like, blockchain assets, we should differentiate between, like, currencies and things like shares of a business issued on a blockchain. Now, right now we're talking just about currencies, not, like, shares. One of the key differences I feel between, like, videos and currencies is that a video doesn't have a network. effect. A video doesn't become more useful because other people are viewing that same video the same time I am. But a currency has a network effect. Like my currency becomes my Bitcoin

become more useful the more other people use Bitcoin. So does that learning really, does that learning from the video world or the podcast world really translate into the cryptocurrency world neatly because of this feature of network effects. So we can take that learning from a very successful site and concept in general, which is discussion groups and the very, very successful site is Reddit, where we have a long tail of subreddit, the user-generated sub-reddit.

And each of them does have a network effect benefiting from having more users. So you have more content and more curation, more feedback. So, you know, it's very hard, actually. to lift a subreddit to be active from the ground. So you have the network effect for any specific community, but still you have the long tail of communities. And if you think about concurrences in this way,

and I think that there is this very basic tool that is, I would call it store of value, assets. I don't know which name to give it. But that tool, let's call it token, you know, but that tool can be applied to very different use cases that are very similar in nature. Whether it's currency, whether it's loyalty point, whether it's shares, whether it's bonds, whether it's derivatives, whether it's asset tokenization that represents something in the other world.

They all share the same property, which I can take some of it and send it to you. And then you can decide to take some of it and send it to someone else. and maybe they have some special rights, and maybe you'll get a dividend in email, and maybe not. It doesn't matter. It is the very basic same tool. So, you know, whenever I talk about currencies, I'm saying, you know, there are many, many uses.

I mean, the first successful use is actually something that no one has imagined, which enabled funding and building ecosystems. I mean, today, before blockchain, you can only fund and build profit centers. But to fund and build an ecosystem that does not have a single profit center that has multiple. And, you know, the foundation itself is nonprofit. But there's like multiple profit center in an ecosystem. This is something you couldn't do before you had this invention of ICO. And the most successful ICO ever, Ethereum is exactly that model.

They created an ecosystem. They're a nonprofit foundation. They created an ecosystem. By the way, it doesn't mean that the Ethereum creators, They do not profit personally. They did, so I've heard. But it is still a non-profit entity which is being created. That is all sole responsibility is kind of developed the ecosystem of Ethereum.

And it worked. Here's an ecosystem. It's happening. A lot of resources are being diverted to that ecosystem. And this is what a currency, a token, enables you to do. Golem is an ecosystem of software developers, of service providers, of service consumers. If you look at every ICO, I mean, most of them, not all of them,

some of them are actually for-profit businesses, which makes sense, because again, an ecosystem is made of for-profit players that are all centralized, if you will. But the ecosystem is decentralized, and there are many for-profit. And because when Facebook and Microsoft tried to create ecosystem around their companies, they always failed eventually because you have a profit center in the middle, like Apple or, you know, those companies. And you always like competing with your ecosystem for the margins. So if someone is like too successful in the ecosystem, you acquire them or you're like, you know, building a competitive service.

But it's not a good idea to have an ecosystem around a for-profit model. So the kind of historical model of companies of shares is just not suitable for ecosystem. We found out. But here's a model that works. It works well. And it's successful, at least in one. And perhaps in many more. So this is a kind of example of how people can use the ability to issue their own currency.

It's pretty incredible in my eyes. I mean, I'm very excited about watching this unfold. Yeah, absolutely. I mean, I fully agree. And I think the network effects that you get from tokens, from ICOs are just incredibly. incredible. And they are so powerful, especially in the startup phase of having any project. This episode is brought to you by ShapeShift, the world's leading trustless digital asset exchange, quickly swap between dozens of leading cryptocurrencies, including Bitcoin, Ether, Zcash, Gnosis,

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which you guys have called a smart token often, that kind of leverages Bankor and that basically has a reserve of another token that kind of serves this liquidity, its price stabilizing function. So let's maybe we can run briefly through the example of a project that says, okay, we want to create an Ethereum token, and we want to use the Bankrupt Protocol

to make this a more powerful and better token. So can you explain how would that work? and how would Banker in this context work and interact with this token? And what are the benefits of that? So Banker essentially function as built-in non-profit, automated market maker for the token. So it has some capital of another token. And with this capital, it works as this market maker and works as market. and works as market maker because at any point,

he's willing to buy the token from you or sell the token to you in a specific price. But as you buy or sell the token, the price changes. And the price changes is based on how much you bought or sold the token. By the way, it doesn't matter in hand how many transactions, just how much you bought in general or sold in general. That affects the price. And there's no spread.

essentially. There is a, there is a slippage, which is as you have a larger transaction, then your price is increasingly worse, but there's no spread between the buy and sell price. And this is what a smart token does. It's being its own market maker. So why would anyone want that? So the first thing is that you don't need to be listed in an exchange in order to be liquid to other currencies. I mean, this is just a very straightforward advantage. You're always liquid. If someone has ether and wants to buy your token, can do it right now, just by sending the ether to an address.

Someone has your token and wanted liquidated back to it. It can do it through the Ethereum network at any given time, any given moment. So that's a good service for your token hold that many people will want. And the other thing is that it provides some kind of a stabilizing effect on the token. Because again, there's this non-profit market maker in the middle that says, you know, I'll buy from you, I'll sell from you. And it uses this very simple concept that the price in which the market maker, the automated market maker would buy and sell from you is just going to be the. price that maintain that the reserve has a specific ratio to the market cap of the token. So if you can define a reserve to be 5%, that means that there'd be exactly 5% of another

token in your reserve compared to the market cap of your token. And then automated market maker will just make sure that this remain the case by using very simple formulas that are kind of taking care of that. It's path independent. Again, it doesn't matter if you split your transaction into 10, you're always going to get the same price. You're always going to end up in the same way. And this price is kind of equalized with the market through arbitrage. So if your token is actually also traded on some exchanges, which have their own users and their own integration to other tokens. Then, you know, you obviously, you can trade in both places, which is very common in this

world where a token is traded in many, many pairs, many, many exchanges in parallel. And arbitrage is kind of balancing the price between the places. So just another place that arbitrage does that. And if you go to Coin Market Cup, you can see in Bank or one of the markets is the smart contract. So it's in the list of the markets that trade B&T to Ether. Let's run through this example now. So let's say we are creating Episano coin and we want to use Bankor. And so you set a reserve ratio, right, which we say, okay, you know, there's a small contract which manages this Epicenter token. And now let's say we want to say that per

ether that's in this contract, we're going to, you know, kind of allow a 1000, or we want a backing of one ether per 1,000 epicenter token. So that then means that somebody wants to get an epicenter token. They can basically send an ether there and then the smart contract sends to them 1,000 epicenter coin. And the same thing, somebody has some epitherto coin. They want to get rid of them. you send that person sends this epicenter coin to the smart contract and the smart contract pays out the ether and then destroys those epicenter coins so that is again kind of this you have to say equilibrium where you know the reserve goes up the token supply goes up reserve goes down token supply goes on but you have kind of the same backing ratio at all times does that roughly uh yeah i mean it's it's accurate

It is accurate. We are careful of using the world backing because backing kind of means that the token does not have a utility that is worth something because it's backed. And some tokens are like that. Like Tether is a token that is worth something because it is backed by dollars. And it makes sense for that. And a maker is going to be a stable coin backed by ether, perhaps. So those scenarios are great. But this is less about backing.

this is about providing a liquidity pool. Like, again, the market depth of a market that gives you kind of the leeway in order to convert one to a data. So it's more like a liquidity pool and less like as something that gives value to the token. It only gives liquidity to the token. You know, if you're liquid, but no one wants you, it doesn't going to help. Your price is going to crash. So we have this example of the Epson coin. but let's say we want to incentivize people to put money in that we want to do an ICO

and we want to have some kind of linkage so that if the projects becomes really successful the coin is going to go up in value how can you combine that with bank or because if you have this fixed ratio of you know one ether 1,000 epithenter coin can you have both yeah so I'll tell you how let's say that the epicenter coin has a reserve in ether. And it has a 5% reserve just for the sake of Excel. Now, you can

issue that currency and, you know, sell it to everyone that want to be promoting his products and sponsorship on Epicenter. And you tell everyone that you will be giving sponsorship exclusively

for that currency. So if you want to get to our show, you better get a whole of that currency. And you can do all kind of neat tricks like saying, and whenever someone pays us with this coin, we burn half of the payment. In the smart contract, you know, it just burns. So it's like a deflation. You can do all kind of stuff.

But that's the easier token, and people hold your token. And if people want sponsorship from you, then they'll have to spend that token, and they will have to acquire that token. And that will create the demand for the token. Now, that alone is something that is enough to generate some demand for a token because there is a demand for sponsorship on epicenter. That's just one example. Now, in this case, what the Bank of Protocol will do is just make sure that it doesn't matter how many people use that token, maybe it's just 100. It is always liquid.

You can always buy it. You can always sell it. But when you buy it and sell it, the price changes. So if the token costs $1.00 right now and I bought a lot of it, maybe by the end of that purchase, it worth $1.2. And if I buy a lot more, it will be worth $1.4. And this is how it works, just like in exchanges, just like in the bid ask model, but in a more predictable way, the more predictable fashion, if you will. Maybe one question that would be useful to clarify. So when you say it is a 5% reserve.

ratio, like what does that mean? Does that mean you would have five ether for 1,000 epicenter coin or does that mean the value of the ether would roughly correspond to 5% of the value of all the epicenter? Yes. So the ratio is between value and when you have a reserve in ether, then your token is denominated in ether. The price is denominated in ether for the sake of that particular reserve. Again, you can have multiple reserves with different currencies. Then you will have a price denominated in those other tokens or currencies. But if you have a reserve in ether, your price is denominated in that reserve and in ether.

And then your market cap is the price times, you know, the supply, right? This is how you could calculate that. So the ratio should be between your reserve balance and your market cap. And it is always maintained on 5%, so if, I have a thousand tokens and each one, the current price is one ether. So my market cup is a 1,000 ether. And if I have 5% reserve ratio, it means that I will have 50 ether in my reserve. That's what it would mean.

When we are creating epicenter coin, somebody is creating one of these smart tokens. We have a choice of setting the reserve ratio to be like 5%. 10%, 20%, or 30%. What advantage do we get if the reserve ratio is higher? What disadvantage do we don't interest if it's smaller? It's adjustable. You can adjust it. I mean, you can even create a smart token where you set

like some kind of minimum and maximum reserve that the community can vote anywhere between. So you can do these kind of things. The way you change it is that you slowly change it over time, so it has like very minimal effects on the current price. But having more reserve is having higher CRR, having higher percentage, is essentially having higher liquidity,

which is not always good, because the ultimate liquidity is pegging. It's just one-to-one. You never affect the price in any way when you're buying and selling. and when you have a very small reserve, let's say, 0.01%, then almost every attempt to convert from the reserve token to the smart token would affect the price drastically. So you want the price to be affected when people are buying the token and selling the token,

and you need to decide by how much. So it is really liquidity becomes like a setting. rather than you know something that you hope to achieve from market makers in the setting you can set higher liquidity or low one

so the way I understand that is let's say that the total value of Hepacity coin is to make 10,000 ether right and let's consider like two scenarios scenario one in which in reserves

is 5% so 5% of 10,000 1,000 ether would be what? 500 ether, right? And scenario 2 is, reserve is 30%. So 30% of 10,000 ether is 3,000. So epicenter coin has a market cap of 10,000 ether. It might have a million units each worth 0.01 ether,

but the market cap is 10,000 ether. And then scenario one, it's like 500 ether in reserve, and scenario 2 is 3,000 ether in reserve. So the difference between these two scenarios is, let's say, I want to go and now get 20 ether worth of epicenter coin, which might be say 2,000 epiCenter coins. So when the reserve is 5%, the price will increase and when the reserve is 30%, the price will also increase. But in the 30% case, the price will increase less as compared to the 5% case. Exactly. And the same on the opposite side.

And I'm trying to sell epicenter coins. The price will decrease in both cases. In the 5% case, it will decrease more than it will in the 30% case. And there's some kind of sensitivity to this, right? Like maybe there is like an optimal point where you spend less on, where you put less, at least in reserve, but you also get less. but you also get good like price

volatility in some cases you want stability and in other cases it's less important because when you have when you have more volatility

then the price can go up or down faster to a target price so it's kind of it would move faster with the lower liquidity and it will move slower with high liquidity markets

and that's kind of the general rule of how it behaves but again this is just making that a setting and solving that through the token itself the mechanism that which is

the reason that we you know we need to issue more token because if you're buying new token, you're buying the token from the token, it needs to be able to issue to you. By the way, it issues in a ratio that, let's say, with a 10% reserve, if the token doubles in value, then it would issue like 10% more of the token. So that will be the rate of new token issuance. If it doubles in value with 10% reserve, it will be around 10% of new issued token. So it's not so bad in terms of... It's like...

an up-round, if you will, in a startup, if you're familiar with the term. One of the questions, though, here becomes that, like, when we say create epicenter coin, when we put Ether in its reserve, how exposed are we to the volatility of Ether? Like, let's say tomorrow Ether crashes by 50%. What would happen to Epicenter Coin in that scenario? So if epithet of coin is traded only through a smart contract and only to ITER and ITER completely crash, that obviously will have a big effect, but it's very important to kind of look around and see how most token behaves. And many of the tokens are traded with different other tokens like maybe Ethereum and Bitcoin and maybe U.S. and there's like those already standard token that many tokens traded to.

And the same goes, the same works with smart contracts. So, you know, if you don't want to be exposed to the volatility of ether, you can, for example, have a die token, maker die token in your reserve, or maybe some DIGs gold token in your reserve and hold some of that. So you can create those reserves externally or internally to the token. They're like different solutions for that. But that will provide a stability that is based on several tokens. And arbitrage would do the kind of balancing between them. But it would not rely on a single exchange to a single token, essentially, in that scenario.

But let me just clarify something. So let's say now we have, you know, these 10,000. percent of coins and we have this or 10,000 ether for epicenter coins and they have a certain price, right, in dollars. And they have a certain price because there's certain like fundamental value associated with them, right? Certain amounts of ads being sold or viewers and projections, et cetera. And now we have an underlying asset that's basically, you know, 5% of the value of these

epicenter tokens in ether, right? And now you have the ether price collapses, but the fundamental, let's say the fundamental value of epicenter coins is unaffected. So, but then the price of these epicenter coins in, let's say, dollar terms would also crash. Is that right? So how is, how is that dynamic? Yeah, I will tell you, what will happen is that the price in ether will, would actually increase because, as ether price drops to the dollar, it would create an arbitrage and makes it very cheap to buy your token for ether

and relative to the price of buying your token for dollars. So it would encourage people to buy your token for cheap ethers and sell it on full price to the dollars. And essentially moving that crash and kind of balancing it with all the other market, that so it will have some effect because one market is crashing but as the market crash you know the you know the the admin you know can we can even choose to emergency like shut down this particular exchange between ether and and and the token because it's just like another market it's not

it's not anything you can have many of those some of them can open some of them can close it's very dynamic. It's every smart token is just another market that connects between multiple, you know, two or more different tokens and allow them to convert between them. So, so you're free to create your own stability system. And, and, and, and, and, and, and, and, and, and, and, and, and, and, and, And that would not allow your token to crash if ether is crashing completely. It would just have, you know, some temporary effect. So in other words, it's like if epicenter token were sort of representing the profits of the epicenter enterprise, like, okay, the advertisements, you make money and the epicenter, and this money is distributed to the epicenter token owners.

Then an ether crash, so like an ether might crash, but our audience remains. the same, the money we make remains the same. So even if ether crashes, the value of epicenter token, the intrinsic value of epitherto token remains the same. So in some way like this market will adjust that epicenter token is like if it was like

100 epicent tokens to one ether before, ether crashed, it would be now like 50 epicent tokens to one ether. And this would automatically be discovered through the smart contract itself. Exactly. Okay. So we get this thing, banks.

Like when you want to issue your new currency, you can link it to another currency or basket of currencies in reserve, and then that creates like this automated liquidity or trading system. So now in this vision, where does B&T fit in? So you have this bank on it, book, token. I think that generally it's important to understand kind of the scope, the context,

and the context is that Banker is a foundation that is created to promote and develop the Banker Protocol. And the foundation is creating an ecosystem that uses B&T as its token. Just like, again, Ethereum foundation create an ecosystem that uses Ether as its token. Now, the ecosystem that Banko creates is very different than the Ethereum because it's a liquidity network. What we're creating is not a blockchain. It's a liquidity network. Now, liquidity network is a network that you can jump from any type of token to another in minimum hops. Because every hope costs you more money.

Every conversion costs you more money. So you want to get to the minimum hops. So as we create the liquidity network, we created with B&M. T in its center. So we create, for example, we announce that we're going to create a token changer between B&T and Nosis. So everyone can convert between them. Now, since B&T has a very large 10% ether reserve, and I can explain why that is considered a big number for us, but because of that, you can also exchange to ether. So now you can exchange from Nosis. to ether. And then you'll be able to exchange between NOSUS to any other token that has

kind of a token changer with B&T. So B&T is like the network token of that particular liquidity network that we are building and we have funding in order to achieve its goals. So getting the liquidity, putting the initial liquidity in the token changers, you need to build that. So that's the goal of the foundation and making that protocol used by many. Can you explain? So what are the kind of network effects around BNT? Or to what extent we'll see it going to be a link between B&T and the success of the bank core protocol usage?

because, you know, for example, why not use ether as a reserve token since, you know, that's so much more prevalent and popular? Why does Gnosis in this case have an advantage of using B&T? The idea is that when you create an ecosystem on blockchain, I think we've seen it with every ecosystem with Bitcoin, with Ethereum, and I think we'll see that with every ecosystem. see it with more ecosystem, one of the most important properties of those ecosystem is to benefit the early adopters, to incentivize the early adopters. The early adopts of Bitcoin, you know, were incentivized to use the system. And I think that's, I mean, you know, a very noble concept

that, you know, if you build a product, you build a, so you have the developers, you have the people that have contributed funds to that product. So you want to incentivize them. So incentivizing the early adopters to kind of build that network is done using that currency. And because that's the whole, I think, structure of building an ecosystem

and funding in ecosystem. The reason that people are willing to sponsor and contribute to new ecosystem is because they are incentivized to do that, because if the ecosystem is indeed successful, proven successful, and provide value to people, you know, that would benefit all those groups. So I think that everyone that joins being the first one to join P&T,

he is better to work with B&T because B&T is not the token that everyone used, but it's the token with the most token changes. So that we're going to build more token changes. for B&T than to any other token because this is our charter. This is our goal. And BNT having the most token changes could be exchange, could be the shortest path to exchange to everything else. Now you can have an additional irreserving ether.

You can have only a reserve. I mean, you can do whatever you want essentially. I mean, it's just a smart contract. But we're creating this liquidity network that makes it, you know, just the shortest, the lowest price, the lowest price. cost to convert between point and B because you have this intermediary currency that connects the other. So it's just one network of liquidity.

And maybe there will be more like, you know, there is Ethereum Classic. You can always kind of take the smart contract and create your own liquidity network. And, you know, maybe it would be better. But dynamic shows that it, you know, this is what people that copied the Bitcoin code originally thought, oh, I'm just going to create my own currency. and it's going to be great. But you know, creating a liquidity network, it's hard. It's a lot of work.

So you can try to do that. You can make it successful. And, you know, it's fine. This is the beauty of this industry that, you know, people can try. That to me seems a very ripple-less answer, actually. So you know this other project, like Ripple, which has this token XRP. And like the way, the way like Ripple, talks about XRP or sales

XRP is that they want to make it that exchange bridge, right? Like when you want to go from the Mexican peso to the Indian rupee on the Ripple ledger, you will go through XRP because there's a market between XRP

and Indian rupee and XRP and the Mexican peso. And as long as like the market depth is very high on both sides, XRP is the best bridge currency. Yeah. They want to position XRP as that bridge currency

and that is supposed to be the utility. Now, the way I would translate like your answer to here is like you're inventing a new exchange technology right. So you don't need a market maker and humans and to exchange between two pairs but you're sort of preserving

that same kind of business model, right? Like trying to be like whenever you're going from one token to one another, trying to position BNT as that bridge. So token 1 would have BNT in reserve and token 2 would have BNT in reserve. So it's the shortest path. Now, it could be the case that token 2 has Ether in reserve, token 1 has BNT in reserve, then BNT and Ether, like BNT has Ether in Reserve.

So that becomes like three hops. If the N tokens connected to B&T, it makes sense for token N plus 1 to also connect to B&T. Exactly. Because that would allow the users of token n plus 1 to easily go to the other end tokens and the users of these first end tokens to go to token n plus 1. So basically you're trying to build that form of bridge. So like as like now approaching this as an investor's perspective in B&D, right? So, like, when I think of it as an investor in B&T, suppose I like this market hypothesis,

what are the key performance metrics or key performance indicators? An investor in B&T ought to look at. What must happen in the market for the investor to know this vision is going well? And what metric if it fails means that this vision isn't going well? Yeah, it's a great question. and it's a very simple answer. BNT, being a network currency, is a currency for currency.

It's a token for tokens. We don't build it, we didn't build it in order to be used by end users. We build it to be used by other tokens as reserves. I mean, this is the whole bank or concept, is that money can use money, right? So the most important metrics is how many other tokens

hold BNT in reserve and what is their market cap? You can measure their volume. So you can really see who are the members in this network? Who are the other tokens? And today it's only the B&T, but we have a couple of tokens that will be launched soon

with their own smart token. Hopefully NOSIS is going to be one of them. And we'll start to see some kind of, of network between different token through B&T. But that will be the measurement the most important. See how much it's used and how the network grows. And then the volume is also very important because one of the use cases for Bank of Protocol for existing tokens is something called token changer.

The token changer is essentially a smart token with two reserves, each like 50 50% CRR, 50% reserve. And basically, it's a place that people, it works in the exact same manner, but you just park your liquidity there, whether you have nois or you have B&T, you can park it there. And whenever someone is doing conversion between the two, some of the conversion will be kept as fee in the reserve. So the reserve will grow at a specific rate, according to how many people are converting from each other. So it kind of generate profit for those who are holding this smart token,

this token changer's smart token. So this is like a for-profit structure to provide liquidity that kind of offer people fees in order to park their liquidity in a smart token to provide liquidity between two tokens. And the built-in mechanism that having one or two reserve is, is kind of the nonprofit model that you can use to use the banker protocol. Cool. Fantastic. So we're already running pretty late and there's so much more that we want to talk about. But there are, I think, a few things that we want to at least address.

So first of all, the crowd sale. So you guys did a massive crowdfunding campaign, which I think it was just above the Dow. and I think it was the largest since I guess now there's maybe some that have surpassed it with like tasels and eels and stuff but I mean of course any crowd sale at this point is going to be surprised pretty quickly but but yeah so so first of all of this crowd sale there was a lot of controversy around it one of this was that there was this cap which is supposed to be one hour and it ended up ended up being three hours so you guys extended it. Can you guys talk about this?

Like what was going on there? Why did you make this decision? I mean, what happens is that, you know, we didn't anticipate Ethereum network to not being able to handle the load for so long. We thought that, you know, within a reasonable period of time, the transaction will be cleared. But apparently there was, you know, very, very, very. high load on the network.

And we were talking to many, many people that were addressing us and telling us that are just not able to get transaction through within the first hours. And the whole idea of the first hour is just to let anyone that try to send funds in the first hours to succeed because it was about inclusiveness. Now, the inclusiveness was something that was, you know, we wanted to let anyone that wants to wanted to participate to do so. But we didn't need all that money. So we had this cap. You know, some went to the reserve. The cap was 200,000 ether. That was the cap. Which just, by the way, 30 days before the ICAO was $18 million. And the price just jumped like

crazy. But that was the cap. And anything above the cap, which ended up to be like $40 million, dollars went to a price floor which is like not ours it's it's it's it's just money back you know limited money back guarantee to all the investors in the in the iCO price that's what it is and and you know when when it's there it's there and it can be run out which which is did when ether plumped from 400 to 130 it was a very rough um drop and and at that point, a lot of money kind of left the crypto industry, like the crypto space. And we saw this price flow being used. But it's just protecting the investors and keeping the kind of minimum price for much longer

by having this kind of price flow, which is a mechanism to accept more money than you need without taking that money, just providing that money as a service to the community. and maybe within few years, if some of it is not used, you can take it. But it's a mechanism to just allow more to participate, which we like. We think it's a great thing to allow anyone that wants to participate and not let them to compete about being the first transaction or put like insane gas fees. We didn't like what we saw on other ICOs. So this is what we did here. And people that wanted to end after an hour, you know, they want to.

I'm sure there were a lot of people like that because a lot of people are making a lot of money from ICOs that do not supply the initial demand. So there's like the initial demand of $100 million and they sell like for $30 million and then it goes to the exchanges and the price goes up and a lot of flippers and sculptors like making tons of money

and returning their investment plus and keeping those tokens for free just because they were able to get in the beginning. We didn't want that. And people that wanted it to end within an hour where barely anyone could put a transaction in. They want to have this manufacturer scarcity, and it's just not something we believe in, something that is done, but we didn't believe it's the best way for us.

I very much agree. I think it's very important that we figure out structures where, you know, people can put in money and, you know, there's not this whole gaming elements of trying to be first, than trying to get in. And at the same time that you can still have a cap, because it's, I think, insane to just say we take whatever money we can get. I think that's also a very poor approach. So I think it's certainly an innovative and interesting way.

You guys have done that, and you certainly succeeded also in getting a large number of people to put money in. I think it was over 10,000. I think that's more than actually they were in the Ethereum crowd sale back then. Maybe a similar amount that was in the Dowel crowd sale. I don't know if you have that number. I don't, but it was one of the largest, and we were very happy about having so many. Yeah, yeah.

Now, I guess the point where I'm sort of like wondering about the structure is my feeling would be, I mean, I don't know how you feel about that, but do you think that if you, didn't have a price floor, the price of B&T would be much lower today? It could be, but if we didn't have price floor, it means that either we had that money and maybe the market would kind of price the fact that we have that ether and would give us a better price because of that. Or it means that we had a hard cap, which means that we left a lot of demand, which is unsatisfying, and that would actually mean a much higher price for not having a price lower because all that

demand will push up the price when it comes after the ICO. We actually satisfied $150 million of demand right at the ICO. So there was no additional demand to push the price up, which was our intention. We didn't think that our value should change five minutes after the ICO. It's the same company. the market just price it. Yeah, I guess what's sort of the thing that I had mind, although maybe this is getting a little bit too off track,

would be like, let's say you returned the money above the cap, maybe one says you return it three months later, so there's some cost of putting it in. You then may still see, but yeah, I don't know. I mean, I'm not sure that would be any better than what you guys have done. So I certainly think it is from that perspective, even though I didn't study it that closely. I think it's a reasonable design that you guys chose for the crowd sale.

Yeah, I think it's important to try new things at this space and see what works and what's not. And be ready to, you know, I think that the price flow was a great thing. And if we were thought about it before, we would not have any one hour limit. I mean, we probably would keep it up for a week. But we didn't think about price flow initially. We created that because initially the community was complaining that we'll have too much money under our control. We didn't think that we'll get so much in the cell, but because they said it, we offer that price flow to give that assurance that we don't want too much money. We're going to have a price flow.

But that was a good idea. Maybe the one hour was not such a good idea, but it's stuff you learn if you try. Yeah, absolutely. Well, Ayal, I think we are kind of at the end of our episode. It's been lots of interesting stuff to talk about. I think Bankroll is going to be a topic that hopefully will come back to, right? Hopefully we'll see some interesting projects using Bankor going to market. And I think some incredibly interesting things could be built when we have these liquidity networks. I certainly agree that it's a very interesting direction. and yeah, I think probably a lot of listeners will still have open questions.

It's not an easy concept to understand Bancor. It's not a very intuitive concept to understand. Of course, we'll link to the white paper. We'll link to some of the other writings you guys have done, which includes some very nice writings. I was particularly impressed also with your post, which was a response to Amy Gincere's criticisms of you, which was a half-a-book chapter that he wrote. but I think quite well addressed a lot of the points he had. So yeah, thanks so much for coming on and for sharing about this super interesting project you're working on.

Thank you for having me. Okay, and well, thanks so much for a listener once again tuning in. Of course, as I mentioned, we'll have a whole bunch of links to talks and other resources about bankers. If you want to learn more, you can go there. And yeah, episode is part of Let's have Bitcoin Network. You can find this show and other shows on Lesnar Bitcoin. And if you want to support the show, you can do so by leaving an iTunes review for us. Unfortunately, there is no epicenter coin you can purchase.

But a review you can leave. So thanks so much and we look forward to being back next week.