Smart Token is the first technological breakthrough build on Ethereum’s smart contract. This is the first of it’s kind and @Bancor-Network as the pioneer is working hard as they head towards mainstream adoption.
Smart Tokens are standard ERC20 tokens which implement the Bancor protocol, providing continuous liquidity while automatically facilitating price-discovery. The smart token’s contract instantly processes buy and sell orders, directly through their smart contract, which drive the price-discovery process. Smart tokens do not need to be traded in an exchange in order to become liquid.
But before we elaborate more, we need to understand what is ERC20 tokens and what is Smart Contract.
ERC20 token is the standard token that defines a common list of rules for all Ethereum tokens to follow, the rules are generally basic functionality issues, including how tokens are transferred and how users can access data about a token.
Smart Contract is a computer protocol that facilities the transfer of digital assets between parties under the agreed-upon stipulations or terms. Smart contracts are one of the functionalities that sets Ethereum apart from other blockchains. A smart contract automatically enforces the conditions by taking the information in the contract as input and assigning values to these inputs. These values then help in execution of required actions under contractual clauses.
With the capability of smart contract, Smart Tokens can have reserve in other token (e.g ether, gnosis, civic) similar to how a central bank which issues a currency also owns foreign currency reserves.
Based on it’s reserve functionality: Smart Tokens are issued when purchased and destroyed when liquidated, therefore it is always possible to purchase a smart token with its reserve token, as well as to liquidate a smart token to its reserve token, at the current price.
This is what makes Smart Tokens always liquid no matter how much the supply & demand is. In other words, smart tokens set their own price, in respect to each reserve token they hold.
Here is the "Price Discovery Formula" or formula to define the price of a Smart Token:
To make it simple, Price is a kind of fraction between a smart token’s reserve balance and it’s supply.
Bancor Network Token (BNT) will become the default reserve for all Smart Tokens created on Bancor Protocol. BNT forms a monetary structure where increased demand for any of the network’s smart tokens drives up the value of BNT, benefiting all other smart tokens holding it in reserve.
Just like the unlimited potentials that Smart Contract has, there is no limit to Smart Tokens functionality in the future. They will become smarter as new features developed.