Why Bancor Will Probably Be A Pump-And-Dump Nightmare for Investors, Unless it Changes
Bancor has a innovative solution to a real problem: low liquidity in small currencies. They solve the liquidity problem of small, rarely traded currencies by using a reserve currency and smart contracts. This ensures that coins will always have value and can always be exchanged. This in theory helps small, less traded currencies benefit from the crypto revolution.
For instance, Johnson Family Corn could issue a JFC coin to insure against crop failure. In this instance, the coin is replacing futures contract but the set-up is basically the same. JFC could fund the seeding and watering of the crop and make sure the Johnson’s make money. Investors might prefer this to buying corn futures because at any point they could break the contract and be guaranteed money in the reserve currency. It is actually a fantastic scheme in this regard. You could really see small operations benefiting.
The problem is that the price function of Bancor based currencies will attract market manipulators. The classic Pump-And-Dump scam is not only easier to do, but a lot safer to do, ensuring it will occur often if steps aren’t taken by Bancor now.
What is a Pump-And-Dump Scheme?
Scam artists basically raise the price of an asset through buying it and hyping it, and then sell at the high point. They leave the people they duped “holding the bags” with an asset that is now worth a lot less. These schemes are normally very risky to pull off. The Pump-And-Dumper risks being a bag holder himself and losing a lot of money.
With the Bancor price model and smart contracts the Pump-And-Dumper’s job is much easier and less risky. See the first image for the Bancor price model. As coins are bought the price will naturally go up and as coins are sold back to the smart contract the price will naturally go down . The Pump-And-Dumper buys low and, if he is successful in raising the price enough, he doesn’t even have to trade the coin to stooges (he can), he can just sell the coin back to the smart contract and abscond with an almost risk free profit. He also gets to exit at the high point. How nice for the scam artist.
The almost risk free profit is the key here. Successful Pump-And-Dumpers who can hype coins well are guaranteed a profit. Bancor will attract them in droves unless it takes measures to address this. The only risk to the pumper is being found out and having current coin holders dump on him. He technically could lose money, but with Bancor he is much less at risk (his exposure is limited). Another important thing to note is that even when the pumper gets dumped on, all other coin holders are hurt too. Only the dumper presumably benefits.
How many stooges does the Bancor pumper need to fool in order to profit? Not many. At zero transaction costs, he only needs to convince others to purchase more coins from the contract than he purchased to have a guaranteed profit.
Do not misconstrue this to be investment advice! I am not telling you to buy or sell Bancor.
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RoosterRed
As long as people buy an asset only due to the short term up trend they identify on the charts, pump and dump will be possible, and these people will be seperated from their money. It is really as simple as that.
Bancor protocol actually make it much harder to pump up by trading between fake parties, and the risk to the pumpers is so much higher since at any moment a whale can grab all the funds pumped to the reserve in a single transaction.
OK. I am confused what your point is here. I initially thought it was something else. I am just going to take your words literally (which isn't always accurate). Feel free to correct my interpretation.
Yes, pump and dumps will always be possible, the problem is that with Bancor they are easier to do and less risky to do, so more scammers will do them. I explain this in the article. I am glad Bancor is looking for solutions to sudden explosions in value that are often shady in nature. Good for Bancor.
With a Bancor backed coin you can pump by buying the contract. The price naturally goes up the more you buy. You don't need fake parties to pump. You could use them though. I don't see what prevents this, but it isn't necessary because of Bancor's pricing mechanism. EDIT: I guess savvy investors could identify trading between fake parties more easily because of the spread between the coin's trading value and its contract value. That is a good feature, but again, pumpers don't need to trade between fake parties to increase the cost of the coin.
Your final point I don't understand and I ask you to clarify it. Is the scenario you are proposing one where a whale buys all the available coins or one where he sells all his coins back to the contract? If it is the former, then the price would go up (way up) and the pumper profits. If it is the later, I covered that in my article (second to last paragraph).
It is possible for a pumper to lose money if he is found out and the current coin holders sell their coins for the reserve currency. However, the pumper's position still isn't a total loss like he risks in non-reserve backed coins, so I don't see how that is more risky at all. It certainly could be sudden though.
Also, this is something I should have mentioned in the article and might add later, in the scenario where the pumper is found out and dumped on by whales currently holding the coin, all other coin holders are hurt too. So it isn't a good scenario for anyone but the whales (who presumably made money on the dump). It isn't good when the one avenue that screws pumpers also screws everyone else.
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STOPDear roosterred,
it really true the opposite, Bancor mechanism is going to allow an
"increased price stability. A smart token that is liquid on exchanges, effectively uses the Bancor protocol to mitigate sharp price increases by collecting an additional reserve and issuing additional supply, as well as prevents sharp price decreases by releasing reserves and decreasing the supply. It dampens the price while still enabling it to go up or down, just less sharply so. We argue that stability has significant value to the token holder, though it is less good news for traders that profit from greater market volatility." --> [source: Bancor is flawed]
However, there is a bug bounty program 2.0 going on, with a reward for "Price Discovery Formula Bugs/Solutions". When your findings are relevant, and your proposal interesting for Bancor, you will be rewarded properly and will contribute to the success of the project itself.
I strongly suggest you to partecipate and support the Bancor Community in getting stronger!
With best regards
.
This comes off as unnecessarily aggressive. I was upset at the time over getting mysteriously banned from another medium. I am glad that Bancor is trying to help the situation with these bounties and research.
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