If you've read the Smart Media Token Whitepaper you may have noticed the section on "Automated Market Makers" which are special contracts based on the Bancor Protocol allowing guaranteed liquidity for SMTs that implement them.
This essentially eliminates the need for what we think of as a traditional crypocurrency exchange where buyers and sellers make orders in an order book. Now users can buy and sell directly to an algorithmic smart contract 24/7 and buy or sell tokens instantly.
When setting up a SMT you'll be able to back it with a reserve tank of STEEM while setting a reserve ratio. For example, if you back your SMT with a 2,500 STEEM reserve and have CPR (constant portfolio ratio) of 0.25, the theoretical market cap of your SMT would be 10,000 STEEM.
The cool part about it is that if someone attempts to dump a ton of tokens on the market all at once, the algorithm will adjust the price lower accordingly and the reserve tank will never go to zero. Alternatively, if someone attempts to buy a lot of tokens at once the price will adjust upward similarly.
Let's take a look at some visual aids to help us gain a better understanding.
Above you see a typical depth chart on an exchange. The buy and sell sides are often mismatched because it is based on the individual buyers and seller decisions. It is a source of market inefficiency.
Now let's look at the this depth chart above. This is what a depth chart that is controlled by the Bancor Protocol looks like. Notice the perfect mirroring of the buy and sell sides. The algorithm perfectly adjusts the price based on demand leading to a highly efficient and convenient market.
I really think this will be a game changer and I'm quite excited to see it implemented on the STEEM blockchain.
This post was not meant to be an exhaustive explanation of the Bancor Protocol or how it will be implemented with SMTs. Please read the SMT Whitepaper for a more thorough and in depth explanation: https://smt.steem.io/smt-whitepaper.pdf
Also the original Bancor Whitepaper is a great resource: https://www.bancor.network/static/bancor_protocol_whitepaper_en.pdf