Relay Tokens are a type of Smart Token with two connector balances, each of which have a 50% weight and can contain any amount of an ERC20 token. A Relay Token's primary utility is to allow converting between each of its connector balances.
You can think of a Relay Token as a balance scale with each side representing the total supply of one connector. The way to buy tokens from one side of the scale is by adding tokens to the other side. The Relay Token does not know what the market deems a fair price for each connector, it only knows that each side of the scale represents the same amount of value. For example, if we were to create a Relay Token named ENJBNT, where one connector has a balance of 1,000 ENJ tokens and another connector balance of 10,000 BNT tokens, the Relay Token will function with the value of 1 ENJ = 10 BNT. If someone tries to buy 1 ENJ from the Relay, they will need to send the Relay Token's converter 10 BNT tokens. After that transaction occurs, the supply of the tokens in the relay changes, and now the Relay Token assumes that 999 ENJ = 10,010 BNT.
As you can see from the example above, every transaction changes the conversion rate between the connectors. This ensures that the balances held in the connectors cannot mathematically ever be depleted, as the supply of tokens on one side of the balance is reduced, the exchange rate between the two sides increases so that it will never reach zero.
Another benefit of this model is that the demand of any one side of the balance dictates its price relative to the other side. When the supply of one connector is reduced, the price increases. This allows the market to determine the price of each side of the Relay Token.
As with all Smart Tokens, when a Relay Token’s calculated conversion rates differ from prices on other exchanges, arbitrageurs are incentivised to act as “liquidity movers” between the Relay Token and other exchanges, ensuring conversion rates represent “real” market prices over time.
The entire 'balance' mechanism is held in the Relay Token itself, and the holders of these Relay Tokens are the liquidity providers, since they purchase them by adding connected tokens to their connector balances (i.e. BNT or ENJ in an ENJBNT Relay Token.) The Relay Token’s value represents both connected token’s balances held by the Relay Token. This is because the combined connector weight - the ratio between each connector balance and the Smart Token’s total value - is 100%. Currently, Relay Tokens use a 50/50 weight configuration between the connectors. For example, if a Relay Token holds 100 BNT and 100 ENJ tokens, and both BNT and ENJ prices are 1$ on the market, this means that the Relay Token’s total value is $200. See “Example 2” in the Relay Token Examples spreadsheet.
A Relay Token may be optionally configured by its creator to take a contribution from every conversion, keeping this percentage amount in its connector balance (the one in which the conversion came from). This causes the connector balances to increase with usage of the Relay Token. As connector balances increase thanks to these contributions (all else held equal), the value of the Relay Token increases, enabling larger conversions to be processed with lower price slippage. See “Example 3” on the Relay Token Example spreadsheet, which displays the difference between a Relay Token with no configured contribution, and one with a 3% contribution.