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How does automatic pricing and market making work?

Smart Tokens™ feature built-in automated market makers. This means that their smart contracts will always buy the Smart Token from and sell the Smart Token to, any user, for any of its connector tokens (or any other token in the network.) The price at which these conversions take place is a function of the Bancor Formula, which balances supply and demand for the Smart Token while holding a constant ratio between a Smart Token’s total value (sometimes called market cap) and its connector token balances.

These ratios (called the connector weight) are configured by the Smart Token creator and may be adjusted to increase or decrease the token's liquidity level. The weight of a connector indicates a Smart Token’s price sensitivity, meaning the extent to which buys or sells affect its price movement. Every conversion affects the price of a Smart Token by altering its connector token balance and Smart Token supply - calibrating the price to maintain the constant weight. When Smart Token prices are out of sync with external prices on exchanges, arbitrageurs quickly act to balance these gaps.

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