The Bancor protocol uses its protocol-owned BNT to jointly fund pools alongside user deposits. In other words, when a user deposits $100,000 in a supported token ("TKN"), the protocol matches the user's deposit by providing $100,000 worth of BNT to the pool. In return, both the user and the protocol receive fee-accruing LP tokens (pool tokens).
When a user withdraws their liquidity, the user's and protocol's pool tokens are both burned. If the user has suffered any IL, fees earned by the protocol's pool tokens are used to compensate for the IL, and the remainder is burned for BNT.
Thus, two burning mechanisms place deflationary pressure on the BNT token:
- LP Withdrawal: the initial BNT provided by the protocol in addition to the fees it earns (less any IL compensation) are burned when an LP withdraws from the system
- Continuous vBNT Burning: a percentage of every transaction on the network is used to burn vBNT (deposited BNT) via the Bancor Vortex
The amount of BNT offered by the protocol to support trading in a given token is governed by the Bancor DAO. The DAO aims to offer protocol liquidity in amounts that are profitable for the network, i.e., where trading fee income exceeds the cost of IL protection.