Contrary to other AMM protocols, Bancor uses its own protocol token, BNT, as the counterpart asset in every pool and trade.
Using an elastic BNT supply, the protocol co-invests in pools alongside LPs with swap fees earned from its co-investments.
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.
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.
