Bancor has a innovative solution to a real problem: low liquidity in small currencies. They solve the liquidity problem of small, rarely traded currencies by using a reserve currency and smart contracts. This ensures that coins will always have value and can always be exchanged. This in theory helps small, less traded currencies benefit from the crypto revolution.
For instance, Johnson Family Corn could issue a JFC coin to insure against crop failure. In this instance, the coin is replacing futures contract but the set-up is basically the same. JFC could fund the seeding and watering of the crop and make sure the Johnson’s make money. Investors might prefer this to buying corn futures because at any point they could break the contract and be guaranteed money in the reserve currency. It is actually a fantastic scheme in this regard. You could really see small operations benefiting.
The problem is that the price function of Bancor based currencies will attract market manipulators. The classic Pump-And-Dump scam is not only easier to do, but a lot safer to do, ensuring it will occur often if steps aren’t taken by Bancor now.
What is a Pump-And-Dump Scheme?
Scam artists basically raise the price of an asset through buying it and hyping it, and then sell at the high point. They leave the people they duped “holding the bags” with an asset that is now worth a lot less. These schemes are normally very risky to pull off. The Pump-And-Dumper risks being a bag holder himself and losing a lot of money.
With the Bancor price model and smart contracts the Pump-And-Dumper’s job is much easier and less risky. See the first image for the Bancor price model. As coins are bought the price will naturally go up and as coins are sold back to the smart contract the price will naturally go down . The Pump-And-Dumper buys low and, if he is successful in raising the price enough, he doesn’t even have to trade the coin to stooges (he can), he can just sell the coin back to the smart contract and abscond with an almost risk free profit. He also gets to exit at the high point. How nice for the scam artist.
The almost risk free profit is the key here. Successful Pump-And-Dumpers who can hype coins well are guaranteed a profit. Bancor will attract them in droves unless it takes measures to address this. The only risk to the pumper is being found out and having current coin holders dump on him. He technically could lose money, but with Bancor he is much less at risk (his exposure is limited). Another important thing to note is that even when the pumper gets dumped on, all other coin holders are hurt too. Only the dumper presumably benefits.
How many stooges does the Bancor pumper need to fool in order to profit? Not many. At zero transaction costs, he only needs to convince others to purchase more coins from the contract than he purchased to have a guaranteed profit.
Do not misconstrue this to be investment advice! I am not telling you to buy or sell Bancor.
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LITECOIN (LTC): LY7JmLzQrStaZpo69u2P5Qgv5zUyjwMGyk
MONERO (XMR): 48nXBajorzkZLeotCBw1XgYaUgENGuxS1hhK75hoGgUSQVHsoVa3EWj86EvqKjeorUY77SVu8fj8TPevfz3dnmX567djac2
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RoosterRed
