Bancor is a protocol designed to facilitate decentralized trading of tokens without the need for a traditional exchange. It employs a mechanism that allows users to convert between different tokens directly, using smart contracts on a blockchain.

The core innovation behind Bancor is its use of liquidity pools. These are reserves of tokens that create automatic pricing and liquidity for various token pairs. When a user wants to trade a token, they can instantly do so by drawing from these pools, which adjusts prices based on supply and demand. Bancor also introduced the concept of “smart tokens.” These tokens have built-in liquidity through their connection to the protocol, allowing them to maintain a stable value against other tokens.

This creates an environment where users can trade easily and reduces the volatility often seen in other token markets. Overall, Bancor aims to create a more accessible and efficient trading ecosystem, enabling users to swap tokens without relying on centralized platforms.