Smart Tokens are a new type of ERC20 compliant tokens that can be bought or sold at anytime through the smart contracts which govern them, without needing to use a digital exchange, or a counter-party.
They differ from regular tokens in the following ways:
They hold one or more easily exchangeable tokens in reserve. In the case of the Bancor, the reserve token is the Ether.
They are governed by Ethereum based smart-contracts which act as an automated issuer and redeemer of the smart tokens, at a continuously calculated price, based on formula which balances buy and sell volumes.
And as a result of these two features:
- Anyone can instantly buy or liquidate smart tokens in exchange for
one of its reserve tokens, directly through the smart token’s contract.
In his Medium article, Scott Morris summarizes the advantages of Smart Tokens as follow:
Costs -- The only mandatory fees
applied by Smart Tokens are the blockchain fees (gas).
Continuous Liquidity with Lower Risk — A Smart Token may be purchased or
liquidated through its smart contract at any time; regardless of its
trading volume, and without the need for a counterparty (e.g. an
online exchange) with its risks (e.g. hacking/theft). Algorithmic
Pricing — The smart contract automatically maintains the exchange
price between a Smart Token and its reserve token(s), meaning there is
a single, real time price for both buying and selling a Smart Token
rather than the traditional bid/ask spread.
Predictable Price Slippage — As a function of the pricing formula, Smart Tokens allow
pre-calculation of price slippage for a transaction of a given volume
prior to its execution.
Native Market Depth — While typical
crypto-exchanges maintain a market depth of well below 1%, a Smart
Token with a reserve of 10% can be compared to an exchange with 10% of
the entire supply of a token in its order-book at all times, forming
substantial market depth.
Sources (with more detailed explanations):