I've read the following SE threads: 1, 2,3, the Bancor's white paper, Eyal Herzog Smart Token 101 post, and Scott Morris's post but I'm still having a hard time trying to understand how exactly Bancor Network works. I might be missing some important knowledge but I can't figure out what exactly I miss.
I got it that Bancor serves as the "CHANGE" of the Ethereum based Tokens (or ERC20's compatible Tokens). I also understand the general idea of Bancor which enables low-profile Tokens to be easily tradable ("liquid"). But there are many details missing in my understanding:
I'm not looking for a specific answer for each of the questions but rather for a detailed explanation/resource that could widen my understanding.
- Consider some Example Smart Token (EST) and its reserve token (RTO). When one creates the EST contract she sets the EST Total Supply, the amount of RTOs (reserve amount) which back the smart token and the Constant Reserve Ratio (CRR). That's actually means that she fixes the initial price EST, but this is just a number, how does one decides on that number? Based on what?
- In the same context, fixing the "reserve amount" actually means that the smart token owns that amount of RTO? If yes then in what sense? Does the EST's smart token (which is a smart contract) maintains an ethereum address by which the owner of that token can make transfers?
- When someone pays RTO to the smart token and receives EST in exchange, how does he do it? By actually transferring RTO to the contract's address?
- What is the alternative to Bancor protocol? I.e. how could I exchange between two tokens if Bancor would not have existed?
- What are the prerequisites to understand the price discovery methods that the Bancor protocol uses?
- The white paper (and other sources) mentioned that there might be a gap in a price of some token when related to multiple other tokens. This is considered as an advantage since arbitrageurs can exploit it somehow. To me it is sounds like a flaw in the system, isn't it? Why?
- Is the CRR a well known term in economics or it made up for the Bancor purposes? Why does it so important to maintain that constant ratio?