Is there a distilled rundown of how the algorithm works?

Advantages of Smart Tokens

Smart tokens introduce multiple advantages over the traditional exchange model:

1. Continuous Liquidity​ - Since purchasing and liquidating is done through the smart
contract, smart tokens are always liquid, irrespective of their trading volume.

2. No Extra Fees​ - The only mandatory fees applied by a smart token are the blockchain
platform fees (gas) which are relatively low.

3. No Spread​ - Since the price calculation is done algorithmically by the smart token, the
same price applies for purchasing and liquidating the smart tokens.

4. Predictable Price Slippage ​- Smart tokens allow pre-calculation of the precise price
slippage, based on the transaction size, before it is executed.

5. Lower Volatility - ​A smart token with a 10% CRR (for example) is comparable to an
exchange with 10% of the entire supply of a token in its order-book at all times, forming
substantial market depth. In a typical crypto-exchange, the share of the supply in the
market depth at any given moment is well below 1%. The higher the CRR, the lower the
smart token’s price volatility. The lower the CRR, the more “new credit” is created relative
to the original reserve amount.

A New Method for Price Discovery

A smart token utilizes a novel method for price-discovery which is based on a “Constant Reserve
Ratio” (CRR). The CRR is set by the smart token creator, for each reserve token, and used in price
calculation, along with the smart token’s current supply and reserve balance, in the following way:

Price = Balance / (Supply * CRR)

This calculation ensures that a constant ratio is kept between the reserve token balance and the
smart token’s market cap, which is its supply times its price. Dividing the market cap by the
supply produces the price according to which the smart token can be purchased and liquidated
through the smart contract. The smart token’s price is denominated in the reserve token and
readjusted by the smart contract per each purchase or liquidation, which increases or decreases
the reserve balance and the smart token supply (and thus the price) as detailed below.
When smart tokens are purchased (in any of their reserve currencies) the payment for the
purchase is added to the reserve balance, and based on the calculated price, new smart tokens
are issued to the buyer. Due to the calculation above, a purchase of a smart token with a less
than 100% CRR will cause its price to increase, since both the reserve balance and the supply are
increasing, while the latter is multiplied by a fraction.

Similarly, when smart tokens are liquidated, they are removed from the supply (destroyed), and
based on the current price, reserve tokens are transferred to the liquidator. In this case, for a
smart token with a CRR less than 100%, any liquidation will trigger a price decrease.
This asynchronous price-discovery model works by constantly readjusting the current price
toward an equilibrium between the purchase and liquidation volumes. While in the classic
exchange model price is determined by two matched orders in real-time, smart token prices are
calculated over-time, following every order.

The above formula calculates the current price, however, when a purchase or liquidation is
executed, the effective price is calculated as a function of the transaction size. The calculation
can be described as if every transaction is broken up into infinitely small increments, where each
increment is changing the smart token’s supply, reserve balance, and thus its price. This ensures
that purchasing the same amount of smart tokens in a single or multiple transactions would yield
the same total price. Additionally, this method ensures that the CRR will be kept constant and the
reserve can never be drained. Essentially, the effect of the transaction size on the price (due to its
changing the smart token’s supply and reserve balance) is incorporated into the effective price
for any transaction. The mathematical functions for calculating price per transaction size are
presented further in this document.

Using this method, the Bancor protocol can enable liquidity and asynchronous price discovery for
existing standard tokens -- through smart tokens holding them in reserve, enabling backward
compatibility.

A Solution to the Coincidence of Wants Problem

The coincidence of wants problem , in the current asset exchange model, creates a situation
where assets are required to be traded at a certain minimal volume or else face liquidity risk.
The cause for this limitation is that the chance of finding a second party with opposite wants to
exchange with, correlates to the asset’s trading activity level. Smart tokens solve this problem
through the use of reserve tokens which embed market depth directly into the smart token’s
smart contract.

Smart tokens are a technological solution​ to the coincidence of wants problem for asset
exchange, rather than a labor-based solution as used in traditional (or decentralized) exchanges.
The current laborers in asset exchange are the professional market-makers who provide liquidity
and facilitate collaborative price discovery. In the domains of information exchange and trade, the
technologies of writing and currency replaced labor-intensive solutions (speaking and barter) with
technological ones, creating mass efficiencies for societies and unlocking collaboration on a
global and intergenerational level. The Bancor protocol proposes to similarly advance the domain
of asset exchange by replacing the need for labor with a technological solution to the existing
coincidence of wants problem.

That doesn't really address any of permie's concerns (concerns that I also share), though. I'd like to believe Dan is willing to look out for the best interests of all his creations, but...I have my doubts at this point.
 

I think this is a bad idea.  It is speculation, far from a "no doubt" proposal.

Relying on volunteers is in fact a subsidy. By relying on unpaid volunteers is not a wise way to operate a company, a DAC, and have stability, growth and sustainability.

I am all for volunteerism. BitShares wouldn't exist without volunteers, but for essential operations that maintain the integrity and security of the network in a decentralized manor it would be foolish to remove the incentive for good quality witnesses to do their job.

A "DAC" has certain expenses, such as infrastructure, "witnesses" for example. Name a not-for-profit company in the real world that is not subsidized and is also self sustaining AND GROWING.

Where were you @CoinHoader when the discussion about witness fees took place? Are you aware witness pay was recently doubled in an effort to improve feeds and witness involvement?