Bonding curves are a way to dynamically set prices on assets with available in a limited quantity. Bonding curves set prices so each subsequent buyer will have to pay slightly more for it.
A bonding curve is a curve (equation) that connects two variables. For example, token prices change when the token supply changes. This is determined by math, coded in a smart contract. This is not determined by other factors like trading in the secondary market.
Continuously liquid - can be exchanged (or mint/burnt) at any time
Hard coded - according to a pre-set formula
Executed from smart contracts - giving them immutability, trust and predictability
For it to not be a Ponzi scheme, the tokens should allow users to claim on future cash-flow by the ecosystem. This could be earning via transaction fees or earning via future profits from the ecosystem.
Trading, fund-raising, curation markets
The most common use of bonding curves is with AMM (automated market makers) which is the main function of DEXs (decentralised exchanges).
An AMM is an alternative to a stock exchange, in that it provides a real-time vehicle for exchanging assets. Stock exchanges use an order book model, involving a separate class of “market makers” who continually adjust their buy/sell offers while watching the market bids. In AMMs this is replaced by a store of actual assets ready to be exchanged (called a “liquidity pool”) and the exchange rate between the two assets is set using a bonding curve formula.
Value comes from the ease of liquidity, availability of liquidity and network of other tokens to interact and trade with.
Value comes from the entitlement to future cash flow. Other than value increasing from more participants joining the ecosystem, the value can also increase from revenue generated from the ecosystem.
-Raising funds using a buy and sell function (e.g. Aragon fundraising function)
-Determining price in a closed economy (e.g. Nexus Mutual $NXM pricing)
-Curation market using tokens as a signal
“Each topic/meme/idea/goal has an associated token of value that is used to curate information inside it.” - Simon de la Rouviere
With curation markets, tokens get allocated (or staked) on topics, which creates a collective signal. For example, if reddit upvotes required staking a token, or adding a restaurant to Tripadvisor required staking tokens which could be slashed if it wasn’t real. The value of the token creates a stronger incentive than a free expression, so can be designed to curate sets.
Value comes from the entitlement to future cash flow or accurately signal market sentiments.
Play with the various functions and parameters: http://bit.ly/bondingcurve
Linear - favours early buyers too much
Exponential - encourages early holders at the cost of volatility later
Logarithmic - high volatility early but stability later
3D curves - adding a z-axis for “productivity level, technology adoption curve, users in the system, active users as a fraction of total users, etc.”
Augmented bonding curves - combines the general bonding curve with a funding pool, lock-up mechanism and inter-system feedback loops. Used to manage speculation and to align incentives to generate returns.
Dynamic bonding curves - prices of tokens are determined by the proportion of token owned. Used to incentivise early adopters, punish freeloaders and encourage active participation in the ecosystem.
Factors to consider
❏Incentivise early adopters
❏Price stabilisation at the end
❏Cost appreciation based on some factor of supply increasing (or productivity of platform or token)
❏Prevention of abuse or arbitrage
❏Growth of underlying product (s-curve, as a function z-axis)
❏Returns appropriately attractive across reasonable range or to focus more on early adopters
Practical Questions to get Started
❏What function is the bonding curve used for? Decentralised exchange (instant liquidity), fundraising, curation market or something else?
❏How many users can the project attract and sustain? (At the introduction stage, at the maturity state)
❏Are both early and late adopters adequately incentivised to participate? Do you want them to be equally incentivised?
❏Can I attract the amount of capital needed to take the project to an adequate level of adoption?