Clear DefinitionsBonding Curve
1 min read
Pronunciation
[bahn-ding kurv]
Analogy
Imagine a special shop that sells limited-edition toys according to a strict rule: the first toy costs $1, the second costs $2, the third costs $4, and so on, with the price doubling each time. If you sell a toy back, the price you get is determined by the current, lower number of toys remaining. This fixed rule for pricing based on how many are sold is like a bonding curve.
Definition
A mathematical formula implemented in a smart contract that algorithmically determines the price of a token based on its circulating supply. As the supply increases (tokens are bought/minted), the price per token rises along the curve; as supply decreases (tokens are sold/burned), the price falls.
Key Points Intro
Bonding curves programmatically manage token supply and price.
Key Points
Defines a deterministic relationship between token price and supply.
Prices increase as tokens are bought (minted) and supply grows.
Prices decrease as tokens are sold (burned) and supply shrinks.
Implemented via a smart contract holding a reserve asset.
Example
A project token for a decentralized community might use a bonding curve. Early members can buy tokens at a lower price. As more members join and buy tokens, the price increases along the curve, rewarding early adopters if the community grows and supply expands. Selling tokens back decreases the supply and price.
Technical Deep Dive
The bonding curve is defined by a mathematical function $P = f(S)$, where P is the price and S is the circulating supply. A smart contract holds a reserve of a base currency (e.g., ETH, DAI). When a user sends base currency, the contract calculates how many tokens to mint based on the curve and current supply. When a user sends tokens, the contract calculates how much base currency to return based on the curve and the new supply after burning the tokens. The contract acts as an automated market maker for the token.
Security Warning
The bonding curve's smart contract is a critical component; vulnerabilities can lead to loss of funds in the reserve. The economics are highly dependent on the curve's design; a poorly designed curve can lead to manipulative behaviors or instability. The value is tied to the capital in the reserve.
Caveat
The price is entirely a function of supply, not external market factors or utility outside the curve mechanism. Early buyers benefit disproportionately from supply growth, while late buyers face higher entry costs and potential losses if supply contracts. Can encourage speculation based on supply changes rather than inherent utility.
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