Returning to the Bonding Curve, have we used it?

Author: Pzai, Foresight News

The core of iteration in the crypto market lies in the innovation of token economics, while algorithmic innovations based on smart contracts have played a key role in the iterations of the past decade. Early tokenization based on Bitcoin was relatively limited, and the relative lack of technology and narrative became a certain constraint on token issuance at that time. As the smart contract ecosystem represented by Ethereum was still in its infancy, some began to consider how to combine smart contracts with token issuance models. Bonding Curve, as one of the early algorithmic innovations on-chain, has had a profound impact on token economics and token engineering. Therefore, this article seeks to trace back to the roots and explore the essence of Bonding Curve, while deeply reflecting on its significance through multiple practical cases.

From Fixed Supply to Dynamic Supply

Early token issuance was rife with centralization and disorder, with the establishment process of a project often lacking any rules; a plain white paper and deck could showcase it in countless roadshows, garnering numerous token inflows. But what happened after the inflow? Centralized token models ultimately led to the collapse of token prices, and the lack of effective regulation in market competition eventually resulted in their demise.

In reflecting on these issuance models, a mainstream viewpoint suggests that the characteristics of issuance at that time limited market scalability, including the following points:

1. Centralization ------ In addition to the centralization of issuance itself, most transactions were conducted on centralized exchanges.
2. Single Asset ------ Poor ecological connectivity, and single chains basically corresponded to single asset circulation (except for USDT circulating on the Bitcoin OMNI framework at that time).
3. Liquidity Restrictions ------ The widespread application of PoW architecture at that time led to longer block confirmation times, restricting on-chain transfers and consequently reducing overall liquidity.
4. Fixed Supply Issuance ------ For tokens with a fixed supply, project teams could only distribute them through consensus layers or initial allocations. Their fixed token economics did not adapt to changes in market conditions, and the significant room for manipulation by project teams led to certain exaggerations and misguidance of token value, which was ultimately a reason why the market did not achieve sustained phases.

In 2017, former Consensys social engineer Simon de la Rouviere conceived a "curation market" that built a system "allowing groups to coordinate around common goals (and interests) and benefit from the value they co-create." This system was constructed on the Ethereum smart contract framework, adding interoperability between protocols at the underlying architecture. The core of this concept lies in "automated coordination," that is, how to allow people interested in the marketization of something to automatically create this market on-chain. In terms of mechanism design, it was necessary to construct a model of user participation without intermediaries. Thus, the continuous token model based on Bonding Curve was born.

Simon defined several characteristics of the simple continuous token model:

• Using tokens like ETH based on hard-coded algorithms (functions) to set the price for minting tokens.
• The cost of tokens depends on the number of tokens in circulation (e.g., unit token price = token supply²).
• The purpose of the tokens is to "destroy" for application operations/services within the network. During the service usage process, the token supply is reduced, while the minting cost decreases, making the use case of tokens not limited to distribution.

Based on this model, we can see that compared to previous issuance models, Bonding Curve itself provides a new issuance model for various applications through decentralized supply. Next, we will explore some already implemented use cases, uncovering the role of algorithms from the perspective of token engineering, and discussing the potential future directions for Bonding Curve.

Curation

As Simon initially envisioned, one major use case of Bonding Curve is curation. In previous curation processes, organizational issues often arose, such as insufficient organizational coordination and lack of information richness. Here, I selected two projects for analysis.

Ocean Protocol

Ocean Protocol is a decentralized data sharing protocol aimed at facilitating the open sharing of AI data. In this process, the purpose of token economic design is to maximize the supply of relevant data and services. In traditional curation markets, participants' main behavior is to signal entry and exit. Ocean builds a Curation Proofs Market by combining these transactional behaviors with the actual work of providing services.

In this market, each individual dataset represents a corresponding "water droplet" staking curve. On this curve, users can choose to receive block rewards (by staking specific datasets and granting their availability) and unstake, while the staking of "water droplets" can become an indicator of user attention.

From the project narrative corresponding to the token economic model, we can see that the project requires stable inflows in the early stage to ensure that datasets can build an equal initial consensus in curation, and subsequently add thresholds for later participants in the availability granting of datasets, increasing the cost of subsequent participation while avoiding excessive concentration of consensus on a single dataset. Thus, its Bonding Curve model is illustrated in the following figure. After 500 "water droplets," the overall minting cost shows a linear increase.

In simple terms, if a user recognizes the value of a dataset early, they can buy in through the Bonding Curve and profit in the future, thus achieving the act of curation. However, this curve remains relatively crude for the curation process, as the buying and selling of these tokens have a certain delay with the datasets used by AI, and it does not guarantee that these datasets are available, requiring other mechanisms for further filtering.

Angel Protocol

The renowned research institution Delphi Digital built a Bonding Curve-based token economic model for the charity donation protocol Angel Protocol, constructed on Terra. The protocol involves three roles: donors, charitable organizations, and charitable supporters (HALO protocol token stakers who curate in the charity market). The goal of the protocol is to combine donations with Bonding Curve to enhance the sustainability of charitable endeavors.

Based on the above use case, its token economics needs to incentivize actions related to curation, donations, and governance, and over time encourage stakeholder participation. Therefore, Delphi proposed a Bonding Curve-based token curation registry based on The Graph's concept (which also curates through Bonding Curve but is omitted here for brevity). This model allows users to participate in staking pools and interact with the curves of specific organizations to mint charitable shares, with the curve determining the exchange rate between HALO and shares. Rational curators will pursue charitable organizations that maximize returns, while the Bonding Curve design can distribute gains between token transactions, and this portion of the gains can be distributed or destroyed.

From the perspective of value flow analysis, the profits generated from the charitable donation fund are divided into share distribution (90%) and protocol fees (10%). In terms of share distribution, 75% flows to charitable organizations, and 25% is used for investment in the donation fund, thus promoting the long-term sustainability of cash flow. The protocol fees are then allocated to DANO (the governance organization of the protocol) and HALO stakers.

It is evident that the intervention of Bonding Curve not only provides token stakers with diversified sources of income (natural participation, protocol revenue inflow, and even early governance rights) but also offers a mechanism for selecting the best among the best for charity, as curators can ensure that only the most needed charitable organizations appear in the charity market, thus building a sustainable economic source based on marketization.

Conclusion

Through the above analysis, we can abstract the role of Bonding Curve in the curation field:

1. Natural Ordering Centered on Token Games: The token price indicators generated by the free market allow us to abstractly understand user preferences within the system and the corresponding status of things.
2. Natural Early Incentives: The market incentives brought by dynamic supply can be priced in real-time through the curve, granting early users an advantageous position in future protocol-related use cases.
3. Healthy Value Flow: Each purchase corresponds to tangible asset storage, and the organic appreciation and potential distribution of assets bring considerable positive cash flow to the protocol.

Overall, the market environment provided by Bonding Curve offers a great setting for curation applications and integrates into the core of protocol growth curves.

Algorithmic Regulation

As an on-chain mechanism innovation, Bonding Curve exists as a core algorithm in multiple protocols. Here, I analyze two examples covering the fields of on-chain insurance and stablecoins.

Nexus Mutual

As one of the pioneers of on-chain insurance protocols, Nexus Mutual has created a mutual-type insurance alternative, providing services for purchasing and underwriting to members within the protocol. Members can provide funds to the mutual fund and receive NXM tokens, staking NXM to assess underwriting risks while earning rewards.

An important parameter introduced within the protocol is the Minimum Capital Floor (MCF), which corresponds to a ratio generated by the existing fund within the protocol, generally referred to as MCR%. For the sustainable development of on-chain mutual insurance protocols, a corresponding relationship between the equity token (corresponding to NXM within the protocol) and the total equity of the protocol is needed to achieve organic scale growth of the protocol. Initially, MCF was determined by governance within the protocol. However, in November 2019, community governance decided to automate the regulation of MCF. On that day, when the MCR% value was greater than 130%, the MCF would increase slightly by 1%.

They modeled this change, showing that when MCF was fixed, the overall curve's growth was relatively slow, while after MCF began to grow linearly, the overall growth rate increased. This is the charm of the composite Bonding Curve—multiple protocol indicators can directly drive token growth.

Fei

FEI was a relatively popular algorithmic stablecoin at the time, integrating lessons learned from predecessors in on-chain mechanism innovation. When users buy and sell FEI on-chain, the algorithm regulates to anchor the token.

To create Protocol Controlled Value (PCV) and accommodate new demand, Bonding Curve became an excellent solution, possessing mathematical fairness. Specifically, prices outside the buffer can be balanced by minting on the Bonding Curve, and this curve is a one-way buying curve. Additionally, for general financing and deployment of PCV, these funds can be obtained through additional Bonding Curves priced in other tokens and directly deployed to various protocols on-chain. For example, at the protocol's launch, a unique curve was established based on the Uniswap ETH-FEI liquidity pool, and subsequently, liquidity from multiple DeFi protocols was added. Each Bonding Curve corresponds to a single protocol's "anchoring" (liquidity), and the flexible design allows PCV to undergo new creative deployments and integrate with potential new DeFi protocols in the future.

Unfortunately, due to the very limited use cases of the stablecoin itself, its unique mechanism also led to users falling into a "water trap." Ultimately, it merged with Rari Capital and suffered a theft incident, ending regrettably. However, before that, Fei and Ondo Finance collaborated to launch Liquidity as a Service (LaaS), achieving part of the above vision. As a major contributor to the construction of PCV, Bonding Curve also added fuel to the development of DeFi that year.

Conclusion

One of the major advantages of Bonding Curve is that it allows users to directly benefit from early growth, and when the curve integrates with other protocol indicators, it can achieve a gain of 1+1>2. In Nexus Mutual, as the staking value increases, it corresponds to super-linear growth of the token, while in FEI, it can achieve synergistic development with other DeFi protocols while stable protocol inflows occur. Additionally, the "purely on-chain governance" introduced by Bonding Curve itself is a very sustainable matter, as the contract itself cannot rug pull itself.

Buying Means Growth… Right?

As this subtitle suggests, does buying mean growth? Look at Friend.tech and pump.fun; they have indeed mastered the application of Bonding Curve, but in the end? One applies to social, the other to MEME, achieving great success in their respective fields, yet sustainability and externality seem to have vanished, as if we are repeating the mistakes of the past.

Why? Let’s revisit the characteristics of these projects that use Bonding Curve purely as a token issuance tool:

• Disorder in Issuance: The open curve market has become a culprit of consensus dispersion, as everyone wants to be the initial issuer of the curve; just look at the launch success rate of pump.fun.
• No Value Flow: For projects that only use token issuance as a use case, any discussion about Value Flow is meaningless.

Let’s return to an age-old question: the crypto space has always pursued the next billion users, yet the discovery of real use cases has been fraught with difficulties. The essence of this reversal lies in our falling into the traps of past issuance models once again in different ways. Ironically, the birth of token economics was originally intended to break such traps.

If we list the advantages of crypto, we can find that token economics is certainly the most crucial part, and serving real use cases is the breakthrough point for token economics.

I would like to list a few potential use cases here:

• Fairer (Natural) Governance: Directly buying and selling governance indicators may be more intuitive than direct voting (similar to the logic of prediction markets).
• Decentralized Asset Backing: For NFTs or other tokens, Bonding Curve can ensure the backing of underlying assets, decentralized distribution avoids the inaction of project teams (since there are no project teams), and can also automate the distribution of generated value. If this logic is applied in RWA, it can ensure a certain collateral rate.
• Protocol Growth: What would happen if TVL, yield, or points were combined with Bonding Curve? Growth on the curve will inevitably drive the flywheel of indicators.

Of course, the imagination of token economics goes beyond these, and I hope to see more novel use cases emerge in the future.