Curation-Bonding-Curve

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Bonding Curves.

With the establishment of curation markets in The Graph Ecosystem, a whole new world of possibilities will be opening up. The new opportunity to participate in the network as a curator comes with many exciting adventures but also with potential risks. Time to polish up our knowledge of bonding curves to be optimally prepared for the day when curation goes live.

What is a Bonding Curve?

Let’s start with a quick definition of what a bonding curve is:

A bonding curve describes the relationship between the price and supply of an asset. It is a mathematical concept modelling the idea that the price of an asset (with a limited quantity) increases slightly for subsequent buyers with each purchase.

From this defintion follows:

Asset supply

Asset price

The reasoning behind the increase in price is that the freely available supply is reduced with every unit that is acquired. The mechanism of a bonding curve rewards the earliest investors with higher profits.

The same holds true for a decrease in the supply of an asset:

Asset supply

Asset price

The basic idea behind the concept of a bonding curve is quite intuitive: The supply of a token determines its price. The price increases when the number of distributed tokens increases and vice versa.

The Basic Bonding Curve.

As can be seen in the diagram below, the basic bonding curve is linear. It has a straight line and an increase in distributed tokens leads to a proportional increase in price:

The basic bonding curve is an increasing linear curve, as seen above. In the context of token issuance, this means that tokens are a lot cheaper when the issued supply is low. Conversely, if the issued supply of a token is high, the price per token is higher than it was during the time when the supply was low.

Basic Bonding Curve Interactions.

“Buying up” a bonding curve means that you mint new tokens, which increases the token supply. This subsequently leads to an increase in price. The same holds true when you “sell down” a bonding curve. When selling tokens, you are burning tokens, which reduces the token supply and decreases the price subsequently.

The following example of a basic bonding curve interaction visualizes this concept:
Bonding-Curve-Price

As you can see in this example, the token price doubles with a doubling of the token supply. Likewise, a reduction of the supply by half also reduces the price by half.

When token supply = 4

Token Price

4

When token supply = 8

Token Price

8

Bonding curves for subgraphs in The Graph Network will use GRT.

Bonding Curve Contracts for Token Issuance.

With the emergence of cryptocurrencies and smart contracts, the concept of bonding curves saw its implementation for bonding curve contracts. These token issuance smart contracts enable users to buy tokens outside of exchanges. The contract calculates the asset price in Ether and sells the tokens to buyers while at the same time buying the tokens and paying for them with Ether. The rate for both of these transactions is defined by the smart contract, which calculates the average price of the token.

Bonding Curve Contract

Calculates asset price in ETH

Purchases tokens

Sells tokens to buyers

The number of tokens issued via a bonding curve contract is not limited by a hard cap. However, the number of tokens that can be issued is limited by price curve limits and the quantity of existing Ether in the market. In general, the price for a token issued through a bonding curve contract increases as the supply increases through token issuance.

The utilization of a bonding curve facilitates a predetermined and fixed price discovery mechanism when issuing tokens. The smart contract ensures that the mechanism is set in stone without allowing changes to be made afterwards.

Summary

The bonding curve is a mathematical curve that defines the relationship between tokens supply and asset price.

  • The price of an asset increases with each purchase

  • The price of an asset decreases whenever a token is sold

Bonding curve contracts are used for token issuance to enable users to buy tokens outside of exchanges.

The basic bonding curve is an increasing linear curve. In the linear curve, price doubles when supply doubles and vice versa.

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