Token Bonding Curve Basics

The token bonding curve (TBC) mechanism is implemented by a smart contract that creates its own market without relying on exchanges. TBCs manage the buying and selling of "Continuous Tokens" (price is continuously calculated) with a mathematical formula that defines a relationship between price and token supply. When a person has purchased the token, each subsequent buyer will have to pay a slightly higher price for each token. As more people find out about the project and buying continues, the value of each token gradually increases along the bonding curve. The adaptive supply of a Continuous Token (tokens are newly minted when purchased and removed from circulation when sold) is a unique and enabling feature which allows for the supply to adjust to demand and for tokens to be continuously available for purchase at predictable prices.

Of a more familiar adage: an asset is only worth what someone is willing to pay for it. Unlike stock markets where a single conversion can spike a stock arbitrarily higher or lower than its current price, the TBC is purely automated by the current state of “supply & demand”. Traditionally, the process is overseen by a centralized entity; someone who oversees incoming buy and sell orders while matching market participants and ensuring liquidity.

TBCs can be designed with separate buy and sell curves to implement a spread between the two. The spread between the two curves results in funds raised by the community for use in achieving its goal. Some communities avoid the added complexity of implementing two curves by instituting a Tax on Buys and/or Sells. This alternative method of raising funds allows for more streamlined operations by simplifying the calculations required.

To summarize, the following are a list of TBC properties:

1. Instant liquidity. Tokens can be bought or sold instantaneously at any time as liquidity of its token is immediate and guaranteed. The TBC acts as an automated market maker holding enough reserves to buy tokens back at all times.

2. Continuous fundraising as the community can permissionlessly buy and sell the bonded tokens at any time.

3. Deterministic/continuous price - buys and sells are conducted at predictable prices based on a mathematical formula. The price of the current token is more than the last token issued, but less than the next token issued.

4. Limitless supply - There is no limit to the number of tokens that can be minted

The most fundamental advantage of Bonding Curves over traditional asset pricing mechanisms is that the pricing of assets is transparent, defined, and immutable at all stages. The TBC is able to reach the equilibrium of consensus through clearly defined rules, without third-party intervention. TBCs offer an innovative solution because they do not require the oversight of a centralized entity to create, oversee, and enforce the market’s pursuit of this equilibrium.

The BASE Project utilizes the reference “CW-20 bonding” smart contract developed by the CosmWasm development team. It can be found on the CosmWasm github in the “cw-tokens” repository.