Bonding curve is a mathematical model describing that an increase in a token's supply is accompanied by an increase in its price.
With about 6000 altcoins on offer, many investors wonder how to maximize profit from them. As is the case with stocks and commodities, so is the case with cryptocurrencies - the way to make profit from a crypto trade is to buy low and sell high.
For instance, if you had bought 1 BTC when it was around €85 in April 2013, you would presently be able to sell it for €38k. In other words, you would've made out with a pure gain of €37,915 on your €85 initial investment. The same applies to many other altcoins like Ethereum (ETH), Solana (SOL), Cardano (ADA), etc.
With Bitcoin and altcoins with a hard supply cap, the price increase over time happened because the demand exceeded the limited supply. However, a smart contract can replicate this dynamic in the form of continuous tokens. Such a bonding curve contract launches a continuous token that has the following characteristics:
- Its price is determined dynamically based on the number of tokens in circulation.
- There is an unlimited number of tokens that can be put into circulation (minted).
- It is governed by a continuous price algorithm.
- The bonding curve smart contract doubles as an automated market maker (AMM). Meaning, continuous tokens have access to instant liquidity for selling or buying.
Therefore, when a DeFi project with a continuous token is launched, the bonding curve ensures that its price increases along with the increase in token supply. In practice, those investors who bought the crypto coin early on will have a considerable advantage compared to those who buy it later for a higher price.
A notable example of such a continuous token created by a bonding curve contract is DXdao (DAO stands for decentralized autonomous organization). Launched in May 2020, this DeFi Gnosis project enticed investors to join in early on because it effectively guaranteed future profits. What can one do with DXdao?
Befitting decentralized finance, DXdao (DXD) gives investors voting rights to govern the following projects:
- Rails - payment gateway running on Ethereum Layer 2 scalability solution.
- Omen - a prediction market in which investors can create bets on future events. If the event pans out, investors receive a profit.
- Swapr - automated market maker (AMM).
- Messari - decentralized exchange (DEX) resistant to miner-extracted value (MEV).
Since DXdao launched in May 2020, the price of this continuous token steadily rose.
Effectively, DXD bonded curve continuous token is akin to Kickstarter funding with extra benefits. Not only does the first wave of investors receive an insurance that the DXD price will rise, thus giving a return on their investment, but it gives them the voting rights to direct other projects within the Gnosis ecosystem.
In the case of DXdao, the initial bonding curve was set in a linear manner, so that €255k worth of ETH would cover 12,000 DXD. Presently, its circulating supply is at 49,32k DXD, its price having increased by over 6x since launch.
Other notable DeFi projects that employ bonding curve smart contracts to create continuous tokens are Perpetual Protocol (PERP), Hegic (HEGIC), and Aavegotchi (GHST). Lastly, because continuous tokens use the bonding curve to either increase or decrease circulating supply, the price can also fall over time based on the following formula.
Continuous Token Price = Reserve Token Balance / (Continuous Token Supply x Reserve Ratio)
Every time the token is traded - bought or sold - its reserve balance will either increase or decrease. Moreover, each DeFi protocol can further customize its own bonding curve formula.