Bonding Curve
A Bonding Curve is a mathematical formula used to determine the price of a token based on its supply. Bonding curves are commonly used in DeFi to create predictable token issuance mechanisms, where the price of a token increases or decreases as its supply changes.
What is a Bonding Curve?
A bonding curve is a pricing model where the price of a token rises with every new token issued and falls when tokens are burned or redeemed. This model creates a self-regulating market, allowing tokens to be bought and sold without relying on traditional order books.
How Does a Bonding Curve Work?
Bonding curves function through a few essential steps:
Formula-Based Pricing: The bonding curve algorithm determines the token price based on its current supply.
Automatic Liquidity: Tokens are issued or burned based on the bonding curve, automatically adjusting supply to meet demand.
Dynamic Pricing: As demand increases, the price rises, and conversely, it falls as demand decreases, following the curve’s formula.
Why is a Bonding Curve Important?
Bonding curves are beneficial for several reasons:
Liquidity Provision: They provide continuous liquidity, allowing users to buy or sell tokens at any time.
Transparency: Bonding curves offer predictable pricing, which can be easily understood and trusted by participants.
Efficient Fundraising: They are often used in token sales to create fair and transparent fundraising mechanisms without intermediaries.
In summary, bonding curves are a valuable mechanism in DeFi for creating transparent, predictable token pricing and efficient liquidity, supporting decentralized fundraising and trading models.