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Have we understood Bonding Curve as we return to it?
The iterative core of the encryption market lies in the innovation of the Token economy, and Algorithm innovation based on Smart Contracts has played a key role in the past decade of iteration. The early Tokenization extension based on BTC was relatively limited, and the relative lack of technology and narrative became a certain constraint on Token issuance at that time. While the Smart Contract ecosystem represented by ETH is still in its infancy, some people have begun to consider how to combine Smart Contracts with Token issuance models. As one of the earlier Algorithm innovations on-chain, Bonding Curve has had a profound impact on Token economy and Token engineering. Therefore, this article explores the core of Bonding Curve through the root cause analysis and deeply considers its significance from multiple practical cases.
From Fixed Supply to Dynamic Supply
The early Token issuance was full of centralization and disorder, and the establishment process of a project was even without any rules. Only a plain White Paper and Deck were needed to appear in numerous roadshows and attract countless Token inflows. But what happened after the inflow? The centralized Token model ultimately led to the collapse of Token prices, and without effective regulation, market competition eventually disappeared without a trace.
In the reflection on these issuance models, there is a mainstream view that the characteristics of the issuance at that time limited the market's scalability, including the following points:
And former Consensys social engineer Simon de la Rouviere envisioned in his 2017 'Curated Market' a system that 'allows groups to coordinate around common goals (and interests) and benefit from the value they co-create.' This system is built on the Smart Contract framework of the ETH block and adds interoperability between protocols at the underlying architecture. The core of this idea lies in 'automated coordination,' namely, how to allow people to automatically create this market on-chain when they are interested in the marketization of something. In terms of mechanism design, a model for user participation without intermediaries needs to be built. Thus, the Continuous Token model based on the Bonding Curve was born.
Simon defined several characteristics that the Simple Continuous Token model possesses:
Based on this model, we can see that compared to the previous issuance model, Bonding Curve itself provides a new issuance model for decentralized supply to various applications. Next, we will explore some implemented use cases, discover the role of Algorithm from the perspective of Token engineering, and discuss the potential landing directions of Bonding Curve in the future.
Curate
As Simon initially envisioned, one major use case of the Bonding Curve is curation. In previous curation processes, organizational issues such as lack of organizational coordination and insufficient information richness were often encountered. Here, the author selected two projects for analysis.
Ocean Protocol
Ocean Protocol is a decentralized data sharing protocol that aims to facilitate the open sharing of AI data. In this process, the purpose of the token economy design is to maximize the supply of relevant data and services. In traditional curation markets, participants' main behavior is a signal-based entry and exit. Ocean builds on this by combining these transactional behaviors with actual work of providing services, creating a Curated Proofs Market.
In this market, each individual data set represents a corresponding 'droplet' stake curve. On this curve, users can choose to receive Block Rewards (by staking on specific data sets and giving them availability) and unstake, while the 'droplet' stake can become a measure of user attention.
From the project narrative to the Token economic model, we can see that the project needs a stable inflow in the early stage to ensure that the data set can build an equal initial Consensus in curation, and then add a threshold for newcomers in the availability of the data set, increasing the cost of subsequent participation and avoiding excessive concentration of Consensus on a single data set. Therefore, the Bonding Curve model is shown in the following figure. After 500 'drops', the overall minting cost shows a linear rise.
Simply put, if users discover the value of a dataset early, they can buy in through the Bonding Curve and profit in the future, thereby realizing the act of curation. However, the curve is still relatively rough for the curation process, as there is a certain delay between the purchase and sale of these Tokens and the datasets used by AI, and there is no guarantee that these datasets are available, requiring further mechanisms for screening.
Angel Protocol
Renowned research firm Delphi Digital has built a Bonding Curve-based Token economic model for Angel Protocol, a charity donation protocol built on Terra. In the protocol, there are three roles: donors, charitable organizations, and charitable supporters (HALO protocol Token stakers who curate the charity market). The goal of the protocol is to combine donations with Bonding Curve to enhance the sustainability of charity.
Based on the above use cases, its Tokenomics needs to incentivize actions related to curation, donations, and governance, and over time, encourage stakeholders to participate. Therefore, Delphi proposes a Bonding Curve-based Token curation registry based on the concept of The Graph (which also utilizes Bonding Curve for curation, but the project is omitted due to space constraints). This model allows users to participate in the staking pool and interact with the curve of a specific institution to mint charitable shares. The curve determines the exchange rate between HALO and shares. Rational curators will seek to maximize returns for charitable organizations, while the Bonding Curve design can distribute returns between Token transactions, and these gains in shares can be distributed or destroyed.
From the perspective of value flow, the income generated from charitable donation funds is divided into share distribution (90%) and protocol fees (10%). Regarding share distribution, 75% is allocated to charitable organizations and 25% is used for investment in the donation fund, thereby promoting the long-term sustainability of cash flow. The protocol fees are allocated to DANO (the governing organization of the protocol) and HALO stakers.
It can be seen that the intervention of the Bonding Curve provides Token stakers with diversified sources of income (natural participation, protocol revenue inflow, and early governance rights), and also provides a mechanism for selecting the best among the best for charity, because curators can ensure that only the most needed charity organizations appear in the charity market, and based on marketization, it builds a sustainable economic source for them.
Summary
Through the above analysis, we can abstract the role of Bonding Curve in the curation field:
Overall, the Bonding Curve provides a market environment that offers a good environment for curation applications and integrates as the core of the protocolrise curve.
Algorithm Regulation
As an on-chain mechanism innovation, the Bonding Curve exists as a core part of the Algorithm in multiple protocols. Here, the author analyzes two examples, covering the on-chain insurance and stablecoin fields.
Nexus Mutual
As one of the pioneers of on-chain insurance protocol, Nexus Mutual has created a mutual aid type of insurance alternative, providing purchasing and underwriting services to members within the protocol. Members can provide funds to the mutual aid fund and receive NXM Tokens, stake NXM to assess underwriting risks and receive rewards at the same time.
An important parameter introduced in the protocol is the Minimum Capital Floor (MCF), which corresponds to an existing fund in the protocol and generates a ratio generally referred to as the MCR%. For the sustainable development of on-chain mutual insurance protocol, there needs to be a corresponding relationship between the equity token (corresponding to NXM within the protocol) and the total equity of the protocol, thereby achieving organic growth of the protocol. Originally, MCF was determined through governance within the protocol. However, in November 2019, the community governance decided to automate the regulation of MCF. On days when the MCR% value exceeds 130%, the MCF will increase slightly by 1%.
They modeled this change, and the overall curve of rise was relatively slow when MCF was fixed, but after MCF started to rise linearly, the overall rise rate increased. This is the charm of the Compound Bonding Curve - the correspondences between multiple protocol indicators and Tokens can directly drive Token rise.
Fei
FEI is a popular Algorithm stablecoin that incorporates the lessons learned from previous on-chain mechanism innovations. When users buy or sell FEI on-chain, Algorithm anchors the Token through regulation.
In order to create protocol holding value (PCV) and meet new demand, the Bonding Curve has become an excellent solution, and it has mathematical fairness. Specifically, the price outside the buffer zone can be balanced by minting in the Bonding Curve, and the curve is a one-way buying curve. In addition, for the general financing and deployment of PCV, funds can be obtained through additional Bonding Curve priced in other Tokens, and directly deployed to on-chain protocols. For example, when the protocol is launched, a unique curve is established based on the Uniswap ETH-FEI Liquidity pool, and later multiple Decentralized Finance protocols' Liquidity are added. Each Bonding Curve corresponds to the "anchoring" (Liquidity) of a single protocol, and the flexible design allows PCV to be deployed creatively and integrated with potential new Decentralized Finance protocols in the future.
It is a pity that due to the very limited use case of its stablecoin itself, and its unique mechanism, users were also determined to fall into the 'water prison', and finally merged with Rari Capital and suffered a theft event, ending in regret. However, before this, Fei and Ondo Finance cooperated to launch Liquidity as a Service (LaaS), which can be considered as achieving part of the above vision. And the Bonding Curve, as a great contributor to the construction of PCV, has also added fuel to the development of Decentralized Finance in the past.
Conclusion
One of the major advantages of the Bonding Curve is that it allows users to directly benefit from the early rise, and when the curve is integrated with other protocol indicators, it can achieve a gain of 1+1>2. In Nexus Mutual, as the stake value increases, it corresponds to a superlinear rise of the Token, while in FEI, it can achieve synergistic development with other Decentralized Finance protocols while maintaining stability in the protocol. In addition, the introduction of 'pure on-chain governance' by the Bonding Curve itself is a sustainable feature, as the contract itself will not Rug itself.
Buy in to rise...?
As the subtitle suggests, does buying mean rise? Take a look at Friend.tech and pump.fun. They have indeed mastered the application of Bonding Curve, but what about the end result? One is applied to social media, and the other to MEME, both achieving great success in their respective fields, but sustainability and externalities seem to have disappeared. It seems that we are repeating the same mistakes of the past.
Why? Let's look back at the characteristics of these projects that use Bonding Curve as a pure token issuance tool.
Let's go back to a long-standing issue: the encryption field has always been pursuing the next 1 billion users, but the discovery of real use cases always comes with some stumbling blocks. The essence of the problem is that in different ways, we have once again fallen into the trap of the issuance model from years ago. Ironically, the birth of tokenomics was originally intended to break free from this kind of trap.
If we list the advantages of encryption, we can find that Token economy is definitely the most important part, and serving real use cases is the breakthrough point of Token economy.
I will list several potential use cases here:
Of course, the imagination of the Token economy is not limited to this, and I hope to see more innovative use cases in the future.
Statement:
This article is reproduced from [Foresight News], with the original title "Breaking The Impossible Triangle: The Ideal and Reality of Web3 Games", copyright vesting original author.[Pzai]If you have any objections to the reprint, please contact [Gate Learn Team](https://www.gate.io/questionnaire/3967, the team will process it as soon as possible according to the relevant process.
Disclaimer: The views and opinions expressed in this article are solely those of the author and do not constitute any investment advice.
The other language versions of the article are translated by the Gate Learn team. Without mentioning Gate.io(http://Gate.io), it is not allowed to copy, disseminate or plagiarize translated articles.