How does it work?

Imagine a mathematical function (a curve on a graph) where the X-axis represents the number of tokens in circulation (the supply) and the Y-axis represents the price of each token. The bonding curve establishes how the price of a token changes as they are bought (creating new tokens) or sold (destroying tokens).

* When someone buys tokens: They send another cryptocurrency (e.g., ETH, USDC) to the bonding curve smart contract. The smart contract creates new tokens and sells them at a price determined by the curve, and that price increases as more tokens are minted. The original cryptocurrency is held in the contract's "reserve."

Key features:

* Deterministic and Algorithmic: The price is always calculated predictably according to a mathematical formula, eliminating the need for a traditional order book or market makers.

* Elastic Supply: The supply of the token is not fixed; it dynamically increases or decreases according to demand.

* Constant Liquidity: There is always a counterparty to buy or sell tokens, as long as there is enough cryptocurrency in the contract's reserve. This eliminates liquidity issues that can affect markets with low volumes.

* Autonomous and Decentralized: Once implemented, the curve operates automatically without human intervention.

Common uses in Crypto:

Bonding curves have various applications, including:

* Creating Markets for New Tokens: Especially for tokens with low initial liquidity or those that do not require a traditional exchange.

* DAOs (Decentralized Autonomous Organizations): For issuing governance tokens that change price based on participation.

* Community Economies/Social Tokens: Where the price of the token is linked to the activity and growth of a community.

* Collectible Tokens (NFTs) with Programmed Scarcity: Although less common, they can be used to adjust the price of NFTs as they are issued.