What is a Bonding Curve?
A bonding curve is a mathematical function that defines the relationship between a token's price and its supply. As more tokens are minted, the price increases along the curve; as tokens are burned, the price decreases. This creates an automated, predictable pricing mechanism.
How Bonding Curves Work
- Minting: Users send reserve currency (ETH, USDC) to buy tokens
- Price Calculation: Smart contract calculates price based on current supply
- Token Creation: New tokens minted to buyer
- Burning: Selling tokens burns them and returns reserve currency
Common Bonding Curve Types
Linear
- Price = m × Supply + b
- Predictable, steady price increase
- Simple to understand
Exponential
- Price = a × e^(b × Supply)
- Rewards early buyers significantly
- Can become very expensive
Sigmoid (S-Curve)
- Slow start, fast middle, slow end
- Designed for fair distribution
- Caps maximum price
Bancor Formula
- Based on constant reserve ratio
- More complex but flexible
- Used in many AMMs
Use Cases
- Token Launches: Fair, transparent ICO alternative
- AMMs: Uniswap's x*y=k is a bonding curve variation
- NFT Pricing: Dynamic pricing based on demand
- DAO Tokens: Continuous funding mechanisms
- Social Tokens: Creator economy pricing
Benefits
- Guaranteed liquidity (always can buy/sell)
- Transparent pricing
- No order books needed
- Automated market making
Risks
- Early buyers have significant advantage
- Price manipulation through large trades
- Can create pump-and-dump dynamics
- Complexity in curve design
Examples
Friend.tech uses bonding curves for social token pricing, where each subsequent share costs more than the last.