The Bonding Curve Revolution
The crypto-space recently experienced a new wave of attention around oracles, decentralized finance (DeFi), and other web3 products. One of the greatest technological tools available in this fast-growing space is called a bonding curve. This article will explain the roots of the technology, why it is so important for tokenization, and how Zap Protocol continues to be the leader in developing cross-industry solutions with the technology.
Origins of the Bonding Curve
ConsenSys engineer Simon de la Rouviere popularized the initial concept of bonding curves (though Zap coined the term) when he considered how to retain our “social liquidity” in an increasingly automated world. Rouviere began this process by questioning how we form Schelling (or Focal) Points off-chain and how to translate this human engagement into the digital world. Rouviere describes a Schelling Point as “a solution people intend to use in the absence of communication, because it seems natural, special or relevant,” noting that before mobile phones and the web “Schelling Points played a key role on how we self-organized locally. Churches, community centers, and bars would all serve as a Schelling Point.”
In a world where interactions are becoming increasingly digital and automated, coordination among common goals can be achieved by creating digital Shelling points with a “bonded curation community” where:
“Tokens are algorithmically minted and then used to deposit it against participants in the community that curate and foster the shared goals of the community. These participants can then use their standing (proportional backing) in the community to curate any information in this community. Anyone, at any point in time can become a curator. It is dynamic. The deposits can be shifted around to other curators as desired.”
Curation markets will form as the number of these bonded communities continues to grow. Zap Protocol’s original oracle smart contract templates allow anyone to tokenize their data on a bonding curve where the secondary-token is worth one data query. This serves as a Schelling Point for people to coordinate around the common cause of needing reliable data for smart contracts.
This work of Rouviere helped to inspire what eventually became Zap Protocol’s creation of the bonding curve. Using smart contract templates and business logic, we created a bonding curve protocol that can be used in dynamic ways for offering many decentralized products/services.
Bonding Curve Mechanics
The image above displays a basic x² bonding curve. The curve represents the immutable and deterministic pricing index that is created by the provider issuing the service or product before launching. It is along this curve that the secondary-token’s price is reflected. In order to access the service, you must bond ZAP tokens to the provider’s bonding curve, which in turn allows you to receive a secondary-token. As the amount of bonded ZAP increases, so does the price of the secondary-token. Vise versa, should the bonded amount of ZAP decrease, then the price of the secondary-token will decrease.
There are two ways to use the secondary-token other than holding it — The first is to redeem the secondary-token for the product/service being provided. If you pay the provider with their secondary-token, then that token is transferred to the provider (who can hold or sell them for ZAP). The second way is for a user to sell the secondary-token back to the bonding curve in exchange for ZAP. In this case, the secondary-token is burned and the seller of the token will receive back from the bonding curve smart contract its value in ZAP.
This creates an incentive for speculators to find and bond to what they believe will be the most valuable services/products offered by individual providers. If you bond to a provider early and the amount of ZAP bonded continues to rise, then you will be able to redeem the product or service for less than anyone who bonds after you. If you choose not to redeem the product or service, you can instead sell the secondary-token back to the smart contract at a greater price than originally purchased. A provider could also prove to not be trustworthy and if consumers unbond and redeem back their ZAP token, the price of the secondary-token could be less than when you originally bonded, leaving you at a loss.
Implications of the Bonding Curve for Tokenization
The bonding curve is a fully liquid decentralized exchange where algorithmic/automated market making is used to facilitate a deterministic pricing index for governing decentralized interactions between providers and consumers. It acts as a decentralized reputation tool, and also eliminates many of the barriers to entry holding back the tokenization of the world.
Currently, other than over-the-counter (OTC) trades, you must go through expensive centralized exchanges that typically charge expensive listing fees, place significant fees on trades/withdraws, and have the ability to delist your token at any time. Decentralized exchanges still use traditional order books and require liquidity. With the bonding curve, liquidity is inherent.
Many attempts to tokenize assets have been tried; however they use one token across many assets. This has been a necessity in order to achieve the liquidity and funding required to operate using traditional order books or on a centralized exchange. For example, a project will make Token X and use it to tokenize assets A, B, and C. This, however, does not lead to true price discovery as the assets are all tied together through the one common token.
With Zap Protocol’s bonding curves, individuals use ZAP to access the fully-liquid DEXs that are issuing the unique secondary-token associated with assets A, B, and C. This creates an instant market for each tokenized asset to be accessed without needing to work with centralized exchanges or market makers. Additionally, every product/service issued through Zap Protocol’s bonding curve templates comes with a customizable widget that can be placed on any website allowing access to the secondary-tokens wherever the widget is found.
For true tokenization to take place, there can not be a reliance on centralized entities to enable access to tokenized products and services. Zap Protocol’s out-of-the-box solution for a fully liquid decentralized exchange for peer-to-peer web3 engagement will be the next great step in the tokenization of the world.
Zap Protocol Advances Bonding Curves
After the initial creation of data oracle templates in 2018, Zap Protocol continued development and created additional smart contract templates that greatly expanded the types of use-cases possible using bonding curves. For example, the data oracle templates create secondary-tokens that can not be traded outside of the contracts; however the smart contract template for creating your own ERC20 token allows the token to be traded or used outside the Zap Protocol templates on any outside ethereum exchange or market.
Other templates use bonding curves for tradable futures markets, fundraising bounties, development bounties, decentralized competitions, and decentralized autonomous organizations (DAO). Additionally, the protocol is currently compatible with the Ethereum and EOS blockchains. For any of these use-cases, anyone in the world can run a server, host a tokenized product/service, and make it available through our protocol.
Recently, the Zap Protocol started an interface redesign that will only enhance the experience for product/service providers and consumers/speculators alike. A clean and intuitive interface will be the next great step for this powerful and disruptive technology made available through the Zap Protocol.
Stay up to date on the latest news and events concerning the Zap Protocol by following the official our official outlets:
Twitter: @ZapProtocol
Discord: discord.gg/pvHzemX
Telegram: t.me/ZapOracles
Reddit: r/ZapProtocol
Facebook: @ZapProtocol
Instagram: @ZapProtocol
Medium: The Zap Project
LinkedIn: Zap
GitHub: The Zap Project
