Understanding the Concept of a Bonding Curve
A bonding curve is a mathematical concept that illustrates the relationship between the price of an asset and its supply.
At its core, a bonding curve operates on the principle that as individuals acquire a limited quantity asset, such as Bitcoin, the subsequent buyers must pay incrementally higher prices.
This price increase occurs because the asset supply decreases with each purchase.
This mechanism aims to generate profits for early investors potentially.
Bonding Curve Contracts
Recently, the cryptocurrency space has witnessed the emergence of bonding curve contracts.
These contracts serve as token issuance smart contracts, creating an independent market for tokens outside of traditional cryptocurrency exchanges.
Within bonding curve contracts, tokens are sold to users by calculating the token price in Ether and issuing them after the payment.
The contract also facilitates the purchase of tokens by repurchasing them from users and paying with Ether.
In both cases, the smart contract determines the average price and establishes the rate based on that calculation.
Dynamic Token Supply
Unlike traditional assets, there is no fixed limit on the number of tokens created through bonding curve contracts.
Instead, the quantity of Ether in circulation and the price curve dictate the number of tokens circulating within the market.
Typically, bonding curve contracts are designed to ensure that as the number of tokens issued increases, the price of each token also rises.