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Understanding Bonding Curves

To understand the nitty-gritty of how bonding curves function, why they do so in a particular manner, etc, one should try and understand its functionality concerning economics and the financial market. One needs to go through thoroughly the relationship between supply-chain and price fluctuations of a token/commodity. In a nutshell, studying these distinct bonding curves guides us in forecasting how the particular market may look like in a given scenario. In the pre-internet days, the variables included used to be limited (consumption of commodities pattern, demographic factor, state/nation factor, culture factor, etc), but in the present-day scrutinizing it from an economical and technological perspective, the list of variables has increased exponentially. The variables used in the pre-internet era does have relevance even today but in less proportion. Factors like throughput time, electricity consumption, the complexity of a query, repeatedness in consuming a specific token, for what purpose is a cryptocurrency used, etc have only gotten added up making the forecast more effective. This piece will cover the potential token economics architecture, token curated registry, etc.

Token economics framework

For a product/service/company to operate at its maximum capability, the overall ecosystem needs to have an appropriate stepping-stone(s) that assist in achieving the desired result. Similarly, for digital transactions to be functional in a blockchain framework where tokens get utilized instead of coins/notes, a specific architecture would guide in appropriate accountability in a decentralized ecosystem. Technically speaking, the higher the supply of tokens in the market, the more the price would be accordingly. In some sense, the relationship of supply and demand of any commodity (financial or non-financial) operates similarly if and when compared with token economics. As one may see from the infographic below that there exist four types of bonding curves:

In the “basic bonding curve”, it is indicated that the price increases as the supply of the token increases. The “sigmoid curve” encompasses three distinct phases, namely, the learning phase, the growth phase, and the decline phase. As the sigmoid curve has somewhat an ‘S’ shaped curve, there exists one inflection point from where stagnation may get commenced. In the quadratic curve, the nature of it can be determined without diminishing the general equation to canonical form. Instead, the values of the fundamental invariants of quadratic curves are scrutinized. Lastly, in the negative exponential curve, the price of the token increases slowly while the supply increases with due time. With the different types of curves being discussed, it’s time to examine the framework of token economics.

Broadly speaking, the framework is categorized under three types, “Market Design”, “Mechanism Design”, and “Token Design”. Market design is a form of economic engineering which encompasses the insights of economics and game theory, common sense, and lessons learned from empirical work as well. Here, the overall design and definition of an environment where the users and token will co-exist takes place. Market design is one of the core factors in token economics for productive functioning because it’s due to it that efficient networks and platforms can build fresh market designs for a new challenge/opportunity. There’re a couple of factors (not limited to these only) that make the marketplace operate appropriately. They are:

Thickness – thickness here means the ability to attract as much proportion of potential market participants as one can. The focal point here is in the network externalities and distinct economies of the scope which are practical and can be implemented as well. The size of a network could be considered as an alternative of thickness, where relevant individuals/clusters of participants transact with each other. Here, the PoW (proof of work) consensus algorithm assists in employing mining.

Ease in Congestion – A particular market is seen congested if insufficient time and/or resources are available for evaluating each transaction. This kind of hurdle arises when heterogenous similar opportunities are available. To resolve such scenarios, govern every transaction by removing low-quality transactions and metering bandwidth. Appropriate fees should be charged as well for accessing it during peak hours and non-peak hours. Lastly, adequate validators should be present for establishing consensus among everyone in the grid via PoA (proof of authority).

Safety – If in a particular market it’s risky to participate, some might try and hurt the overall market trying to safeguard oneself and the market too. In the ecosystem of tokens, safety could be measured through code adding up a layer of security for the participant. Regarding having a frictionless safe transaction, privacy features like ring signatures, cryptographic agility like post-quantum security, and peer-reviewed white papers will surely enhance the market-mechanism-token design.

Now let’s come to the relationship between mechanism design and token economics. Mechanism design lays down the rules of the game for governing the actions of the participants. It is directly interlinked with the long-term effect on the sustainability and decentralization of the token ecosystem. Another factor mechanism design is crucial because it observes, adapts, and guides the actions and behaviors of users in the grid. In short, for mechanism design to function at its best, it requires to offer adequate governance, encompass non-financial incentives, and design the blueprint of the mechanism as well. Governance could be seen as the alternative of consensus protocols and resolution mechanisms (smart contract).

Lastly, coming to the token design, it focuses more on token policies. The policies may include (not limited to these only) supply of tokens, inflation/deflation of tokens, token valuation, platform productivity, dynamic price equilibrium, etc. As decentralized platforms and applications are being seen as the potential future, this portion might be helpful in understanding and implementing it appropriately in the future. Now, let us go through some practical illustrations of tokenized data structures.

Tokenized data markets

The token curated registry (TCR) is one example among others (Distributed Hash Table, Tokenized Dataset, Tokenized Tree, Token Curated Registry, etc) of distinct token data structures. TCR offers an abstraction of how a cluster of participants can operate together in building a curated list. This piece of research suggests adding a fresh feature namely “recursively nesting TCR” which will assist in constructing more complex data structures like off-chain storage which wasn’t available in the previous version of TCR. The advantage of off-chain storage is that one could store all of its datasets which wasn’t possible in the prior version. Both Bitcoin and Ethereum were originally designed keeping in mind with PoW (proof of work). The PoS (proof of stake) consensus algorithm was originally built to secure blockchains, but with time it got clear that it could also assist in coordinating users and punish dishonest behavior as well. TCR’s specifically allows for the development of lists that are maintained by a set of curators. These curators must get bonded into the TCR by keeping tokens as stake. This bonding establishes a natural incentive structure that helps the listing take a natural form. It should be kept in mind that tokenized data structures (TCR, Distributed Hash Table, …) are a mixture of PoS’s incentive schemes along with distributed hash table form decentralized storage.

A distributed hash table is a tokenized data structure with no associated token but having an off-chain storage form of the distributed hash table.

A simple token curated registry is a particular scenario of a tokenized data structure with no off-chain storage and no private data. It should also be kept in mind that the concept of tokenized data structures are special cases of token curated registries.

A tokenized dataset is a distributed has table with an associated token. Besides that, it can be seen as a token curated registry with the addition of off-chain storage. A tokenized map is a 2-dimensional network with off-chain storage for local information at network points. In the end, a new way of constructing a decentralized data exchange got developed and might turn insightful in the future. In coming times, the digital economy in various forms will be the norm. One potential outcome can be the one mentioned below.

Tokenomics – Digital Socio-Economic Efficiency

Cryptographic tokens represent a fresh and unique phenomenon where through coding one could steer participant’s behavior. Tokens allow coordination, optimization, and administering a large cluster of networks in a decentralized fashion and on large scale. As mentioned earlier that tokenomics and crypto-economics would be key pillars in the productive understanding and functioning of bonding curves. While cryptography is employed to prove things in the past, game theory is used to design the interaction protocols that are interconnected with economic incentives. In crux, code and economics would be intrinsically be interlinked in the coming days. Tokenomics includes the concept of the economic system and optimization design to incentivize particular behaviors in the society via tokens by building a self-sustaining ad hoc economy.

Cryptographic tokens within distributed networks offer incentives to automatically align interests even in the absence of third parties/intermediaries leading to the building up of Web 3.0. Web 3.0 will be a mixture of more sophisticated decentralized scalable frameworks with terms like the Economy of Things (EoT), dEoE (digital economy of everything), etc. In layman’s words, EoT is a digital economy of everything, meaning a heterogeneous mix of IoT (internet of things) devices, digital entities (machine learning-based running services), etc. dEoE could hence be perceived as a complex open context ecosystem where distributed ledger protocols could provide the successor evolutionary building block of the internet enabling appropriate socio-economic output.

Token Economics Framework

The major focus in tokenomics is towards:

  1. Building networks with particular properties.
  2. Utilizing game-theory and economic as well as non-financial incentives to encourage the system developers to sustain those particular properties in the future as well.
  3. Employing cryptography to prove the properties of the past and make it tamper-proof.

At the end of the day, adherence to the principles and values that are designed and set via the evolutionary process of digital collaboration can help in setting up a market economy characterized by socio-economic efficiency. The following paragraph mentions about the interconnection between cryptoeconomic systems and tokens used in the system state.

Cryptoeconomic System and System Theory

In this piece of research, it tries to showcase how cryptoeconomic systems are complex socio-economic systems. A systems theory provides a means to describe any system through its

  • Structure,
  • Purpose,
  • Functioning,
  • Spatial and temporal boundaries including interdependencies with its environment

To have a thorough look, go to page 2 where an info-graph showcases how systems are categorized in the blockchain framework. Networks in crypto-economic systems are multi-scale as they are categorized by the local protocols while defined by the macro-scale properties. Their design requires an interdisciplinary approach to build protocols that are robust and resilient. As the entire system is decentralized, multi-scale feedback is a prerequisite (fig. 4, page 6) for frictionless functioning in the long run. Tokens can be perceived as the individualized state of an economic system. Tokens, as the atomic unit of state, could make every socio-economic activity visible and feasible. If you’re interested in seeing the different aspects of crypto-economics in play i.e. micro-level and macro-level analysis of economic; governance; design; and bitcoin perspective, visit page 9 having table 3. Governance is another crucial factor for the proper functioning of the bond market and blockchain ecosystem as every user has some stake. To coordinate various aspects simultaneously, there should be a purpose-driven activity(s), ethics-based algorithm development, applying social science to cryptoeconomic systems, and lastly employing cyber-physical systems engineering to cryptoeconomic design and analysis. With various factors keeping in mind, the bond curation market in a digitalized platform will surely assist in helping individuals at the micro-level as well as the macro level.

Concluding Remarks:

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Last modified on August 3rd, 2023 at 3:24 pm