Token Engineering: Driving Real World Impact Through Bonding Curve Incentives
Leveraging bonding curves in token engineering can offer pathways to align incentives, foster innovation, and empower economies that impact real world problems.
Griff Green is a serial giver. The digital currency evangelist co-founded an extensive portfolio of decentralized philanthropic giving platforms, collaboration tools and is on a mission to “decentralize everything” to empower the individual and support the voluntary funding of public goods. Griff is co-founder of Giveth, General Magic, Commons Stack, Dappnode, Token Engineering Commons and contributor to Greenpilled: How Crypto Can Regenerate the World.
He recently discussed Token Engineering: Real Solutions to Real Problems with Bonding Curves with UETH and introduced us to:
Bonding curves, a subset of token engineering that can unlock opportunities in incentive alignment, innovation and economic empowerment.
How bonding curves can revolutionize how value is generated, distributed and managed in decentralized ecosystems.
Examples of how bonding curves are being used today, one facing challenges of sustainability, another of responsible engineering for the benefit of its community
Bonding Curves: One of Many Tools in the Token Engineering Toolbox
Token engineering is a relatively new field that combines principles from economics, game theory, computer science, and systems engineering to design, create, and manage ecosystems that incentivize a specified behavior or action.
Under the umbrella of token engineering, bonding curves stand out as a mechanism. Their core attribute, the capacity to determine the relationship between token supply and price, plays a critical role in molding the economic framework of decentralized networks.
In line with fundamental supply and demand principles, the "curve" in bonding curves usually begins at a lower value when the token supply is limited and gradually increases as more tokens are purchased. The term "bonding curve" derives from the way participants engage with the system through the purchase or sale of tokens, essentially forming a bond. This "curve" signifies the mathematical correlation between the supply of tokens and their price, directing the impact of these transactions on the token's market value.
Bonding curves are a radical departure from traditional Web2 finance mechanisms because of the following capabilities and characteristics:
Continuous Liquidity Provision: Participants can buy or sell tokens directly from the curve at any time, ensuring constant availability of liquidity without relying on centralized exchanges or market makers.
Decentralized Price Discovery: Bonding curves use algorithmically determined pricing based on token supply, providing decentralized and transparent price discovery without the need for intermediaries.
Programmable Incentives: Smart contracts governing bonding curves can be designed to incentivize specific behaviors such as liquidity provision or community participation, enabling granular control over economic incentives.
Fair and Inclusive Access: Traditional financial systems often have barriers to entry, excluding many individuals from participation.Participants can enter and exit the market at any time, and token prices adjust dynamically based on demand, facilitating broader participation.
Elasticity and Stability: Bonding curves can dynamically adjust token supply and price in response to changing market conditions. This stabilizes token prices and mitigates volatility, offering a more stable and predictable environment for participants.
Bonding Curves In The Real World: What Can Go Wrong and What Good Looks Like
In the practical application of bonding curves, Bankless DAO incorporates bonding curves in its governance token distribution model. This allows members to acquire governance tokens by contributing to the ecosystem or participating in community activities. Curve Finance, a decentralized exchange (DEX) employs bonding curves in its liquidity pools to ensure stable prices and high liquidity for stablecoin trading pairs.
However, Griff illuminated challenges through the case of friend.tech, a protocol enabling users to establish personal chat rooms. Here, "keys" or access tokens became more costly as their demand increased, creating an opportunity for profit as a chat room's popularity soared. Unfortunately, the protocol's swift rise attracted bots intent on exploiting the system, leading to market manipulation. This situation has drawn criticism, with some likening the explosive growth of friend.tech to the latest Web3 Ponzi scheme, and others questioning its long-term viability as key creators exit en masse. This case study underscores vulnerabilities in token engineering design, emphasizing the need for robust safeguards against such exploitative behaviors.
In contrast, Griff explained that the Token Engineering Commons (TEC) had already been utilizing bonding curves for two years prior to friend.tech, opting for an augmented bonding curve (ABC) model. This strategic choice was aimed at fostering sustainable token economies that reflect community values, thereby minimizing the risks of speculative behavior and market manipulation. TEC's core mission involves funding initiatives that are dedicated to uncovering, refining, and spreading best practices for crafting secure, token-based economies that benefit token holders and align with their success.
Source: Griff Green
TEC deliberately curated its initial group of token holders to include individuals deeply committed to the community's goal of promoting ethical token engineering. This selective process effectively shields against the kind of speculative frenzy and vulnerability to manipulation observed in friend.tech’s model.
Moreover, TEC has implemented a system where each member's contribution in XDai triggers the creation of a new TEC token. Accompanying each transaction is a fee that directly supports public goods. This innovative approach acts as a "programmable tax," intentionally designed to back social projects that resonate with the community's ethos. By prioritizing responsible token engineering and aligning incentives with community values, TEC showcases a strategic framework to safeguard the stability and integrity of tokenized systems, ensuring they serve broader societal goals effectively.
Optimizing Outcomes through Strategic Use of Bonding Curves in Token Engineering
Bonding curves represent a powerful tool within the broader framework of token engineering, offering innovative solutions to longstanding challenges in economic design. They facilitate a paradigm shift in finance by offering continuous liquidity, enabling algorithm-driven price discovery, customizing incentives, and ensuring equitable participation. This revolutionizes traditional financial frameworks, heralding a new era of more open and resilient digital ecosystems.
The importance of responsible implementation and governance in token engineering is highlighted by challenges observed in certain protocols. The TEC, with its focus on ethical practices, augmented bonding curves, and alignment with community values, stands as a model for creating sustainable and beneficial tokenized economies.
By employing thoughtful design and diligent management, bonding curves have the potential to foster diverse and dynamic ecosystems that reflect and fulfill the aspirations and principles of their communities.
Get involved
Watch the full Workshop + student Q&A here.
Tell us what you think of this blog post on Discord or Twitter.
Engage with our workshop guest on X: @thegrifft
Interested in learning more about bonding curves? Check out the curated reading list below: