- Bonding curves help to estimate the value of tokens in Decentralized Finance (DeFi) by establishing a relationship between the token’s value and its supply.
- They provide a sense of security when engaging in trade practices and solve many issues and hindrances in the crypto market.
- Bonding curves are smart contracts with predetermined conditions that raise or lower the value of the token whenever they are bought or sold in the market.
Bonding curves are equations in the field of mathematics which can be used as a tool to estimate the value of tokens when they are bought or sold.
Automated Adjustment of Token Value
Possession of certain types of tokens can provide the holder voting rights in Decentralized Autonomous Organizations (DAO). Other types of tokens may give the holder privileges like the ability to utilize explicit services or products.
Smart contracts are used with mathematical formulas to steadily regulate prices of tokens based on circulation in the crypto market. If more people acquire them, the value will adapt to the situation and increase, or decrease when tokens are removed from the market.
Types of Bonding Curves and Their Applications in Crypto
There is not a specific type of bonding curve or a formula which can be applied to all scenarios as the crypto market is dynamic and valuations of tokens and coins are always changing.
There are several types of curves and the concept is customizable for many different types of situations. However, common scenarios occur often in the market and specific curves are usually used for them.
- Linear curves are easy and straightforward where the value of a token is directly related to the amount of tokens sold. As more coins are minted or sold off, the price is increased by a set and specified amount. The is the most typical or common scenario in the crypto market for tokens.
- Exponential curves affect the value of tokens drastically as the supply of tokens increases. The value increases exponentially so a small increase in supply can mean a huge increase in the value, even double or triple the previous amount.
This type of bonding curve is most beneficial to early investors and buyers as when the demand increases in the future, they will benefit the most if they decide to sell their tokens as the price will be much higher than what it was initially.
- Logarithmic curves have an opposite effect in comparison to other types of curves as the value of tokens increases a lot initially, but as the supply expands, the price eventually comes down to a regular level.
This type of evaluation attracts a lot of buyers in the early stages as the tokens bought initially gain a lot of value in a short span. This can be a great opportunity for early investors to maximize their profit.
Conclusion
The use of bonding curves in token value estimation assists in streamlining and regulating the process of trading crypto tokens. The application of bonding curves makes the buyers and investors feel secure about their decisions regarding buying and selling of tokens as the risks involved are fair and visible upfront.