Bonding Curve
A math formula that automatically sets the price of a share based on how many people have bought it.
#Plain-English Definition
A Bonding Curve is a way to create a market without a counterparty. Instead of waiting for someone else to sell you a share, you buy it directly from a smart contract. The contract uses a formula (the curve) to calculate the price.
- Buy: When you buy, the contract mints new shares, and the price usually goes up slightly for the next person.
- Sell: When you sell, the contract burns your shares, and the price goes down slightly.
This ensures there is always liquidity—you can always buy or sell, as long as you accept the current price determined by the curve.
#How It Works
The most common formula in prediction markets is the Logarithmic Market Scoring Rule (LMSR) or the Constant Product Market Maker (CPMM) used by platforms like Polymarket (via Uniswap-style AMMs).
Imagine a curve on a graph:
- X-axis: Total supply of shares.
- Y-axis: Price per share.
As you move right (buying more shares), the price climbs the curve. As you move left (selling), it slides down.
#Why It Matters
- Instant Liquidity: You don't need a matching buyer or seller; the contract is always there to trade.
- Price Discovery: The price automatically adjusts to demand, theoretically reflecting the "crowd's" probability estimate.
- Slippage: If you buy a huge amount at once, you push the price way up the curve, resulting in a higher average cost (slippage).
#Key Takeaways
- Bonding curves automate pricing and liquidity.
- They allow trading even when no other humans are online.
- They are the engine behind AMMs (Automated Market Makers).