In the traditional framework, there are three forces that dominate the allocation of resources, the market, the government, and the third sector (ethics, religion, and non-profit organizations). In a market economy society, almost everything can be priced and traded. A common theory is that the equilibrium price is at the intersection of the supply and demand curve. In the secondary market, price discovery becomes slightly more complicated, at least considering time Factors, the power of both the long and the short, the circulation and the depth of the transaction, etc. The joint curve model is a contract for issuing tokens through the [buying and selling function]. The joint curve model can be understood as describing the functional relationship between the “buying and selling price” and the “total issuance”, forming a “price-total volume” curve. It can also be understood as an automatic market maker that executes automatically in the form of smart contracts.
What is the essence of Bonding Curve? Its essence is to establish a decentralized collaboration mechanism in the on-chain environment, which integrates multiple elements such as time, counterparty, disk size, depth, and price, and the algorithm is responsible for the allocation of resources within the entire collaboration mechanism. At present, at the theoretical level, a lot of research on economic issues such as market economy and public goods distribution is still needed to solve problems including sybil attack (sybil attack), front running (order in advance), fork (fork) and other issues. But there is no doubt that the joint curve provides us with a new perspective.
PentaLaunch, recently acquired by Dorafactory, is a bonding curve auction platform. At present, its main purpose is to raise funds for open source projects. The DAOrayaki decentralized research organization believes that for the pricing of NFTs, the curation market will be one of the most important application areas of this joint curve model, but it may not be a continuous curve, but a discrete curve.
Today, we will introduce a new concept, Re-Fungible Token (Re-Fungible Token). When the off-chain assets such as artworks and collectibles have been digitized and turned into NFTs (Non-Homogeneous Tokens), which can be re-spliced and combined in the DeFi world, we should never stick to their pricing mechanism anymore It is based on the traditional thinking of curating and auctioning.
When Re-Fungible Token meets the joint curve
Core Author: Billy Rennekamp
Reference: Compulsory course of economic system for each application class Dapp-Token Bonding Curve, Token Bonding Curve: Innovative exploration of token issuance methods | ONE.TOP rating, Curation Market, etc.
The focus of this article is to explore the use of ERC20 joint curve token (Simon de la Rouviere, Bonding Curve Token) or liquidity token (Bancor, Liquidity Token) as the owner address of the ERC721 standard NFT. Unlike in the past when a specific person owns a specific NFT, people can hold a certain number of homogenized tokens, and this means that they have an original NFT. I think this will be very helpful to the curatorial market of art, intellectual property and digital payment.
Joint curve and liquidity tokens (Bonded Curves&Liquid Tokens)
There is a special type of ERC20 token that allows users to buy and sell directly on smart contracts. Simon de la Rouviere calls bonded curve tokens and Bancor calls liquid tokens. Both refer to a smart contract. It accepts ETH or another EC20 token in exchange for the denomination minted into a new token.
Simon de la Rouviere’s version is named after the curve. The curve in the figure shows that the price of each token (y-axis) and the number of tokens in circulation (x-axis) are combined by a predefined slope formula. The slope can be linear, exponential, logarithmic, or completely arbitrary, depending on the use case, but the most common situation is that the price increases with the number of tokens in circulation.
Here is a popularization of the mathematical connotation of the joint curve (quoted from “Economic System Compulsory Course for Every Application Dapp-Token Bonding Curve, First Block Rhythm”
Regarding the functional form of the joint curve, its type and design are limited only by human imagination. The Bancor protocol is the first complete set of design ideas from the price function to the overall mathematical deduction of transaction pricing.
Linear function with different buying and selling functions
Taking this mechanism as an example, 30% of the handling fee is charged for each sale. Suppose the buying curve is a simple linear function y=x. Then the selling function y=(1-30%)*x=0.7x. The simple shape of the two curves is shown in the figure below:
Linear-like functions with the same buy and sell functions
Convex function curve type (including exponential type)
Concave function curve type (Logarithmic type, inverse function type, polynomial-like type)
Connotation: where a and c represent that the price of the token increases by a% every time the number of tokens doubles by c. m and b are used as linear function parameters to adjust the intercept and slope. Taking the above formula as an example, this specific function curve represents a 25% increase in price every time the number of tokens doubles.
Bonded Curve Tokens&Curation Markets
These joint curve tokens are mainly described for use in the curatorial market, where the price of the token can represent the popularity of a topic. One example is Trend Forecasting, which can be done by buying and selling different tokens representing different trends. People who predict the success of a certain style may buy tokens, hoping that as the style rises to fame, more people will follow it. As newly minted tokens create profits for early adopters, prices will rise accordingly. Similar to the prediction market, it draws on “popular wisdom” through economic incentives.
Liquid Tokens & Market Makers (Liquid Tokens&Market Makers)
Bancor refers to this technology as mobile tokens, emphasizing that tokens can always be purchased or sold in any amount. They determine the relationship between buying denomination and selling denomination as the deposit reserve ratio. The ratio below 1/2 increases exponentially, the ratio above 1/2 increases logarithmically, and the ratio 1/2 increases linearly. The purchase price is calculated based on the total supply of the token, the amount of the basic reserve and the predetermined deposit reserve ratio.
Bancor’s goal is to support long-tail tokens that do not have a sufficient number of buy and sell orders (lack of trading depth and liquidity) on traditional exchanges. By encouraging the use of their Bancor Network Token as a normal purchase denomination, they can provide exchanges between different tokens.
Re-Fungible Token (RFT) that can be re-homogenized
Finally, we can start thinking about the experiment I originally proposed: What happens if an ERC721 NFT is owned by an ERC20 Bonded Curve Token/Liquid Token address?
In essence, non-homogeneous assets will once again become homogenous assets. The casting and unminting of these homogenized tokens will be bound to a pre-defined price curve.
In the end, it is possible to prove part of the ownership of the NFT, just like proving the ownership of the token through the standard ERC20 interface. If I am a wallet, I can check the NFT’s Digital Asset Registry (DAR) to see who owns it. Then, I can check the owner’s address to see if it is really an RFT contract. If so, I can use the balanceOf function to check whether an address has a certain amount of RFT tokens and verify partial ownership of the original NFT.
Depending on the specific situation, some signals can be collected through the price of each token representing the asset. A very high price RFT must represent some expected high quality, such as a famous painting and a well-known IP, so that so many users are willing to buy it. These users may be rational participants, and they expect to gain profits from the further growth of the token, or they may be iron fans (perceptual supporters) of this IP, regardless of the effect of their investment. The signal obtained from the price of each token may be different, depending on the type of NFT it represents.
Art in the curatorial market
There is no doubt that information asymmetry is rampant in the art market. This situation is largely beneficial to dealers and auction houses, who can usually lock in prices and deliberately create scarcity to take advantage of larger selling prices to sell works.
Linking NFT artwork to the Re-Fungible token of the joint curve will create a new trading system in which the value of the artwork will be continuously updated with the price of the curatorial market on the joint curve. Such a system can create a mechanism that benefits artists, and investors with a keen taste will benefit from smart acquisitions. Artists can similarly speculate or pre-mint (pre-mint), or use inflation on RFT to obtain a sustainable source of income. In the case of inflation, there may be a price difference on the buying and selling curve, and the difference between the two will be continuously paid to the author of the work, or there will be a simple fixed fee in each transaction. Basically, the artist makes money every time he sells his work.
Of course, this situation may generate more questions than answers. To what extent does the price of an artwork-specific token reflect the quality of the artwork? If a work of art can only be owned by one collective, what does it mean conceptually? Will this lead to more or less moral consumption of art? How much does the price fluctuate?
Nested Investment Market (Nested Investment Market)
In this context, the curatorial market is nested, and each Bonding Curve Token accepts some base denomination when it is minted. This basic denomination can be ETH, a stable coin similar to DAI or any other ERC20 token, including another Bonding Curve Token.
An artwork NFT will reflect multiple pricing elements at different levels in our market. At one level, it may be a general investment token (GIT), which is tied to ETH or stable currency. This GIT can be used to purchase different digital asset pools (DARTs, Digital Asset Registry), these tokens can represent the entire NFT type;
Imagine a CryptoKitty DART, a celebrity DART, and a CryptoPunk DART. The last level will be RFT (Re-Fungible Token), which is purchased together with DART and represents part of the ownership of a single NFT.
The price of NFT binding-RFT-should mark the success of a single artwork, DART-the success of the entire NFT pool of a certain type, and GIT-the success of the entire system.
For details of the above nested model, please refer to the article: Continuous Token-Curated Registries: The Infinity of Lists, Solving Price Discovery Of Non-Rivalrous Goods (with Curved Bonding), to solve the problem of price discovery of non-competitive goods (if you are interested, you can translate And contributed to DAOrayaki)
What’s the next step?
All these scenarios require a lot of experimentation, because there are many questions without answers. What parameters are needed to create an efficient system? How many tokens are needed for payment? Will this number change over time? How should the price curve be set? What degree of inflation has provided sufficient remuneration for the founders of the token, while providing attractive investment opportunities? What compliance issues might these tokens involve?
When the off-chain assets such as artworks and collectibles have been digitized and turned into NFTs (Non-Homogeneous Tokens), which can be re-spliced and combined in the DeFi world, we should never stick to their pricing mechanism anymore It is based on the traditional thinking of curating and auctioning. Hope this article has inspired you.
Author/ Translator: Jamie Kim
Bio: Jamie Kim is a technology journalist. Raised in Hong Kong and always vocal at heart. She aims to share her expertise with the readers at blockreview.net. Kim is a Bitcoin maximalist who believes with unwavering conviction that Bitcoin is the only cryptocurrency – in fact, currency – worth caring about.