Introducing the bonding curve with homogeneous liquidity distribution

An optimized community funding mechanism for early-stage crypto projects

Interlude
5 min readNov 23, 2024

One of the big advantage of crypto over other industries is the greater availability of community funding. For small innovative projects that can’t or don’t want to access institutional funding, being able to tap a community of small, early investors that believe in the project can be a game changer. However, while it’s attractive on paper, community funding often turns out to be much more of a headache in practice. Indeed, a project that want to get community funded in practice has two choices:

  • do a token presale without unlocking the token, thus delaying the liquidity event to a later date when the project will be more mature
  • launch a token on the market (most often on a DEX, potentially after a presale), then get the funding from the live token, either by being a liquidity provider or by selling some of the project’s reserve holdings

None of these choices are ideal:

  • a presale with locked tokens will be unattractive to a lot of short-term investors, who are looking quick profits
  • having a token live adds a huge amount of stress and instability to a project. If the project is mainly centered around the token (eg for memecoins) this is fine but for more ambitious projects (with a product to develop) where having a token is not the main focus this is a lot of additional stress and complexity. This is in addition to the huge amount of capital that is immobilized in liquidity pools (in DEXes), that could be better used by being invested in product development for example.

One might then ask if there might be a way to design a better system, that would keep the advantage of a live token (a rising price, and possibility for early investors to take some profits) while removing the characteristics that may be good for a memecoin but not for a long-term project (risks of pump and dump, short-term speculation).

In the following we propose an example of such system, that we call a “bonding curve with homogeneous liquidity claims”, or more simply automated market.

Introducing the bonding curve with homogeneous liquidity distribution

While AMM solve the problem of providing liquidity to small cap tokens by automating the trading counterpart and replacing it with a formula and a liquidity pool, automated markets go even further: they don’t only act as a counterpart when the holder wants to sell, but instead trigger the sale automatically whenever some new liquidity is brought to the system.

Here’s how it works in more details:

  • Participants are allowed to buy following a bonding curve (price curve)
  • The tokens are not tradeable, and the participants are not allowed to sell their holdings.
  • Instead, whenever a new investor makes a purchase on the curve a small share of every participants is automatically sold, such that the total liquidity obtained from the sale (for all holders) is equal to a fixed share of the new liquidity (for example 50%). The remainder of the liquidity is used to fund the project (like in a normal presale)

The liquidity owed to each holder is automatically reserved by the contract. Holders are free to withdraw it and then can choose to reinvest it (eg hold) or keep it (eg take profit). The sold tokens may be burned, or equivalently airdropped back to the holders (this wouldn’t change the overall repartition of the token). Lastly this system can easily be transitioned to a normal market by releasing the tokens, for example once a certain share of the supply has been sold or if the project reaches a certain milestone in development.

A sale curve with an exponential step function

This mechanism shares some similarities with traditional markets/AMMs: namely, that investors can buy the tokens at any time, the token price increases as more investors get in, and participants are allowed to take profits as the asset price rises. The main difference is that selling is limited: in effect the system is equivalent to only allowing investors to sell a small share of their holdings equivalent to their share of the new liquidity, whenever someone adds liquidity. This way we still allow for some profit taking, but in a limited, controlled way, that can’t trigger a sell-off like in a normal market.

The main difference: in a traditional market anyone can dump their entire holdings and walk with a huge share of the liquidity. In our system every investor is guaranteed the same ROI.

Hence we get a system that is still attractive to short-term investors, while allowing the project to focus on building and working on a long term roadmap without worrying about short-term volatility.

Conclusion: a fairer, stability-maximizing, and stress-minimizing system

Our system allows us to get the best of both worlds: a token that rises in price as more investors get in, and that allows for fair profit taking, while limiting the risk of pump and dump and the volatility that come with traditional crypto markets.

Overall this makes our system much more fair and less stressful compared to a live token, and much better suited to financing a risky, innovative project that needs more stable and predictable funding. In the case of memecoins the fear and excitement of holding and selling at the right time is a big part of the fun, so a normal market will be more appropriate. But for more ambitious projects that are looking for community investors but don’t want a live token and its chart to become their full-time focus, these kinds of alternative mechanisms could be very much worth looking into.

We will be using this mechanism in our upcoming presale for the Interlude project. We are very interested in any type of feedback, so if you have some suggestions, remarks, or questions please add them in the comments. If you’re interested in a Solidity implementation you can also contact us.

--

--

Interlude
Interlude

Written by Interlude

Interlude: the metaverse dungeon

No responses yet