Educational Byte: What Are Bonding Curves and How Can You Earn With Them?

In crypto, prices and liquidity are chaotic. Traditionally, markets rely on the interaction between traders to set prices. This means that prices can be more volatile and influenced by large trades or market manipulation, and liquidity fully depends on the availability of buyers and sellers. Bonding curves can efficiently solve these issues and, depending on the platform, even offer some rewards to participants.

Bonding curves are mathematical functions that link a token’s supply to its price, creating a dynamic pricing mechanism. This way, when someone buys tokens, the price adjusts upward according to the curve’s formula. Similarly, when tokens are sold, the supply decreases, causing the price to adjust downward. This method ensures that the token's price always responds to changes in demand and supply, allowing for an automated and transparent valuation process without needing a centralized entity or powerful traders to control the market.

These curves work by embedding liquidity directly into the token’s smart contract or Autonomous Agent (on Obyte), which handles both buying and selling. The entire process is decentralized and relies on algorithms to automatically balance the supply and demand, enabling continuous liquidity for the token. This means traders can buy or sell tokens anytime without relying on traditional order books or middlemen.

Bonding curves in DeFi + Obyte

In decentralized finance (DeFi), bonding curves have several practical applications. For example, they are used to create tokens that can fund projects by automatically adjusting the price as demand changes. They also ensure that liquidity remains available, even for newer tokens, making them a valuable tool for projects seeking fair funding and sustainable growth. Moreover, bonding curves can be leveraged to create decentralized autonomous markets where tokens’ prices adjust in real time, promoting fairness and reducing the risk of price manipulation.

Obyte is currently using bonding curves to handle the prices of several tokens on different platforms. Let’s discover some of them.

Ostable (Bonded Stablecoins)

This was the first bonding curve project in Obyte, designed to issue and exchange algorithmic stablecoins. Instead of a fiat reserve, stability for these tokens was supposed to be reached by using multi-dimensional bonding curve formulas (described here). While this system was designed to keep the stablecoin’s value near the price of the target asset, the actual experience has shown that trader behavior was not what we expected, and the prices of many stablecoins deviated from their target prices. The subsequent bonding curve projects in Obyte took this into account.

Prophet

Prophet is a prediction market platform on Obyte that lets users bet on various future events, such as sports games or political outcomes, using tokens tied to specific results. The platform uses bonding curves to create a dynamic and liquid market where tokens representing different outcomes are continuously priced based on supply and demand. This means that as more people bet on a particular outcome, the price of that outcome’s tokens increases, and the prices of other outcomes decrease.

Users can earn money on Prophet by betting on the outcome they believe will happen. If their prediction is correct, they receive a share of the total pool, which includes their initial stake plus a portion of the funds from incorrect bets. Additionally, users can profit by buying and selling tokens when they believe they are mispriced, taking advantage of market fluctuations, or by providing liquidity to various pools and earning from trading fees.

To know more details about how bonding curves work in Prophet, you can read a whole explanation here.

OSWAP Token

This is the governance token for the largest decentralized exchange on Obyte, Oswap.io. Its price is determined by a bonding curve, which ties the token's value to the total liquidity in the available pools. As more liquidity is locked in the platform, the token’s price appreciates faster.

Users can earn with OSWAP by providing liquidity to the pools and receiving token rewards, or by participating in staking and governance to help decide how to distribute rewards and manage the platform. The bonding curve ensures continuous liquidity, and token holders benefit from trading fees as well as the potential long-term appreciation of OSWAP’s value.

Bonding curve formulas, detailed tokenomics, and more about the OSWAP Token are available here.

Pythagorean Perpetual Futures

They’re decentralized futures contracts on Obyte that use Pythagorean bonding curves and Autonomous Agents (AA) to provide always-available liquidity and continuous price tracking of assets. The bonding curves here ensure that the prices of these futures tokens stay aligned with the value of the underlying asset by dynamically adjusting parameters based on market conditions, making them stable and eliminating liquidation risks. Unlike Ostable, tokens in this platform (like USDC1) always keep its peg.

Traders can earn by profiting from price adjustments, staking for governance rewards, and collecting trading fees, while also benefiting from the DeFi composability of these fungible tokens for integration into other decentralized applications. A full explanation of Pythagorean Perpetual Futures, including specific bonding curves, is available here.

As we can see, bonding curves are valuable in DeFi because they provide continuous liquidity and automated, fair pricing based on market activity. This dynamic system allows early participants to benefit from token price appreciation and offers steady rewards for liquidity providers and traders through fees. If you’re ready to try them, you can start on Obyte!