Token Bonding Curve

Introduction

The token bonding curve (TBC) manages the supply of tokens in a rational way, without the involvement of humans, to create a system that avoids the boom-bust problems of traditional economies and the deflationary economics of many cryptocurrencies.

A token bonding curve is a smart contract that takes the input of some token and outputs a new token. This creates plethora of possible variations to drive an exciting area of research, but in SORA we use a simple model where there are two linear functions: a Buy-Price Function and a Sell-Price Function.

Primary market is the TBC, the secondary is Polkaswap/Uniswap..

In simple words, the token bonding curve is essentially an infinitely liquid, decentralized central bank. At any time, you can buy newly minted XOR from the token bonding curve using some specific reserve assets, or sell your XOR tokens (which are instantly burned) for one of those assets.

Furthermore, because the token bonding curve’s pricing functions slope upwards, the price increases with the token supply. Keep always in mind that with a token bonding curve, XOR price and supply are correlated, and they move accordingly.

Price tends to increase when supply rises

Another important implication of this mechanism is that XOR price on secondary market (Polkaswap, Uniswap, CEXs...) tends to be limited in a certain price range (red triangle in the picture above). In fact, if a user trades XOR outside that range, it creates an arbitrage opportunity to buy/sell XOR below/above the token bonding curves prices: XOR volatility is thus reduced.

Why is the token bonding curve useful?

  • Autonomous Management of Token Supply to Match Demand (Elastic Supply) — The token bonding curve introduces and removes XOR from circulation to meet the demand of the market. This ensures sustainable economic growth and price stability of the token economy, as the system can adapt to the changing needs.

  • Deep and Immediate Liquidity — The bonding curve contract is the counterpart of the transaction and always holds enough buyback reserves (read more about this below in the "Ideal and Actual Scenarios" paragraph).

  • Mitigate influences of pump-and-dump/market-manipulation attacks

  • The decentralized monetary policy of XOR offers protection from abuse by authorities and full transparency for users.

  • Primary market buy-back reserve puts a limit on ability of governments or short-sellers to manipulate the market.

  • The SORA v2 monetary system is neither debt-based nor debt-driven, and new tokens are always allocated under democratic supervision, which works to eliminate the unsustainable boom-bust cycles in contemporary economic systems.

  • The current buy/sell-prices offered by the token bonding curve provide support & resistance levels, or a confidence range for XOR price in the market, with forward guidance.

  • 20% of the amounts bought from the buy function are reserved for different players in the SORA Network, as you can see in the picture:

While the SORA economy is in its infant phase, the token bonding curve plays a crucial role in maintaining the store-of-value property of XOR. The ability to set confidence ranges of token price movements lowers the psychological boundary in accepting XOR for payments.

It is important to note though that the token bonding curve does not guarantee stability of the price of XOR, but rather a measure of forward-guided price predictability.

Ideal and Actual scenarios

Let's now focus on reserves, which play a crucial role in the TBC mechanism.

At the launch of the SORA v2 network, 350,000 XOR will already be in existence. This means that the SORA token bonding curve will have an unfunded liability of 350,000 XOR worth of DAI, 350,000 XOR worth of ETH, 350,000 worth of VAL, and 350,000 XOR worth of PSWAP. This is the actual scenario.

The Buy-Price Function has been set at 900$ at Soft launch, its equation is y = mx + b, where b:=634$ and the slope m := 1/1337.

The implication of this scenario is that the Sell-Price Function of the token bonding curve is not 20% lower than the Buy-Price Function (as it should be in the ideal scenario), but it is lower. Infact, there is little liquidity in reserves for you to sell your XOR tokens, and the price on Sell-Price Function may be low, compared to the secondary market price.

The Actual Sell-Price Function increases as the reserves increase, approaching the Ideal Sell-Price Function, which is 20% lower than the Buy-Price Function.

Buy-Price Function is the same in both the Actual and Ideal scenario.

This is why building reserves after launch is crucial and there is a special incentive program in PSWAP (25% of the total PSWAP supply) for users that buy newly-minted XOR on the TBC. You can read the details here.

Selling in the Actual scenario

Considering that the ideal reserves are a long term goal, it is important to understand how selling in a token bonding curve which is not fully collateralized works.

As you can see, the price has a different behaviour in the actual scenario, where users will sell their tokens at a lower price than the ideal scenario. It is important to note though that when the reserves increase, the Sell-Price function will become closer and closer to the ideal Sell-Price Function, and users will have already good liquidity to sell even large amounts. You can see a detailed selling example with numbers here.

In addition, there are extra fees when selling with low collateralization:

  • under 30% collateralized: +1% fee

  • under 20% collateralized: +3% fee

  • under 10% collateralized: +6% fee

  • under 5% collateralized: +9% fee

These extra fees will be burned.

Token Bonding Curve and Parachain auctions

The TBC plays a key point in securing a Parachain slot for the SORA Network on Polkadot and Kusama.

At full launch, Polkadot and Kusama will be integrated in the SORA Network, and users will be able to buy XOR with DOT and KSM from the token bonding curve.

DOT and KSM tokens held in reserves by the token bonding curve will be used to make a bid for a parachain slot for the SORA ecosystem.

Double rewards will be given to users who buy XOR with KSM and DOT, as these two currencies are needed to secure parachain slots for the SORA ecosystem.