📈Token Model
The v33-X bonding curve is a crucial component of the token model, responsible for maintaining the value of TOKEN and determining its market price.
The token model offers three significant features:
Single-sided liquidity provision: Allows liquidity provision for TOKEN without the risk of impermanent loss, leading to deeper liquidity pools, and better price stability.
Emission of call options: Provides a sustainable emissions mechanism through oTOKEN call options.
Borrowing against vTOKEN: Enables borrowing against vTOKEN without risk of liquidation, no interest, and no oracle, creating a risk-free borrowing mechanism.
Bonding Curve
The bonding curve is the contract that governs the price dynamics of TOKEN via a dual bonding curve mechanism. It enforces strict supply control policy for TOKEN and ensures that whenever TOKEN is minted, it is backed by liquidity. There are two bonding curves that make up the reserves of TOKEN: the floor reserves and market reserves.
Floor Reserves
The primary purpose of the Floor Reserves is to guarantee a predetermined floor price for TOKEN. This ensures that the TOKEN's value never falls below this threshold, providing stability and confidence for users within the system. The concept operates on a fixed-price curve y = c, where the TOKEN price remains constant at 1 BASE/TOKEN, termed as the floor price.
Constant-option bonding curve for the Floor Reserves, which is continuous and doesn't cap the reserves it can hold. This mechanism allows for a potentially infinite TOKEN supply.
oTOKEN, which is the emission token, acts as a call option on TOKEN. It has a strike price equal to the floor price (1 BASE/TOKEN) and does not expire. When exercised, users can acquire TOKEN at a rate cheaper than the current market rate, allowing them to profit.
oTOKEN can be created without affecting the strict supply control policy of TOKEN because exercising will inject the bonding curve with the floor price equivalent of BASE
Users have the ability to redeem their TOKEN to the floor reserves at the floor price, ensuring a guaranteed minimum value for all circulating TOKEN.
Exercising oTOKEN with BASE brings TOKEN into circulation. Redeeming removes TOKEN from circulation.
Market Reserves
The Market Reserves dynamically adjust to market demand, determining the market price of TOKEN. This curve ensures that the market price of TOKEN remains above or equal to the floor price, providing ample liquidity and promoting price discovery. This bonding curve employs a virtual bonding curve based on the xy=k formula for TOKEN price discovery.
Virtual bonding curve for the Market Reserves, negating the necessity for upfront capital. This strategy offers deep liquidity and minimal slippage for TOKEN right from its inception, without the dependence on external liquidity incentives.
In its initial state, the complete TOKEN supply is minted into the market reserves, balanced by an equal quantity of virtual BASE. Virtual BASE is used solely for accounting purposes in the xy=k equation and will not back circulating TOKEN because initially the circulating TOKEN supply will be 0.
TOKEN's pricing within the market reserves varies, ranging from a minimum of 1 BASE/TOKEN (the floor price) to a theoretical maximum of infinity BASE/TOKEN. Users are free to buy or sell TOKEN at the prevalent market price from these reserves at any time.
Buying TOKEN from the market reserves brings them into circulation. Selling TOKEN to the market reserves removes them from circulation.
Examples
To better understand the bonding curve's functionality, let's consider a scenario that begins with an empty bonding curve, undergoes some operations, and then winds down to empty again. This example will illustrate how the bonding curve works and demonstrate how 1 TOKEN is always backed by ≥ 1 BASE.
Initial State: The bonding curve has 0 circulating TOKEN and 0 BASE backing it. The Floor Reserve price is set to 1 BASE/TOKEN, and the Market Reserve equation is set to (100 virtual BASE) * (100 TOKEN) = 10,000.
Buy TOKEN: A user spends 33.33 BASE to purchase TOKEN from the Market Reserves. The calculation is as follows: (100 virtBASE+ 33.33 BASE)(100 TOKEN- y TOKEN) = 10,000 y = 25 TOKEN
What does slippage look like if we set X and Y higher? X, Y = 100 -> 25 BASE => 20 TOKEN -> Slippage = 20% X, Y = 1000 -> 25 BASE => 24.4 TOKEN -> Slippage = 2.4% X,Y = 10000 -> 25 BASE => 24.94 TOKEN -> Slippage = 0.24%
The deployer of this system determines X and Y and they can be set to any amount.
This example illustrates how the bonding curve achieves single-sided liquidity without any upfront liquidity provision. TOKEN itself serves as the "LP" (although users won't earn swap fees unless they stake it for vTOKEN). Note that there are now 25 TOKEN in circulation, backed by 33.33 BASE, maintaining the 1 TOKEN ≥ 1 BASE relationship.
Exercise oTOKEN: A user converts 25 oTOKEN + 25 BASE to receive 25 TOKEN, exercising their oTOKEN to purchase TOKEN at the floor price. This adds another 25 TOKEN to circulation, and since BASE was deposited into the bonding curve, the circulating TOKEN remains backed by at least 1 BASE/TOKEN.
Sell TOKEN: The user who exercised 25 oTOKEN for 25 TOKEN now wants to take their profit. They can do this by selling TOKEN at the market price to the bonding curve. The calculation is as follows: (100 virtBASE + 33.33 BASE - x BASE)(75 TOKEN + 25 TOKEN) = 10,000 x = 33.33 BASE.
The total profit is 33.33 BASE - 25 BASE = 8.33 BASE (25 BASE used to exercise oTOKEN to TOKEN, and 33.33 BASE from selling TOKEN to BASE).
A liquidity pool can also be created for oTOKEN so that farmers can directly sell into it instead of exercising options. Arbtragers would then exercise the options to rebalance the pool and turn a profit.
Notice that there is no more BASE liquidity in the Market Reserves (100 virtual BASE)(100 TOKEN). There is still 25 TOKEN circulating, however they can't be sold to the Market Reserves since there is no real BASE in them. In this case the user wishing to exit must redeem their TOKEN to the Floor Reserves at the floor price (1 BASE/TOKEN).
Redeem TOKEN: The user redeems 25 TOKEN for 25 BASE from the Floor Reserves.
With the system winded down completely, there is no longer any TOKEN in circulation and no need for BASE in the bonding curve to back it. However, the bonding curve still functions as needed, with TOKEN available for purchase from the market reserves, and the floor reserves expanding as needed to fulfill call option exercises.
Single-Sided Liquidity
When purchasing TOKEN, the transaction involves only inputting BASE and in return, receiving TOKEN. Consequently, holders maintain just the TOKEN, subjecting them exclusively to TOKEN's market variations in relation to BASE. This concept mirrors a single-sided liquidity position. Once TOKEN is staked for vTOKEN it will also start earning the swap fees from that single-sided liquidity on the bonding curve.
Taking inspiration from Balancer's novel ve-model, which utilized a 80%/20% BAL-ETH liquidity pool for their vote escrow token, this model further refines the idea, presenting 100% liquidity as the voting escrow token.
Borrowing
One of the bonding curve's distinct features is the ensured floor price, which guarantees that TOKEN's value will never descend below 1 BASE per TOKEN. This structure introduces a unique borrowing mechanism. vTOKEN holders can borrow an equivalent amount of dormant BASE, risk free. For example, by holding 25 vTOKEN, one is eligible to borrow 25 BASE. This is attributed to the borrowing occurring at the floor price and the assurance that the TOKEN's worth won't go beneath this threshold. Thus, liquidation is non-existent. The system elegantly sidesteps the need for liquidation measures or oracles, as it's inherently built into the bonding curve with a floating loan-to-value (LTV).
Fundamentally, individuals borrow their exit liquidity, given TOKEN's resemblance to a single-sided liquidity pool. The last TOKEN to ever exit this system will always be redeemable for 1 BASE/TOKEN, which is why liquidity at this floor price can be borrowed when vTOKEN is locked away as collateral.
Examples Continued
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