Crypto’s latest fad, friend.tech, is causing a stir, and it’s not only fans jumping on the commentary about this bizarre blend of playground politics and a celebrity dead pool. For every post on X praising the friend.tech team for catapulting us all into SoFi — social finance — there’s another about it being a Ponzi scheme.
Regardless of whether you believe in the utility and longevity of friend.tech, it’s worth understanding how the model works as it differs from the way cryptocurrency markets operate. Friend.tech keys are bought and sold on a bonding curve, which impacts prices very differently than tokens traded on an exchange.
How Bonding Curves Determine Token Price
Traditional markets can be influenced by various factors such as economic conditions, geopolitical events, and investor sentiment. These factors can lead to rapid price fluctuations. In contrast, a bonding curve is like a mathematical formula that governs how the price of a token changes as more tokens are bought or sold.
Friend.tech keys are bought and sold on a bonding curve, which impacts prices very differently than tokens traded on an exchange.
It’s called a “bonding” curve because it connects the creation of new tokens with the amount of cryptocurrency (usually a more established one like ETH) that is “bonded” or put into the system.
With thanks to ChatGPT, here’s how a bonding curve works:
Initial State: Let’s say you’re creating a new token called “XYZ Coin” and you’re using ETH as the bonding asset. At the beginning, there are very few XYZ Coins in existence.
Price and Supply Relationship: The bonding curve equation determines the price of XYZ Coin based on its supply. In simple terms, as more XYZ Coins are bought, the price of each new coin increases. Conversely, if people start selling their XYZ Coins, the price goes down.
Buying Tokens: When someone wants to buy XYZ Coins, they send a certain amount of ETH to the bonding curve smart contract. The smart contract calculates the price based on the current supply of XYZ Coins and the bonding curve equation. The buyer receives XYZ Coins, and the total supply of XYZ Coins increases.
Selling Tokens: If someone wants to sell their XYZ Coins, they send them back to the bonding curve smart contract. The smart contract calculates the amount of ETH they’ll receive based on the current supply and the bonding curve equation. The seller receives ETH, and the supply of XYZ Coins decreases.
Impact of Demand: As more people buy XYZ Coins, the supply increases, and the price per coin goes up. This creates an incentive for more people to sell their XYZ Coins, thus bringing the price back down. It’s a self-adjusting mechanism.
Impact of Supply: If many people start selling their XYZ Coins, the supply decreases, causing the price per coin to decrease. This might attract more buyers, as the price becomes more affordable.
If you substitute ‘friend.tech key’ for ‘XYZ Coin’, you can get a sense of what is happening each time people buy and sell keys on friend.tech.
Remember, while bonding curves offer an interesting way to determine token value, they can also be quite complex due to the mathematical formulas and algorithms involved. If you’re considering using or investing in tokens that use bonding curves, it’s a good idea to do thorough research and understand how the specific curve works in that context.
For more detail on the friend.tech contract, dig into this thread.
The shape of the bonding curve can vary. Common curve shapes include linear, exponential, and sigmoid (S-shaped) curves. Friend.tech is following an exponential curve.
Linear Curve: In a linear bonding curve, the rate of token creation or destruction is constant. For every unit of cryptocurrency deposited, you get a fixed number of tokens, and vice versa.
Exponential Curve: In an exponential curve, the rate of token creation starts slow and then rapidly increases as more cryptocurrency is deposited. This can encourage early adopters and investors.
Sigmoid Curve: A sigmoid curve starts slow, increases quickly in the middle, and then slows down again. This can balance incentives for early and late participants.
Bonding curves also have limitations and potential drawbacks, including:
Lack of Price Discovery: The price of tokens in a bonding curve is determined solely by the formula, which may not always accurately reflect the true value of the token.
Susceptibility to Manipulation: Depending on the design, bonding curves can be susceptible to manipulation by large actors who can influence the price by making significant purchases or sales.
Complexity: Bonding curves can be complex to understand for the average user, which can be a barrier to adoption.
Bonding curves provide an alternative model for creating and managing token economies that is distinct from the traditional supply and demand market model. The X post below is not reproduced here in full, due to its length, but it’s worth a look:
What will be most interesting to observe will be what happens after the initial flurry of activity settles down. Whether the model changes, or is forked, it’s unlikely this will fade away to nothing.
Friend.tech opens up new possibilities for access to people and the content they create, but ultimately it is based on monetization of relationships. People who have bonded as friends in Discord may find that the sharing overtakes caring in the friend.tech zone, but remember not to take it personally and never spend more than you can afford to lose.
Author and Designer Bio
trewkat is a writer, editor, and designer at BanklessDAO. She’s interested in learning about crypto and NFTs, with a particular focus on how best to communicate this knowledge to others.
Hiro Kennelly is a writer, editor, and coordinator at BanklessDAO, an Associate at Bankless Consulting, and is a DAOpunk.
BanklessDAO is an education and media engine dedicated to helping individuals achieve financial independence.
This post does not contain financial advice, only educational information. By reading this article, you agree and affirm the above, as well as that you are not being solicited to make a financial decision, and that you in no way are receiving any fiduciary projection, promise, or tacit inference of your ability to achieve financial gains.