What is a bonding curve?
- Author
- CRYPTO PORT Editorial
- Published
- Updated
- Reading time
- 4 min
In short
A bonding curve is a formula that sets a token's price from how many units exist. Buying mints new units and pushes the price up; selling burns them and pushes it down. It guarantees a price without an order book — and because later buyers always pay more, it structurally favours whoever arrived first.
Key points
- A formula deriving price from the number of units issued
- Buying mints units and raises the price
- Trades always clear, with no order book needed
- Later buyers necessarily pay more than earlier ones
Definition
A formula that computes a token's price from its circulating supply, so that purchases increase both supply and price while sales reduce both, linking demand to price mechanically.
The contract holds incoming funds as a reserve and mints new tokens according to the formula. Selling reverses it: tokens are burned and the reserve pays out. Because no counterparty needs to be matched, a trade clears even when nobody else is there. It shows up in initial distributions and in venues designed for very small trades.
The designer picks the formula. A steep curve makes early buyers' gains large; a gentle one narrows the gap with later entrants. Since the shape directly determines how price behaves, choosing it is effectively choosing how value is distributed.
The point to keep in mind is that a rising price is backed only by the reserve. If many holders sell at once, the reserve shrinks and the payout price falls along the curve. The reserve never holds anything like the displayed market capitalisation, so not everyone can exit near the quoted price.
Watch out for
- · The reserve does not hold the quoted market value, so holders cannot all exit at that price
- · When an early buyer with a large holding sells, the price slides down the curve sharply
- · Flaws or admin privileges in the reserve contract can allow the funds to be withdrawn