Augmented Bonding Curve (ABC)

The Augmented Bonding Curve (ABC) is a vital component of the economic design of SECOIN. Here we aim to provide an understanding of what an Augmented Bonding Curve is, its reasons for implementation, and how it operates.

What is an Augmented Bonding Curve?

An Augmented Bonding Curve (ABC) is a specialized financial strategy used in blockchain technology. It helps control how a token (a type of digital asset) is created and priced. Think of it as a bridge that helps transfer value from SecureSECO DAO to the rest of the world.

ABC does two main things:

It borrows ideas from the traditional bonding curve but also adds new features to keep prices stable and make it safer for those who hold tokens.
It also acts as a never-ending fundraising tool for organizations that create and keep public goods going. This results in a cycle of value within the community, which helps them remain financially healthy.

The ABC is designed to address an issue known as the free-rider problem (opens in a new tab). This is a situation where people benefit from resources but don't pay or pay too little for them. The ABC addresses this by setting up mini-economies that are always liquid (easy to trade) and offer alternative funding sources that encourage the right behavior for shared resources.

With bonding curves, the price of tokens is determined continuously using algorithms. In an ABC, tokens are made (minted) or destroyed (burned) right through the smart contract. This allows for automatic price adjustment based on the present supply of tokens.

The ABC's also hase an ICO period or 'Hatch' phase, representing its initial offering. Early contributors can purchase tokens at a lower, fixed price in this phase. This phase aids in bootstrapping the curve and raising initial funds for the project.

Why did we choose an Augmented Bonding Curve?

Stability and security

One of the key advantages of an ABC is the stability it provides. By basing the value of SECOIN on a predictable price function, an ABC can prevent abrupt shifts in SECOIN value, reducing the risk for holders. Moreover, the design of the ABC helps to moderate drastic price changes by ensuring that SECOIN isn't created from nothing, further bolstering its inherent value.

The ABC model is designed to maintain balance in the market. When the demand for SECOIN is on the rise, the protocol slows the price growth by minting more SECOIN and rewards the DAO. On the other hand, when there's a downturn in the market, the protocol eases the selling pressure by reducing the supply (burning SECOIN), which in turn rewards the SECOIN holders by increasing their share of the collateral. This mechanism ensures a win-win situation for all parties involved, reinforcing the stability and security of the DAO.

Friction as a mechanism

Friction is a key feature in the ABC model, taking the form of fees during the minting and burning processes. These fees support the ecosystem and promote stability. During the SECOIN burning process, an exit fee is imposed, with a small portion of the returns going back into the Funding Pool (Treasury), facilitating the ongoing funding of the commons while contributors earn returns.

The minting process in the ABC model involves two key financial components:

The Deposit: When a user wants to mint SECOIN, they deposit an ERC-20 collateral currency. A certain percentage of this deposit, referred to as Theta, is automatically sent to the DAO's treasury or funding pool. This fee, is a contribution that supports the longevity and sustainability of the DAO.
The Minting Fee: Many bonding curve models implement a specific fee for minting new tokens. However, in the ABC for SECOIN, there is no additional fee charged at the minting stage. Instead, the aforementioned contribution to the DAO's treasury can be viewed as an indirect cost associated with minting.

Conversely, during the SECOIN burning process, users are subject to an exit fee (a part of the burn proceeds). While nothing from this exit fee is directly sent to the DAO, it serves a crucial role in maintaining the price dynamics of SECOIN and ensuring the stability and security of the ecosystem.

DAO Minting Restrictions

The unique structure of the Augmented Bonding Curve (ABC) presents a potential challenge in the context of the DAO's interactions. Given that the DAO receives the minting fee, the DAO could mint SECOIN at a lower cost since the fee would, effectively, be paid to itself. This scenario could disrupt the balance of the ecosystem, create unequal conditions for token holders and possibly lead to manipulation of SECOIN's price dynamics. To address this issue, a restriction has been put in place to prevent the DAO from utilizing the standard mint function.

Instead, the DAO is granted a unique ability to mint SECOIN through a 'Sponsored Mint' function. In this operation, 100% of the deposited DAI remains in the ABC contract, and no portion of the minting fee is transferred to the DAO. Although this function is open to everyone, the resulting SECOIN is always directed to the DAO's treasury, making it particularly suited for generous parties wishing to donate SECOIN to the DAO. Utilizing the 'Sponsored Mint' function, while simultaneously bypassing an additional transfer transaction, enables donors to contribute efficiently and transparently to the DAO's sustainability and success.

How does the Augmented Bonding Curve work for SECOIN?

The Augmented Bonding Curve (ABC) model for SECOIN integrates two main elements: the Reserve Pool, which bonds DAI and manages the minting and burning of SECOIN, and the Funding Pool (also referred to as the Treasury). This combined structure creates a self-sustaining financial ecosystem.

Contrary to the standard approach, our first version of SECOIN's ABC skips the initial Hatch Phase to promote quick adaptation to market dynamics and foster experimentation. Instead, we directly commence with the Open Phase, during which anyone can mint SECOIN by contributing DAI to the curve.

Curve dynamics and key variables

SECOIN's pricing and supply dynamics are primarily determined by the Bancor formula, which defines the structure of our bonding curve. This formula is not set in stone. The DAO has the power to adjust or replace it through collective decision-making. It also has the flexibility to bypass the reserve ratio if necessary.

The Bancor formula was chosen for its mathematical robustness and simplicity. It uses a 'Reserve Ratio' to shape the bonding curve, influencing SECOIN's liquidity and price stability.

In addition to the Bancor formula, there are other critical variables within the ABC structure:

Theta: This represents the portion of minted SECOIN allocated to the Treasury, supporting the continuous funding of the community.
Friction: This refers to the share retained within the ABC during the burning of SECOIN, increasing the value of the remaining tokens.
Reserve Ratio: This ratio impacts the shape of the bonding curve, influencing how SECOIN's price reacts to supply changes.

The DAO has the power to adjust these variables, allowing the community to actively participate in shaping SECOIN's financial ecosystem.

The bonding curve

The ABC uses the Bancor formula to shape the bonding curve, which defines the relationship between token supply and price. The Reserve Ratio plays a key role in this formula. It influences the bonding curve's shape and thereby determines how changes in supply affect SECOIN's price.

A higher Reserve Ratio results in a flatter curve, making token prices less sensitive to supply changes. Conversely, a lower Reserve Ratio leads to a steeper curve, making prices more responsive to changes in supply.

In conclusion, SECOIN's ABC is a sophisticated model aimed at maintaining the stability and security of the SECOIN ecosystem. By understanding these mechanisms and participating in the DAO, community members can play an active role in the development of SECOIN's financial landscape.