Application of the model of continuous funding in crowdfunding

The emergence of cryptocurrency has drawn attention to a wider class of systems in which the economic interests of participants coincide in such a way that, acting for their own benefit, ensure the stable functioning of the system as a whole. In the study and design of such self-sufficient systems, so-called cryptoeconomic primitives are distinguished - universal structures that create the ability to coordinate and distribute capital to achieve a common goal through the use of various economic and cryptographic mechanisms.

One of the main problems of crowdfunding is that potential sponsors of projects and organizations often do not have enough incentive to finance them. This is especially true of socially significant projects, the benefits of which are received by many, while the burden of financial support falls on a relatively small number of sponsors. Long-term projects also often suffer from the gradual extinction of interest from sponsors and are forced to constantly invest efforts in marketing. Such difficulties may lead to the closure of the project, despite its relevance, and in the aggregate are also referred to as the free-rider problem .

The technology of programmable money has opened up the possibility of implementing new financing mechanisms that help solve the free rider problem. The existence of cryptoeconomic primitives facilitates this task, allowing you to create a system of coordination of participants with previously known properties. One of these primitives, which can be used both to ensure continuous funding of socially significant projects, and for the rational management of common resources, is the token bonding curve [1] . This mechanism is based on the idea of ​​a token , the price of which algorithmically depends on the total number of tokens in circulation, and is described by the upward curve equation:

This mechanism is implemented in the form of a smart contract that automatically releases and destroys tokens:

• The token can be released at any time by purchasing through a smart contract. The more tokens released, the higher the release price of new tokens.
• Money paid for the release of tokens is stored in the general reserve.
• At any time, the token can be sold through a smart contract in exchange for money from the general reserve. The token is removed from circulation (destroyed) and its price decreases.

The basic mechanism can be modified or supplemented depending on the application. In the particular case of a crowdfunding campaign, the contract owner is the project team, and some of the tokens from each purchase or sale are transferred to it (for example, 20%). Token holders become project sponsors, not only by transferring funds to the project support fund, but also by increasing the price of tokens with each purchase. The project team subsequently sells the received tokens and sends the proceeds to achieve the goals of the campaign.

The mechanism is constructed in such a way that early sponsors receive tokens at a low price and can subsequently sell them at a higher price, but only if the volume of tokens in circulation is increased. The opportunity to earn encourages early sponsors to draw more attention to the project, thereby increasing the total amount of donations and facilitating the promotion of the project for its founders. When the early sponsors sell their share of tokens, their value decreases, and this encourages new members to join the campaign. This favorable cycle can be repeated again and again, providing continuous funding for the project. If the project team starts to show unsatisfactory results, then the holders of tokens will seek to sell their tokens, as a result of which their value will fall and funding will stop.

Considering the many different projects that collect money according to the scheme described above, potential sponsors will try to find more promising and invest money in them at an early stage. From the point of view of investing money, the most promising and socially significant projects will be the most promising, since they will attract more sponsors in the future and we can expect a significant increase in the price of the token from them. Thus, the alignment of the economic interests of the individual participants in the system with respect to common goals is achieved.

Implementation

A smart contract implementing a binding curve should provide methods for buying (issuing) and selling (destroying) tokens. Implementation details can vary greatly depending on the application and desired characteristics. A discussion of the general appearance of the interface can be found here: https://github.com/ethereum/EIPs/issues/1671 .

When releasing and destroying tokens, the smart contract calculates the purchase and sale price according to the binding curve. The curve is defined by a function that determines the price of the token. through the total number of tokens in circulation . The function can take different forms, for example:

Consider a power function:

Amount in reserve currency required to purchase tokens in quantities , can be calculated as the area of ​​the area under the curve bounded by the current number of tokens in circulation and the future number:

To optimize these calculations, it is convenient to use the current volume of the reserve, which is equal to the area of ​​the area under the curve, limited by its beginning and the current number of tokens:

From here you can withdraw the number of tokens that the sponsor will receive by sending a known amount in reserve currency:

Amount in reserve currency returned on sale tokens, calculated similarly:

An example of implementation in Solidity can be found here: https://github.com/relevant-community/bonding-curve/blob/master/contracts/BondingCurve.sol

Further development

If a volatile cryptocurrency is used to purchase tokens, the money stored in the general reserve will be subject to rate jumps, which may adversely affect the operation of the mechanism (sponsors will not want to make long-term investments for fear of a fall in the rate). To avoid such risks, you can use a stable cryptocurrency (for example, Dai ) as a reserve currency.

The token is a reflection of some common value for its holders, so it can be used not only as part of the funding mechanism, but also for related purposes.

For example, tokens can be used to manage a project through a decentralized autonomous organization (DAO). The distribution of funds collected by the project can be done by voting for various initiatives put forward by the project founders or the sponsors themselves. If the project does not have a permanent working team, then in the same way rewards can be awarded for performing individual tasks for which temporary performers will compete. Deploying a smart contract to an autonomous organization on the basis of a public blockchain will ensure the transparency of the decision-making process and the openness of all transactions.

The ability to use a token to participate in the management of a project or organization, coupled with a good reputation, provides the real value of the token. To complicate market manipulation , additional mechanisms may be involved. For example, a smart contract may freeze tokens (prohibit their sale) for a while after purchase.

A system in which the token has no intrinsic value will be more subject to manipulation and may become a financial pyramid .

Conclusion

The token binding curve can be applied in different areas, but using this mechanism in crowdfunding looks particularly interesting, since the main idea - supporting the project by sending money - does not change, but is complemented by new opportunities for participation, while maintaining a low user login threshold.

Projects that collect donations on air today to a regular address can instead deploy a smart contract that implements the token binding curve and receive payments through it. Sponsors will have the opportunity to support the project as a normal transaction (direct transfer of money), and buying tokens, and in the second case they will benefit from the growing popularity of the project.

However, the effectiveness of this crypto-economic mechanism has yet to be assessed. At the moment there are not so many examples of real application of binding curves in decentralized applications (one of the most famous projects is Bancor ), and the design and development of crowdfunding platforms using this mechanism is only being carried out:

• Giveth is a platform for charitable organizations. Recently, we have begun to work out a model of continuous funding based on binding curves.
• Convergent is a platform for the release of "personal tokens", focused on content creators.
• Apiary / Aragon Fundraising App is a fundraising application developed for autonomous Aragon organizations.
• Protea is a protocol for the coordination of communities using tokens, which, among other things, provides for the construction of crowdfunding applications.

Notes

[1] In the Russian-language literature there is no established translation of the term "bonding curve". The mechanism may also be called the “ laying curve ”. In this case, it is assumed that the participants contribute money to the smart contract as a pledge, and receive tokens in return.