A bonding curve is a mathematical curve that defines the relationship between the price and the supply of a given asset.
What is a Bonding Curve?
A bonding curve is a mathematical concept used to describe the relationship between price and the supply of an asset.
The basis of the bonding curve is the idea that when a person purchases an asset that is available in a limited quantity (like Bitcoin), then each subsequent buyer will have to pay slightly more for it. The reason for this increase in price is that the number of available asset units decreases with each one that is acquired. This mechanism should, supposedly, bring profits to the earliest investors.
More recently, the cryptocurrency space also saw the creation of so-called bonding curve contracts. Those are token issuance smart contracts that create a market for the tokens that is independent from cryptocurrency exchanges.
Bonding curve contracts sell the tokens to users by calculating the token price in Ether and issuing them after the payment, also buying them and paying with Ether. In both cases, the smart contract calculates the average price and bases the rate off of that.
There is no hard limit on the number of these kinds of tokens that can be created; instead, the quantity of Ether in existence and the price curve limits how many can circulate in the market. Usually, bonding curve contracts ensure that the price of each token increases as the number of tokens issued increases.