The use of the continuous funding model in crowdfunding
The advent of cryptocurrencies 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, they ensure the stable functioning of the system as a whole. In the study and design of such self-sufficient systems, the 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 sufficient incentive to finance them. This is especially true of socially significant projects, the benefits of which many receive, while the burden of financial support falls on a relatively small number of sponsors. Long-term projects also often suffer from the gradual fading of interest from sponsors and are forced to constantly invest in marketing. Such difficulties can lead to the closure of the project, despite its relevance, and in the aggregate are also called the free-rider problem .
Programmable money technology 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 by allowing the creation of coordination systems for participants with previously known properties. One of these primitives, which may be applied both to ensure continued funding socially significant projects and for the management of shared resources control binding curve is tokens ( 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 equation of the upward curve:
This mechanism is implemented in the form of a smart contract that automatically issues and destroys tokens:
- The token can be issued at any time by purchase through a smart contract. The more tokens issued, the higher the price of issuing new tokens.
- The money paid for the issue 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 a common reserve. The token is withdrawn from circulation (destroyed) and its price decreases.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 sponsors of the project, not only by transferring funds to the project support fund, but also due to the increase in 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 designed in such a way that early sponsors receive tokens at a low price and subsequently can sell them at a higher price, but only if the volume of tokens in circulation increases. Opportunity to earn stimulates early sponsors to attract more attention to the project, thereby increasing the total amount of donations and facilitating the promotion of the project for its founders. When early sponsors sell their share of tokens, their value decreases, and this encourages new participants to join the campaign. This favorable cycle can be repeated over and over again, providing continuous financing for the project. If the project team starts to show unsatisfactory results, then the token holders will seek to sell their tokens, as a result of which their value will fall and financing will cease.
Considering the many different projects that raise money according to the scheme described above, potential sponsors will try to find more promising ones and invest money in them at an early stage. From the point of view of investing money, the most promising will be demanded and socially significant projects, since they will attract more sponsors in the future and a significant increase in the price of the token can be expected from them. Thus, the alignment of the economic interests of individual participants in the system with respect to common goals is achieved.
Implementation
A smart contract that implements a binding curve should provide methods for buying (issuing) and selling (destroying) tokens. Implementation details can vary greatly depending on the application and the desired characteristics. A discussion of the general appearance of the interface can be found here: https://github.com/ethereum/EIPs/issues/1671 .
When issuing and destroying tokens, the smart contract calculates the purchase and sale prices in accordance with 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
. A function can take many forms, for example:
Consider a power function:
The amount in reserve currency required to purchase tokens in quantity
can be calculated as the area under the curve limited by the current number of tokens in circulation and the future quantity:
To optimize these calculations, it is convenient to use the current reserve volume, which is equal to the area under the curve, limited by its beginning and the current number of tokens:
From here you can derive the number of tokens that the sponsor will receive by sending a known amount in the reserve currency:
The amount in the reserve currency returned upon the sale of tokens is calculated similarly:
An example implementation in the Solidity language can be found here: https://github.com/relevant-community/bonding-curve/blob/master/contracts/BondingCurve.sol
Further development
If volatile cryptocurrency is used to buy tokens, then the money stored in the general reserve will be subject to fluctuations in the exchange rate, which may negatively affect the mechanism (sponsors will not want to make long-term investments, fearing a depreciation). 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, therefore it can be used not only as part of the financing 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 carried out by voting for various initiatives put forward by the founders of the project or by the sponsors themselves. If the project does not have a permanent working team, then similar rewards can be assigned for the performance of individual tasks for which temporary contractors will compete. The deployment of a smart contract of an autonomous organization based on a public blockchain will ensure transparency in the decision-making process and openness of all transactions.
The ability to use a token to participate in the management of a project or organization, together 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 can freeze tokens (prohibit their sale) for some time after purchase.
A system in which a token has no inherent value will be more susceptible to manipulation and may become a financial pyramid .
Conclusion
The token binding curve can be applied in different areas, but the use of this mechanism in crowdfunding looks especially interesting, since the main idea - supporting the project by sending money - does not change, but is supplemented by new opportunities for participation, while maintaining a low threshold for users.
Projects that collect donations on the 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 with both a regular transaction (direct money transfer) and the purchase of tokens, and in the second case, they will benefit from the growing popularity of the project.
However, the effectiveness of this cryptoeconomic mechanism has yet to be evaluated. At the moment, there are not so many examples of the real use 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 charities. We have recently begun developing a model of continuous financing based on linking curves.
- Convergent is a platform for issuing “personal tokens” targeted at content creators.
- Apiary / Aragon Fundraising App is a fundraising application developed for autonomous organizations Aragon .
- Protea is a protocol for coordinating communities with the use of tokens, which also includes the construction of crowdfunding applications.
Notes
[1] There is no established translation of the term "bonding curve" in Russian-language literature. The mechanism may also be referred to as a “ laying curve ." At the same time, it is understood that participants deposit money into the smart contract as a guarantee, and in return receive tokens.