Background
FOAMM is motivated by the limitations of current pricing mechanisms. This chapter introduces AMM, bonding curves, and auction curves, highlighting their advantages and challenges or drawbacks.
Economics whitepaper on SSRN:
Motivation
Liquidity constraints pose a fundamental challenge in decentralized systems, particularly for unique or infrequently traded assets. To establish a trustless asset ecosystem, the Function Oracle Automated Market Maker (FOAMM) is designed to facilitate automated on-chain price discovery and liquidity provisioning through transparent and verifiable smart contract mechanisms.
Key Features: Automated On-Chain Price Discovery + Liquidity Optimization.
On-chain Assets Pricing
Automated Market Maker(AMM) curves
Utilized for token swaps, with constant product formula x * y = k gaining the most consensus, employed by Uniswap.
Advantages:
• Most widely used token swap solution.
• Strongest consensus for ERC20 exchanges.
At the same time, there are also drawbacks:
Challenges in sourcing and managing liquidity.
Vulnerability to MEV attacks.
Limited to ERC20 assets.
In conclusion, while AMMs with the constant formula are widely used for token swaps, they face challenges such as liquidity management, vulnerability to MEV attacks, and limitations to ERC20 assets. Despite these drawbacks, they remain essential for decentralized exchanges and will need improvements to address these issues.
Bonding Curve mechanism
Bonding curve directly quotes based on factors like supply, with examples including curve.fi and pump.fun.
Key Components:
Supply Token: The underlying assets of the liquidity pool.
Issued Token: The amount of another token that can be purchased, calculated based on the curve after using the supply token.
Curve (determines price): It is used to determine prices.
Based on the key components above, the bonding curve offers two advantages that are rarely matched by other mechanisms, as the curve determines the price.
Advantage
No reliance on initial liquidity.
Suitable for Curation Markets.
Compared to AMM curve , the main advantage of the Bonding Curve lies in its independence from initial liquidity. Token issuers do not need to provide substantial liquidity upfront; instead, they can issue tokens and rely on user-contributed liquidity to maintain the price. This is particularly beneficial for Curation Markets, such as pump.fun, where curators issue MEME tokens, and participants buy them according to the Bonding Curve. Friend.tech is another example of a uration Market.
Auction-based mechanism
On-chain auctions often use Dutch auctions for efficiency, with notable examples including GDA, VRGDA (Progressive Dutch auctions), and UniswapX’s Dutch auction mechanism.
• VRGDA allows for fungible and non-fungible token issuances in a single launch, eliminating the need for manual initiation of each auction.
• Unlike GDA, VRGDA incorporates a time element, enabling the issuer to set a release curve for tokens.
GDA and VRGDA are variants of the Bonding Curve model but do not resolve its issues and lose the secondary market functionality.
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