# Background

**Economics whitepaper on SSRN:**

{% embed url="<https://papers.ssrn.com/sol3/papers.cfm?abstract_id=5141660>" %}

**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.

<div align="center" data-full-width="false"><figure><img src="/files/dnrd3H5IGwNad2lJzqYy" alt="" width="375"><figcaption><p>Schematic Diagram of Asset Price Trends</p></figcaption></figure></div>

<div align="center"><figure><img src="https://lh7-rt.googleusercontent.com/slidesz/AGV_vUcKNWla5zOU9wyQI-Wa1PySLaaiQDNwH1SZqZCs4pW1nvsKoYAWoIkljEbFi0wTHY90fjuhT6tHjZYkh5XrBW0MCor6FHtQ4QaG-rGx1YSJu1tXaL2IsCyqZZqyExWNzPwrw5tZew=s2048?key=mudaCuScP-hsvYGuXBZotpN8" alt="" width="375"><figcaption><p>The curves related to on-chain automatic price discovery and liquidity</p></figcaption></figure></div>

### On-chain Assets Pricing

{% embed url="<https://premiumdao.gitbook.io/ramble-on-chain-pricing-mechanism-and-erc7527>" %}

Automated Market Maker(AMM) curves

Utilized for token swaps, with constant product formula **`x * y = k`** gaining the most consensus, employed by [Uniswap](https://app.uniswap.org/).

**Advantages:**

• Most widely used token swap solution.

• Strongest consensus for ERC20 exchanges.

<figure><img src="https://lh7-rt.googleusercontent.com/slidesz/AGV_vUd-wMtQpJ_-7DGiqpKX0EluPPX24wiUKFue0-pdqoWbGpEO6fbtGyKQK3LVctkWcm08PQTysaUhGO3eCOjoyAlXyvcLnViDlAdSm-qwFmgyVnu4k8MqiQ7oLHDnzFEgCPZ4EOt15g=s2048?key=mudaCuScP-hsvYGuXBZotpN8" alt="" width="375"><figcaption><p>AMM Price on x * y = k</p></figcaption></figure>

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](/readme/background.md) and [pump.fun](/readme/background.md).

1. **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.

2. **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](/readme/introduction.md) 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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