🗃️Differentiating Primary & Secondary AMMs
Exploring use cases for bonding curves
Last updated
Exploring use cases for bonding curves
Last updated
Bonding Curves can power a myriad of use cases depending on their configuration and context in relation to other components it is integrated to within a larger system.
Most bonding curves in use today are embedded into Automated Market Makers like Uniswap, Balancer, or Curve, or other decentralized exchanges whose main function is to facilitate the exchange of existing tokens via ‘liquidity pools’.
These mechanisms can be considered Secondary AMMs (or SAMMs) since their purpose is to facilitate secondary market exchange between tokens already in existence. Much has been written about this application of bonding curves, and many different invariant functions have been experimented with for a wide range of purposes.
Another use case for bonding curves is in the direct issuance (minting) and redemption (burning) of a token. These mechanisms can be considered Primary AMMs (or PAMMs), since they are the ‘source’ of token issuance when reserve assets are deposited and the ‘sink’ for token redemption when reserve assets are withdrawn from the bonding curve. PAMMs enable dynamic supply token ecosystems and could be considered as a ‘supply discovery’ mechanism for a token deployed using these tools.
PAMMs address some of the key challenges of token design today, such as projects having to guess how many tokens their system will require throughout its entire lifetime. By allowing dynamic token supply according to market demand, PAMMs not only simplify early-stage decision-making but could also serve as a continuous fundraising tool for productive projects, with protocol-owned liquidity by default.
This article briefly outlines these two use cases for bonding curves to understand the benefits they offer to token ecosystems and briefly explores how they can be combined to provide a range of critical infrastructure for token ecosystems of all sizes:
