This post proposes a self-contained futarchy mechanism for bonding curve tokens.

Problem

Decentralized exchanges are likely the best price-finding solution for futarchy markets but, until they’ve achieved sufficient usability and liquidity, futarchies must be self contained providing their own price-finding mechanism. The current best know solution is to use an LMSR automated market maker but this presents a significant challenge. Each LMSR market must be funded up front in order to provide liquidity to market participants. This places a significant burden on the party that needs to provide the funding.

Bonding Curve Futarchy

A bonding curve token has a built in price-finding mechanism as well as a reserve pool of funds. This can be used to create a relatively simple and self-contained futarchy mechanism. The mechanism works like this:

Start with a bonding curve token ABC where its bonding curve uses ETH as the reserve token. A decision to accept a new proposal is started with a YES or NO outcome. Two tokenized events are started allowing the conversion of ABC into the outcome tokens YES-ABC and NO-ABC and ETH into YES-ETH and NO-ETH . If the decision is YES , YES-ABC tokens can be exchanged for ABC tokens and YES-ETH can be exchanged for ETH . Likewise, if the decision is NO , NO-ABC tokens can be exchanged for ABC tokens and NO-ETH can be exchanged for ETH . The main bonding curve is halted and two new bonding curves are created that mint YES-ABC and NO-ABC in exchange for their respective reserve tokens YES-ETH and NO-ETH . The main bonding curve’s reserve ( ETH ) is split into YES-ETH and NO-ETH and is used as the reserve for the YES-ABC and NO-ABC bonding curves respectively. Participants trade on the YES-ABC and NO-ABC curves predicting the value of ABC if the proposal is accepted on not accepted. The decision is resolved using a normal futarchy decision function such as highest price over the last 24 hours. The winning bonding curve’s reserve pool is converted back into ETH through the tokenized event and is used as the reserve for the main ABC bonding curve once again. The winning outcome tokens can be exchanged for ABC and the main ABC bonding curve can resume trading as normal.

Drawbacks