In this article, I delve into the intriguing story of how Friend.tech stumbled upon an accidental (or not) innovation that has the potential to reshape the landscape of the DeFi and NFTs world.
First and foremost, I want to make it clear that this article does not endorse or promote the usage of Friend.tech or key trading. I have personally tried the app, but I no longer use it, and I do not hold any keys. In fact, I believe it to be nothing more than a typical crypto Ponzi-like cult, as I have previously discussed in 👉 my post on X.
These are some other interesting researches about how pozi is Friend.tech:
Friend.tech operates on a simple ponzinomic: users can acquire keys (previously known as shares) of specific Twitter accounts to unlock access to their exclusive chat. It's important to note that these keys are not ERC20 tokens or NFTs, and they cannot be transferred. They are exclusively purchasable through the Friend.tech smart contract. Furthermore, the value of these keys is not fixed; instead, it fluctuates in accordance with a bonding curve formula 👇
(K = Total keys in existence for the Twitter Account selected)
The formula dictates that the ETH buying price for keys is automatically determined as K (Key Total Supply)^2 divided by 16000, while the selling price is calculated as (K-1)^2 divided by 16000.
While the Friend.tech app on top of the bonding curve is a classic ponzinomic, the technology behind it introduces a clear-cut use case for the bonding curve that has the potential to revolutionize the DeFi and NFT landscape!
The Bonding Curve is the interesting part of the story
Before Friend.tech in the Ethereum ecosystem, we only experimented with the bonding curve in some ICOs, for years, a few projects experimented with it with low levels of adoption and success, and most of them are not even alive today.
Friend.tech is the first post-ICO success case of the bonding curve usage, and behind the application itself, it demonstrates that a bonding curve for mint/burn can be a highly successful strategy for a lot of business cases.
In DeFi, various trading mechanisms have emerged for NFTs and ERC20s. However, they all grapple with significant liquidity and loss issues, making it challenging for projects to grow and maintain adequate on-chain liquidity. As a result, users often end up holding assets that lack market liquidity, Let deep into it:
Automatic Market Makers (AMM):
An ecosystem that has risen with Uniswap V1, AMMs are pools of two assets equilibrated by a formula:
(X = Token A amount | Y = Token B amount | K = Constant)
Based on the AMM formula after every trade K must never change to achieve equilibrium. Example: A liquidity pool has 1,000 ETH and 1,000,000 USDC (K = 1,000,000,000), giving a price of 1 ETH = $1000. If a trader buys 5 ETH from the pool, they'd leave 995 ETH in it. To keep the pool's balance, they'd need to add about $5,025.13 in USDC. After the trade, the new price of 1 ETH would be roughly $1,005.03.
👉 Here is a simple video to explain this process from @gabrielhaines on X
In AMMs, users add liquidity to a pool and earn trading fees from transactions. However, a limitation arises: liquidity providers can experience Impermanent loss (IL). This loss occurs when there's a significant shift in the pool balance between assets X and Y due to a price surge or drop, leading to a potential value loss compared to simply holding the two assets. In fact in a study from REKT, in Uniswap V3 more than 50% of liquidity providers are in a loss.
Over the years, AMMs have evolved in attempts to address the IL issue. Innovations include multi-asset pools like Balancer, NFT-powered pools such as Sudo, and custom range curves like Uniswap V3. However, the problem persists. In fact, many projects depend on team-provided liquidity or incentivize users to add liquidity through farming.
Conversely, AMMs excel in stable trading like Curve, which involves trading between assets that maintain similar values 99% of the time due to minimal price fluctuations.
Another challenge with AMMs is liquidity itself. The more liquid a pool is, the cheaper the swaps. In contrast, pools with low liquidity cause traders to incur an additional cost known as Price Impact. This cost increases based on the amount swapped and the available liquidity from LPs. This leads to further complications when a token operates across multiple sidechains and L2s. Additionally, projects with more than one token face challenges due to fragmented liquidity.
Order Books:
Traditional order books, commonly used in NFT trading, don't face the same liquidity challenges as AMMs. However, they have a more severe problem: liquidity is solely based on orders. This results in a pronounced liquidity shortage for projects, slowing down trading.
Many have likely encountered the frustration of holding NFTs they can't sell due to a lack of orders. Furthermore, orders offer limited liquidity power. Most are stored off-chain, and on-chain orders are cost-prohibitive. This makes it very difficult to develop decentralized applications, such as DAOs, Farming, or Collateralization, atop this type of liquidity.
Is Bonding Curves the new big thing?
The bonding curve LP approach, unveiled by Friend.tech, presents a groundbreaking design suitable for numerous assets in the crypto realm. It's particularly beneficial for multi-asset projects, shielding them from the challenges of liquidity erosion.
Contrary to conventional methods, Bonding Curves eliminate the need for external liquidity or order books, offering projects a streamlined strategy to ensure liquidity for their assets.
Using Friend.tech as a case study, a Bonding Curve has the ability to mint and burn keys. The value of these keys varies depending on the total number of keys currently in circulation. When a user acquires a key, the Ethereum used isn't funneled to a liquidity provider or another participant. Instead, it's retained within the Bunding Curve, ready to reimburse users who opt to sell their keys later on.
This mechanism guarantees authentic liquidity without any intricacies. Furthermore, it assures holders of the ability always to liquidate their assets via the Bonding Curve.
What's more, Bonding Curves offer a high degree of adaptability. They can be tweaked to modify the rate of price changes, either accelerating or decelerating them. By adjusting Bonding Curves, developers can also establish a supply cap and implement a royalty system. Notably, this royalty is HARD-CODED, ensuring it's applied every time an asset is minted or burned, rejuvenating the NFT sector.
To provide a clearer picture, let's delve into a hypothetical scenario separate from Friend.tech:
Imagine an NFT collection employing a Bonding Curve for its minting process. The developers configure a maximum supply of 10,000, a 5% royalty, and a pricing formula that starts at 0.001 $ETH and escalates to 50 $ETH.
In this context, the Bonding Curve's mint/burn mechanism promotes more active trading of the NFTs. This setup grants arbitrageurs the opportunity to reconcile market values with mint/burn values, provides users with a safety net against significant losses by allowing them to burn, and ensures the collection's creator continues to earn royalties, even when platforms like Open Sea or Blur bypass them.
This concept can be added to ERC20s and can be powerful for multi-tokens projects, the projects that suffer the most from the AMM/Order design of DeFi.
Delving deeper, Bonding Curves can be seamlessly integrated with DAOs or community-operated systems to adeptly manage an asset's supply. This can be done by either expanding or contracting the supply, adjusting the price for minting and burning, or even introducing a novel automatic earning mechanism.
In essence, by embracing the Bonding Curve, the DeFi industry can address:
✅ Fragmented Liquidity
✅ Liquidity Erosion
✅ Rogue Pull Issues (when teams withdraw liquidity from AMMs)
✅ Royalty Challenges
Is the bonding curve the next piece in DeFi to reach capital efficiency as never before? Bonding Curves will be a significant topic of discussion in 2024. Eagerly anticipating its evolution!
The Other Thing…
Another intriguing feature of Friend.tech is the non-transferability of Keys. While some might view this as a limitation, a deeper understanding of the crypto ecosystem reveals it to be a strategic decision.
A significant reason behind the surge in NFT popularity and the substantial funds raised through NFT drops is the absence of clear legal precedents in the NFT domain. Essentially, NFT drops function similarly to ICOs (Initial Coin Offerings). However, until 2022, regulators remained largely silent on this matter, allowing numerous entrepreneurs and anonymous entities to capitalize on drops without legal constraints. This dynamic is emblematic of the perennial "cat and mouse" game in the crypto world: as long as regulators lag behind, innovative fundraising methods will flourish and often achieve cult status.
Friend.tech's like approach of minting non-transferable assets combined with the implementation of a bonding curve could very well become the next major trend in the crypto world. Given the absence of legal precedents for non-transferable assets, this strategy opens the door for a plethora of new applications, both legitimate and questionable, to adopt this framework.
Consider the concept of a Bonding Curve DEX, which aligns with the core functionality of Friend.tech Contracts. Such a decentralized exchange can cater to a myriad of innovative use cases. It can facilitate the minting and trading of tokenized assets, NFTs, and ERC20 tokens. Furthermore, it can serve the gaming industry by handling in-game items, a sector that's vast yet plagued by fragmented liquidity. The potential applications are vast and varied, underscoring the versatility of this approach.
Friend.tech is a terrible application and a terrible ponzinomic, however, it has inadvertently (or intentionally) stumbled upon the next significant innovation in the crypto space.
Is this prediction accurate?
Time will be the ultimate judge. But it's certainly worth keeping a close eye on the development and trajectory of such decentralized applications!
