ERC-7649: Bonding curve-embedded liquidity for NFTs

Abstract

This proposal introduces a standard for embedding Bonding Curve-like liquidity into Non-Fungible Tokens (NFTs) without modifying the ERC-721 standard. The proposed standard allows the attachment of an embedded liquidity contract, referred to as Tradable Shares, to an ERC-721 NFT. Tradable Shares leverage a Bonding Curve-like approach to attract liquidity, enabling trading of shares based on the bonding curve price formula.

Motivation

The ERC-721 standard lacks a specific mechanism for embedding bonding curve-based liquidity, limiting the creative possibilities for NFT-based projects. This EIP addresses the need for a standardized approach to integrate bonding curve contracts seamlessly into ERC-721 NFTs, allowing for diverse and innovative implementations without modifying the ERC-721 standard.

The proposed standard focuses on enhancing the ERC-721 standard by introducing a framework for embedding bonding curve-based liquidity into NFTs. This approach provides creators with a flexible and customizable tool to attract liquidity through bonding curve mechanisms, while ensuring creators receive guaranteed fees for their contributions.

The bonding curve-embedded liquidity for NFTs standard finds compelling use cases across diverse industries, offering a dynamic solution for embedding Bonding Curve-like liquidity into NFTs. One prominent use case revolves around the intersection of AI services, where NFTs model AI models, GPU resource pools, and storage resource pools. Let's explore two specific use cases within this domain:

1. AI Model Marketplace:

   • NFTs representing AI models leverage the embedded liquidity standard to embed Bonding Curve-like liquidity. AI model providers attach Tradable Shares contracts to their NFTs, enabling a seamless integration of liquidity features without modifying the ERC-721 standard.
   • The Bonding Curve mechanism allows the pricing of shares (or keys) based on the AI model's supply and demand. As AI models gain popularity or demonstrate superior performance, liquidity providers are incentivized to buy and sell shares, fostering a competitive marketplace.
   • Creators can customize bonding curve parameters, such as slope and intercept, tailoring the liquidity mechanism to match the evolving nature of AI models. This ensures a fair and adaptive marketplace where liquidity providers are attracted to promising AI models, thereby creating a symbiotic relationship between liquidity and AI innovation.

2. Decentralized GPU and Storage Resource Allocation:

   • In a decentralized ecosystem, GPU and storage resource pools are represented as NFTs with embedded Tradable Shares contracts. This enables resource providers to attract liquidity and compete for resource allocations based on the Bonding Curve mechanism.
   • The Bonding Curve determines the price of shares associated with GPU and storage resources, reflecting the current supply and demand. Providers can customize bonding curve parameters to optimize their resource pool's attractiveness, taking into account factors like available resources, performance metrics, and historical usage.
   • Guaranteed creative fees incentivize resource providers to continually enhance and optimize their services. As the demand for GPU and storage resources evolves, the embedded liquidity standard ensures that providers receive fair compensation for their contributions, maintaining a competitive and responsive marketplace.

In both use cases, the standard serves as a powerful incentive for providers to attract and retain liquidity. The dynamic nature of the Bonding Curve-like mechanism aligns with the evolving landscape of AI models and resource pools, fostering innovation, competition, and liquidity-driven growth within the decentralized AI services domain.

Specification

The key words "MUST", "MUST NOT", "REQUIRED", "SHALL", "SHALL NOT", "SHOULD", "SHOULD NOT", "RECOMMENDED", "NOT RECOMMENDED", "MAY", and "OPTIONAL" in this document are to be interpreted as described in RFC 2119 and RFC 8174.

1. Bonding Curve-Embedded Liquidity / Tradable Shares:

   • An embedded bonding curve-based liquidity SHOULD be attached to the NFT via a separate contract.
   • An embedded bonding curve-based liquidity MUST NOT be embedded into or modify the ERC-721 standard.
   • The bonding curve contract MUST manage the liquidity of the associated NFT through a bonding curve mechanism.

2. Bonding Curve Mechanism:

   • The bonding curve determines the price of the NFT "keys" (sometimes also referred to as "shares") in relation to its supply, encouraging liquidity providers to buy and sell NFT shares based on the curve's formula.
   • Implementation MAY allow the creators to customize the bonding curve parameters, such as slope, intercept, or any other relevant parameters.
   • Implementation MAY allow the creators to customize the shape of the bonding curve (the curve's formula).

3. Guaranteed Creative Fees:

   • The implementation MUST include the mechanisms that guarantee creative fees for NFT creators, that is it MUST guarantee the creators receive a percentage of transaction fees generated by the embedded liquidity contract during buy and sell operations.
   • The implementation MAY allow the creators to defne the transaction fees.

4. Payment Mechanisms:

   • The embedded liquidity contract MUST support either ERC-20 tokens or native ETH as a payment, it MAY support both.

BondingCurve Interface

Bonding Curve-Embedded Liquidity / TradeableShares Interface

Rationale

The rationale behind the design choices for the embedded liquidity standard is deeply rooted in providing a robust and versatile framework for embedding Bonding Curve-like liquidity into NFTs. The following key considerations have influenced the technical decisions:

1. Bonding Curve-Embedded Liquidity / Tradable Shares Contract:

   • Seamless Integration: The decision to allow an embedded bonding curve-based liquidity contract to be attached to an NFT without altering the ERC-721 standard stems from the desire for seamless integration. This approach ensures that NFT developers can enhance their creations with liquidity mechanisms without introducing complexities or requiring modifications to the widely adopted ERC-721 standard.

   • Liquidity Management: The bonding curve contract's role in managing liquidity through the bonding curve mechanism is essential. This design choice facilitates a dynamic and automated pricing model based on supply and demand, contributing to the overall liquidity and tradability of NFT shares.

2. Bonding Curve Mechanism:

   • Dynamic Pricing: The adoption of a bonding curve mechanism to determine the price of Tradable Shares aligns with the goal of encouraging liquidity providers to engage in buying and selling NFT shares. The dynamic pricing, influenced by the curve's formula, ensures that the market for Tradable Shares remains responsive to changing conditions.

   • Customization for Creators: The decision to allow creators to customize bonding curve parameters, such as slope and intercept, empowers them to tailor the liquidity mechanism to the unique needs and characteristics of their projects. This customization fosters creativity and innovation within the NFT space.

3. Guaranteed Creative Fees:

   • Creator Incentives: The emphasis on guaranteeing creative fees for NFT creators is foundational to sustaining a thriving ecosystem. By enabling creators to specify and receive a percentage of transaction fees, the standard aligns incentives and rewards creators for their contributions, fostering a sustainable and creator-friendly environment.

4. Payment Mechanisms:

   • Developer Freedom: The standard's implementation-agnostic approach is motivated by the desire to provide developers with the freedom to choose and design the most suitable liquidity mechanism for their NFT projects. Whether interacting with ERC-20 tokens or native ETH, this independence ensures that developers can make informed choices based on the specific requirements of their projects.

The rationale behind these design choices is to create a Tradable Shares standard that is not only technically sound but also flexible, adaptable, and supportive of diverse and creative implementations within the ERC-721 ecosystem.

See also: Bonded Fungible Tokens (1671)

Security Considerations

1. Smart Contract Security: Implementations of smart contracts should undergo thorough security audits to ensure resistance against vulnerabilities and attacks.

2. Creative Fee Handling: Mechanisms for handling and distributing creative fees should be secure and transparent to prevent any malicious activities.

3. Compatibility: Developers should ensure compatibility with existing ERC-721 implementations, allowing for a smooth integration of the embedded liquidity standard.

4. User Experience: Considerations should be made to maintain a positive user experience, avoiding complexities that may hinder the adoption of NFT projects utilizing embedded liquidity.

This security considerations section reflects the importance of anticipating and addressing potential security challenges in the implementation, ensuring its robustness, compatibility, and user-friendly nature.

Copyright

Copyright and related rights waived via CC0.