Intro
Hi /mechanisms,
As promised, here's a mechanisms analysis of a certain decentralized social platform.
What the fuck, Friendtech: a thread frame
When friend.tech took the industry by storm late last summer. Onchain natives lined up in droves at the Base bridge to invest their hard-earned gambling money on the speculative clout of their Twitter oomfies.
"shares" were the primary offering: an access pass to various gated groupchats hosted by users of the platform.
Curve Derivation
Later rebranded as “keys” to dodge egregious securities violations (presumably), these shares were priced according to their issued supply. A mapping known to the industry as the Continuous Token Model. Below is the pricing function of their contract, which can be found at 0xcf205808ed36593aa40a44f10c7f7c2f67d4a4d4.
Mathcels will recognize there’s nothing too fancy going on here. Ignoring the ternaries, the above is just the expanded integral of the spot pricing function:
p(x) = (x^2 - x + 1/6)/16000 eth
where x is the total issued supply of shares for a given group chat.
Mundane as it may appear, an overarching growth rate of O(x^2) is incredibly aggressive for a CTM, whose purpose is to guide the price action of the token according to its supply growth.
A curve like this––and any superlinear curves for that matter––is really only good for pump and dumps and should be written off as unsustainable for any long term investment.
Extraction Meta
Not included in the above pricing function are the protocol and subject fees, which taxed traders when buying and selling keys on friendtech. these fees effectively created a buy curve 10% above and a sell curve 10% below the base curve visualized above.
By nature, extractive. But protocols gotta eat, and the 18% (1-0.9/1.1) pricing gap creates room for an open market to form around the token. In effect, this is a good thing.
..or at least it would have been if friendtech followed widely adopted standards like ERC20.
Doing so would have allowed their shares to trade on industry adopted market making primitives like uniswap’s CFMM. this incompatibility though instead forced users to trade their shares directly on friendtech in the meantime, resulting in max-extraction directly to the protocol.
Love Death and Robots
The resulting price performance over the following months were reflective of the extractive ponzinomics baked into the model.
The impact of product quality and PMF can’t be discounted of course, but when it comes to Continuous Token Models in particular, the shape of the pricing curve is a strong predictor of future price action. Coupled with extractive dynamics that siphon out available capital over time, the negative sum trading environment inevitably leads to a cratering of price in bank-run-like fashion.
Traders would be wise to take note of the price action that superlinear price mappings portend. Naturally, these curves play a large part in dictating the market price of an asset, even when an open market alternative exists. Consider them guardrails on volatility. And consider opting for a sublinear curve as a builder; that is if you hope for sustainable price action within your protocol.
Personal Shill
There it is. As promised, a /mechanisms analysis of friendtech’s pricing curve at 20 channel followers. 20 channel followers on the dot. Let it be known I am nothing if not punctual. If you enjoyed the read, consider liking and subscribing for more content like this.
If you're interested in the Continuous Token Model in particular and how to properly integrate it in your protocol check out the following article for a somewhat thorough exhaustive rotation of the shape. Feel free to reach out with any questions.
To Rug or Not to Rug: Why is that a Question?
This article contains worthwhile insights for those striving towards an anarcho-capitalistic ideal, those designing protocols as microeconomies or those who would vote with their wallet to loosen the grip of institutional capital on our beloved Internet. To give you an idea of what you're getting yourself into:
