Bonding Curves 101
A simple explanation of automated pricing mechanisms.
Note: This is a technical concept. You don't need to understand this to trade, but it helps explain how prices move in AMM-based markets.
What is a Bonding Curve?
A bonding curve is a mathematical formula that defines the relationship between price and supply.
In prediction markets (specifically the LMSR - Logarithmic Market Scoring Rule, or CPMM - Constant Product Market Maker):
- The curve ensures that as more people buy "Yes", the price of "Yes" goes up.
- It guarantees that there is always a price available, even if no human is on the other side willing to sell to you. You are trading against the math.
Slippage
Because of the curve, the "Marginal Price" (price for 1 share) is different from the "Average Price" (price for 1000 shares).
- Price: 50¢.
- Buying 1 share: Costs 50¢.
- Buying 10,000 shares: Might cost an average of 55¢.
Why? Because your purchase pushes the price up as you buy. This difference (50¢ vs 55¢) is called Slippage.
In the CLOB model (current Polymarket standard), slippage still exists, but it's determined by the depth of limit orders rather than a mathematical curve.