Bonding
Buy your favorite DeFi tokens at a discounted rate with another asset.
Bonds are a financial service for protocols to acquire their own liquidity, in exchange for their governance tokens at a discount:
Bonds provides Price Stability & Confidence by ensuring the availability of liquidity
Negative flywheel effect during a market crash at DeFi
With Bonds, now Protocols own their liquidity, solving the negative FlyWheel
Bonding is a mechanism in which a user can sell assets to a protocol in exchange for its native token.
To incentivize users to sell to the protocol, rather than the open market, bonds are offered at a discounted rate. Bonds also have a vesting period to prevent users from selling all the discounted tokens at once for a quick profit.
Bond price is determined by the supply and demand of bonds. It trends higher when there is more demand. As a result, bonding is a very competitive space - bonders compete with each other to grab the largest discount.
Bond price can also be controlled by BCV (Bond Control Variable). It is a parameter set by the policy team to adjust bond capacity. When BCV increases, bond price increases, thus resulting in a smaller bond capacity.
As mentioned earlier, bonds are linearly vested over a period of time (5 days by default) to reduce sell pressure due to arbitrages.
Bonding allows a protocol to accumulate their own liquidity.
- Protocol Owned Liquidity (POL) guarantees users that there is always sufficient liquidity for normal market operation. In other protocols, in case of a bank run, liquidity is often pulled from the protocol, exacerbating the situation with less exit liquidity.
- POL transforms liquidity from a liability to a revenue source. Every swap transaction in a pool contributes a 0.3%/0.25% (Pancakeswap/Sushiswap) fee to the LPs. As liquidity is permanently locked in the treasury, these fees provide a constant source of revenue for the protocol.
- POL allows for additional yield farming opportunities. For example, Pancakeswap offers the Syrup Pool program, where protocols could have their liquidity pair listed for CAKE rewards. Once successfully listed, the protocols could deposit their PLP tokens into the Syrup Pool menu and farm CAKE tokens.
Last modified 8mo ago