Bonding
What is Bonding?
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.
What are the Benefits of Bonding?
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% 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. Decentralized exchanges will offer incentives for people to provide liquidity by offering rewards in their token.
Bonding is the secondary value accrual strategy of Olympus Doge. It allows Olympus Doge to acquire its own liquidity and other reserve assets such as $wDOGE and $USDC by selling $OHMD at a discount in exchange for these assets. The protocol quotes the bonder with terms such as the bond price, the amount of $OHMD tokens entitled to the bonder, and the vesting term. The bonder can claim some of the rewards ($OHMD tokens) as they vest, and at the end of the vesting term, the full amount will be claimable.
Bonding is an active, short-term strategy. The price discovery mechanism of the secondary bond market renders bond discounts more or less unpredictable. Therefore bonding is considered a more active investment strategy that has to be monitored constantly in order to be more profitable as compared to staking.
How is the bond price/discount determined?
The bond discount is determined by the following formula:
The bond price is determined by the debt ratio of the system and a scaling variable called the Bond Control Variable (BCV). This allows us to control the rate at which the bond price increases. Note that the bond price is independent of the market price, as no data from price oracles are used when determining the bond price.
The debt ratio is the amount of reward tokens owed to the bonders by the protocol, divided by the total supply of the reward tokens. A higher debt ratio implies a huge demand for bonds, resulting in a higher bond price, and vice versa.
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