Chicken Bonds will enable projects/DAOs to bootstrap protocol owned liquidity (POL) for their token at no cost while boosting the yield opportunities for end users.
Token holders may acquire newly issued Boosted Tokens (bTokens) through a novel bonding mechanism. By directing and reinvesting additional yield from the current POL and pending bonds, the system amplifies the return of the bTokens compared to the underlying. Chicken Bonds can be used to acquire POL for various purposes such as increasing DEX liquidity, funding lending markets, or bootstrapping algorithmic market operators (AMOs).
Note: Chicken Bonds is currently a work in progress. We have released a preliminary whitepaper and a pricing challenge for the bTokens. All kinds of feedback is appreciated. More information about concrete implementations will follow soon.
Users can benefit from the system in two ways:
- 1.Bonding: Deposit existing tokens in order to accrue bTokens in exchange for the deposited tokens.
- 2.Investing: Buy the bTokens on the market as a long-term investment with amplified returns and limited downside risks.
Unlike in other protocols, bonding in Chicken Bonds is principal-protected and specifically tailored to risk-averse users. It can be seen as a principal-protected zero-coupon perpetual convertible bond with a variable conversion rate.
Upon bonding tokens, the user starts accruing a virtual balance of bTokens according to a flattening curve approximating a cap:
Accrual of bTokens through bonding
At any point in time, the holder of the bond can decide to:
- Claim bond (Chicken In): claim and mint the accrued balance of bTokens in exchange for the deposited tokens.
- Cancel bond (Chicken Out): retrieve the deposited tokens (principal) forgoing the accrued balance of bTokens.
The option to Chicken Out protects the investor's principal, making bonding an economically risk-free investment (except for smart contract risk and opportunity costs). As a third alternative, users can also sell their bonds (represented as NFTs) on the secondary market like OpenSea. This especially makes sense for bonds that have accrued a significant amount of bTokens without breaking even yet.
Depending on the current price of the bTokens, there will be an optimal time to Chicken In, sell the bTokens for original tokens, and create a new, larger bond. To facilitate such rebonding (compounding the gains) and exiting the system, the protocol will incentivize DEX liquidity for the bToken.
All tokens under the temporary or permanent control of the protocol generate yield (e.g. from staking or LP rewards) which is used to boost the value of the bTokens.
When users bond tokens, they are first placed in a Pending Bucket. In case of a Chicken In, the bonded tokens are moved into two other buckets according to a proportional split depending on how much of the cap has been used:
- 1.The first portion goes into the Reserve Bucket directly backing the bToken supply: bTokens are redeemable for a pro rata share of the Reserve Bucket at any time.
- 2.The second portion is put into a Permanent Bucket, which is permanently owned by the system and benefits the bTokens through its yield.
The system's backing ratio given by
reserve_bucket/boosted_token_supplycan never decrease, but only increase by capturing the yield inside the Reserve Bucket. This important non-dilutive property is due to the proportional bucket split based on the cap that is defined inversely as
boosted_token_supply/reserve_bucket.In other words, whenever somebody Chickens In, the protocol expands the bToken supply in the same proportion as it increases the Reserve Bucket backing them.
As a consequence, the "bTokens will benefit from a rising price floor, below which redemption is profitable (arbitrage).
For instance, let’s assume a user bonds 120 TKN, and the current backing ratio is 1.5. Therefore the cap for that bond would be 80 bTKN (= 120 / 1.5).
After some time and reaching 80% of the cap the user claims the bond. So the system mints 64 bTKN for the user, and the bonded amount is split in 96 TKN (80%) which go to the Reserve Bucket, and 24 TKN (the remaining 20%) which are deposited in the Permanent bucket.
Note that after this Chicken In event, the backing ratio will remain at 1.5, as both the Reserve Bucket and the total supply of bTKN are increased in the same proportion.
Given that the yield from all three buckets is sent to the Reserve Bucket, the backing ratio (price floor) will grow faster than the value of a simple portfolio of the underlying token.
By pricing in the amplified growth, the bTokens should trade at a premium against their price floor, driving a flywheel: the more people bond, the more yield is retained for the bToken holders. A higher yield in turn increases the price premium, making bonding more attractive through a higher APR.
To ensure that bonding remains attractive when the premium drops, the protocol may automatically adjust the accrual rate (steepness of the accrual curve) using a controller targeting an average Chicken In time or bond age.