Game of Chickens! The end of the bootstrap period and what it means for bLUSD
October 14, 2022
LUSD Chicken Bonds were successfuly launched Tuesday, Oct 4: so far more than 7M LUSD have been deposited. At this stage, we are still in the bootstrap period: Chicken Ins are not possible yet.
If you are not knowledgeable about the model already, check out the LUSD Chicken Bonds Introduction article as this one does not go over the basics again but instead focuses on bLUSD and its liquidity pool.
As we move forward, the end of the bootstrap period (Oct 19th) will enable bonders to claim their bLUSD and access new earning opportunities. Indeed, bLUSD being claimable will also mark the start of the incentivized bLUSD liquidity pool.
This article provides an overview of what to expect with the end of the bootstrap period, as well as additional information regarding the bLUSD/LUSD-3CRV pool that should prove valuable to anyone considering supplying liquidity.
What happens at the end of the bootstrap period?
The end of the bootstrap period will mark the end of a restriction that was a necessity for the first couple of weeks of the system:
- Chicken In will become possible.
- It means that the bLUSD supply will eventually be greater than 0, as the first bonders eventually claim it.
- It will also be the beginning of the incentives for the bLUSD Curve pool, creating sufficient liquidity for easy swaps in and out of bLUSD.
Why was a bootstrap period needed?
When users create a bond, they start accumulating bLUSD over time. Depending on the price action of bLUSD, the break-even point and optimal rebond time may vary, but the system is parametrized for roughly 1-month cycles.
It means that during the first couple of weeks of Chicken Bonds, no bond had accumulated enough bLUSD to reach its break-even point: thus restricting Chicken In was a way to protect early depositors and ensure a smooth start of the protocol.
While the bootstrap period will end on Oct 19th, users looking to optimize the amount of bLUSD obtained per LUSD will wait until their optimal rebond time, which is around Nov 4th for the first bonders.
Break-even and optimal rebond time are rough metrics based on assumptions, such as a bLUSD market price that will evolve as the bootstrap ends and the LP grows. They are helpful estimations but should be used cautiously, as a change in bLUSD's price can affect them significantly. The goal is to provide landmarks to the users to help with the timing of the Chicken In decision.
Thus the bLUSD supply should increase progressively as the first bonders are approaching their optimal rebond time. It also opens up new strategies, as some bonders might choose to claim their bLUSD early (obtaining less of them) and make up for it by supplying liquidity to the bLUSD pool,getting their share of the incentives
Impact on the three buckets
LUSD deposited into Chicken Bonds are split into three buckets:
During the bootstrap period, only the Pending Bucket was getting funded with users' deposits. It already started to produce a yield sourced from the Stability Pool using B.Protocol which is redirected to the Reserve Bucket. The Permanent Bucket remained empty at this stage.
When users Chicken In, the bonded LUSD are spread across several parts of the system:
- First, a 3% fee is taken to incentivize the bLUSD pool (more on this below).
- Then, the remaining LUSD is split between the Reserve and the Permanent Bucket, according to a formula available in the docs: the earlier the Chicken In, the greater the share sent to the Permanent Bucket.
Thus as users start to Chicken In, the current balances will shift from the Pending Bucket to the Reserve and Permanent Buckets. The funds deposited into the Permanent Bucket can then be deployed into the LUSD/3CRV Curve pool using the shifting function that anyone can trigger, as long as LUSD is trading at a premium.
It will be the first sensible impact of Chicken Bonds on LUSD’s peg and liquidity: since it supplies the Curve pool single-sidedly with LUSD, it will help rebalance it, lowering LUSD’s premium.
What it means for bonders
After the first Chicken In, any bonder will be able to do it too!
The bootstrap period ends when the first Chicken In happens, enabling anyone else to Chicken In if they want to. It can be triggered by any bonder 15 days after the creation date of the bond, so we expect it to happen around Oct 19.
This also brings new options for users, which can now sell their bLUSD to rebond, purchase bLUSD directly to avoid the wait of the bonding period or become a LP. It opens the full range of strategies to harness Chicken Bonds; bonder, treasurer, liquidity provider, trader: which one will you be?
As bonders Chicken In (or Out — their choice!), they will see their Egg (bond) NFT evolve into either a Proud Chicken or a Scared Chicken: you’ll find all the info about the NFTs attributes in the dedicated article: NFT x DeFi: Deep dive into LUSD Chicken Bonds' Dynamic NFT
The bLUSD/LUSD-3CRV pool
As users start to Chicken In, the corresponding collected fees will be added as incentives on the bLUSD Curve pool, enabling it to attract liquidity providers and grow along the bLUSD supply. The pool will also provide a market price source for bLUSD, informing bonders’ decisions.
So, let’s zoom in on the pool structure and its incentives to understand its contribution to the protocol and how users can harness the opportunity it creates.
bLUSD Curve pool liquidity structure and incentives
The chosen liquidity structure for the bLUSD is interesting, as the pool involves another LP token, one of the main LUSD/3CRV pool. Thus growing the liquidity on the bLUSD/LUSD-3CRV will help grow the liquidity of the LUSD/3CRVl pool too. It also enables bLUSD holders to easily swap to LUSD, but also any of the 3pool stablecoins if wanted: USDC, USDT and DAI.
At equilibrium, the pool will be made of 50% bLUSD (limited risks thanks to redemption) and 50% of LUSD-3CRV LP tokens: 3pool and LUSD, both stablecoins, thus greatly limiting the risk for impermanent losses. To earn the LUSD rewards, liquidity providers will need to stake their LP token into the pool Curve gauge contract.
Just like Chicken Bonds created new earning opportunities for LUSD holders, the liquidity pool is another compelling option for bLUSD holders. Indeed, the 3% fee collected on Chicken Ins (in LUSD) serves as an incentive for liquidity providers.
The Curve gauge contract handles the distribution of the LUSD incentives for liquidity providers: it is supplied continuously, as chicken in occurs. Every time funds are received, a new reward rate for the weekly period is computed.
It enables to streamline the rewards and ramp them up progressively as more bLUSD comes into existence, following the end of the bootstrap period on Oct 19. As more bonds get closer to their optimal rebond time and Chicken In, the rewards allocated to the bLUSD liquidity providers will scale appropriately.
Zapping In and Out of the pool
Since the bLUSD/LUSD-3CRV pool involves another LP token, it could mean more transactions are needed to deposit or withdraw from it. To streamline the process, a zapping option will be made available in the UI, enabling users to deposit or withdraw from the pool using LUSD or bLUSD in one transaction.
Single asset strategies to deposit into the bLUSD pool
Understanding the bLUSD pool composition is essential to grasp when it can be the most profitable to supply it and with which assets. Depending on the pool current balance, supplying it with either bLUSD or LUSD can prove more profitable:
🌊 bLUSD / 🌊🌊🌊 LUSD/3CRV
At the end of the bootstrap period, bLUSD will still be quite scarce. The incentives for the bLUSD pool will be available and might attracts LPs that did not bond before. Liquidity will still be thin by this point, so to partake their only option would be to single supply the bLUSD pool with LUSD, pushing the bLUSD price up.
When the pool is unbalanced towards LUSD-3CRV, supplying it with a bLUSD single asset deposit results in a premium.
🌊🌊 bLUSD / 🌊🌊 LUSD/3CRV
At any time as long as LUSD is trading at a premium, it means the LUSD/3CRV pool is unbalanced. If the bLUSD/LUSD-3CRV pool is at equilibrium, entering it with a LUSD single-asset deposit would result in a premium (since it rebalaces the LUSD/3CRV pool, which is 50% of the bLUSD/LUSD-3CRV pool).
🌊🌊🌊 bLUSD / 🌊 LUSD/3CRV
Finally, if many bonders are rebonding at the same time for instance, the bLUSD pool might find itself temporary unbalanced with too much bLUSD. If that’s the case, entering the pool with a LUSD single asset deposit would result in a double compounded premium:
- Premium for rebalancing the bLUSD/LUSD-3CRV pool
- Premium for rebalancing the LUSD/3CRV pool described in the previous section.Next steps for the bLUSD/LUSD-3CRV pool
Estimating the bLUSD pool APY
Now for the question probably on everyone’s mind: can the pool APY be estimated? It will be displayed in the front end once available of course, but until then you’ll need to make some assumptions to try to predict the pool APY in the first weeks.
At the end of the day, the pool’s APY will depend on the market dynamic. At first, the 3% Chicken In fee will be the only incentive the pool has, on top of the base yield coming from trading fees.
The main governing factors for the APY will be:
- Incentives Budget: The value of the bonds Chickened In, 3% of which is provided as an incentive for the bLUSD pool.
- bLUSD-3CRV pool staked TVL: the amount deposited into the bLUSD/LUSD-3CRV pool and staked in the gauge.
Regarding the value of the incentives (1), with 7M LUSD currently bonding at the end of week 1, assuming all of them eventually Chicken In within 2 weeks of the end of the bootstrap, a total of 210K LUSD would be collected for the bLUSD LP pool incentives for the two-week period.
The TVL of the pool is harder to anticipate. However, we can extrapolate the first 2 weeks' budget assumption yearly, and calculate the corresponding LUSD APY.
Depending on the staked TVL it would mean:
- 546% APY for a $1M TVL bLUSD/LUSD-3CRV pool
- 109.2% APY at $5M TVL
- Or still 21.84% APY for a $25M TVL pool
This is a highly simplified model that fails to account for the fact that new bonds are continuously created and simply extrapolate the current state of the system into the future.
Next steps for the bLUSD/LUSD-3CRV pool
Although Chicken Bonds was designed to self-sustain liquidity through autonomous means, the Curve governance might decide to allocate CRV rewards to the pool once its liquidity and volume are sufficient. On top of providing another revenue stream for depositors, this would also give them more options since having CRV rewards means the pool could be supported in yield-optimizing services like Convex or Yearn. It enables depositors to earn CRV and CVX tokens on top of the built-in LUSD incentives.
Besides, the CRV rewards would give more levers to increase incentives directed to the bLUSD pool, since veCRV gauge-voting, as well as vote bribing, also become possible, allowing the community to increase the CRV budget allocated to the pool at each given round.
We hope this article provided you with all the context you needed on bLUSD liquidity structure and incentivization. To get ready for the end of the bootstrap, you can bond your LUSD (make sure to mint them!) using one of Chicken Bonds frontends. To follow and discuss the end of the bootstrap period as it unfolds, join the Liquity Discord server.