September 21, 2022
The launch of the LUSD Chicken Bonds introduces a new, innovative form of bonding to decentralized finance. LUSD Chicken Bonds will offer an amplified yield-earning and trading opportunity for LUSD holders while helping to stabilize the price of LUSD and improve its liquidity.
We're excited to take this game-theoretic experiment to mainnet while also pioneering Dynamic NFTs which will evolve based on the user’s interactions.
If you've been following Liquity for a while, you are aware that we are not the kind of team that will chase innovation for the sake of it. The Liquity protocol itself is the perfect example. While similar to Maker/DAI, its infrastructure is quite different and improved at every level leading to a new type of product. And we're proud that Liquity stands as the most resilient and efficient borrowing protocol and stablecoin on Ethereum.
With Chicken Bonds, we're tackling a different playing field with a similar approach. Here, the aim is to enable protocols to capture liquidity efficiently and sustainably. We have created a unique bonding model which is gamified and provides better guarantees and less downside for users than existing bonding approaches. Bonders will benefit from principal protection: they always have the option to "Chicken Out" (hence the name of Chicken Bonds), canceling their bond and claiming their principal back.
Today, every user earns the same amount of yield in the Stability Pool. Chicken Bonds will open up new earning and trading strategies for the expected future yield of the Stability Pool. Users will be able to bond to receive a derivative token (bLUSD) that captures an amplified, auto-compounded yield, which they can either hold or trade.
Chicken Bonds will not only be more engaging because of those new strategies but will also reward users with unique Dynamic NFTs - these are on-chain generative NFTs that change their visual representation based on the users actions.
What makes these generative NFTs unique is their dynamic nature: the NFT visual will either be an egg (while bonding), a chad chicken (after claiming the bond - “Chickening In”) or a run-away chicken (after canceling the bond - “Chicken Out”). The most chad Chicken Bonders and engaged users in the Liquity ecosystem will get the rarest NFT. We are excited to join forces on the NFT side with the artist Luchador, creator of the eponymous collection and Play 2 Earn game.
The Chicken Bonds NFT collection is exclusively tied to the DeFi application. The only way to mint one is to create a bond. We invite DeFi degens and NFT maniacs to partake in this first of its kind event, where your financial decisions will shape the NFT collection you will end up with. “Play-2-Mint” your Dynamic NFT!
So, what kind of chicken will you be:(🥚,🐔) or (🥚,🍳)? And will you optimize your profit or NFT collection?
Buckle up and learn more 👇
Before diving into LUSD Chicken Bonds, let’s quickly recap how users earn stablecoin yield with LUSD.
The Liquity Stability Pool is an attractive stablecoin yield opportunity for many users. In the past, users were able to earn on average a double-digit APR. The yield consists of two components: users buy ETH at a discount from liquidations, and they receive continuous LQTY rewards for providing the LUSD which is used to pay off the debts of undercollateralized loans.
Chicken Bonds offers users the ability to leverage the LUSD yield: users can bond their LUSD (instead of depositing into the Stability Pool itself) and acquire a boosted LUSD token (bLUSD). bLUSD is a derivative token with interesting properties:
In summary, bLUSD provides user access to a yield optimizer strategy that amplifies and auto-compounds the existing Stability Pool yield.
The primary mechanism to acquire bLUSD is through bonding. Let's explore how the novel Chicken Bond mechanism works.
Bonding consists of several steps:
First, users create a bond by depositing LUSD into Chicken Bonds. Once the bond is created, users will progressively accrue a virtual balance of bLUSD tokens. Every bond is unique and is represented as an NFT to make it transferable and tradable. We also created a visual representation for each NFT - more on that later.
The bond has no maturity date and users can choose one of the following two actions at any time:
Once users Chicken In, they may further compound their yield profits by selling the bLUSD for LUSD and rebonding with a larger LUSD principal. Thus, the risk model of Chicken Bonds is similar to PoolTogether: while bonding, the principal is protected and only the user’s generated yield is at stake.
Of course, users can also buy bLUSD directly on a DEX to get access to the amplified yield without going through the bonding process. In general this is like any trading activity. You need to make calculated bets on the price of bLUSD. But compared to other tokens that fluctuate in price, bLUSD has two main advantages:
There will be a volatile premium above the redemption price that users are willing to pay based on the participants’ market sentiment and future yield expectations. Each user might have a different perception of the fair price of bLUSD as there is currently no simple way to calculate this fair price (see our fair price challenge bounty)
In essence, the yield amplification is achieved by having three different sources directing their yield to bLUSD. Thus, thanks to the redistribution, holders of bLUSD enjoy a yield superior to the one they would have achieved staking them directly.
In the beginning, early bLUSD holders will profit mainly from the yield from bonders. This kicks off a flywheel dynamic: the first bonders to Chicken In will get the yield from those who are still bonding.
It has been our goal to create a fair flywheel dynamic without Ponzi mechanisms where late joiners hold the bag and might lose their entire principle. Thus we made sure to minimize the economic risks for users:
With these novel mechanisms and escape hatches Chicken Bonds differentiates itself from previous bonding mechanisms.
We are very much looking forward to observing the different strategies users employ to outperform today’s Stability Pool yield. In order to prepare yourself and figure out a winning strategy, you should check the following example strategies.
Let's consider four different strategies to understand better how the LUSD Chicken Bonds work in practice.
Alice likes this strategy because it allows her to trade with a limited downside risk as bLUSD has a guaranteed price floor. In case bLUSD falls below the redemption price, Alice can always redeem the bLUSD pro rata for the LUSD of the Chicken Bonds Reserve which is backing it.
Furthermore, even if she is just holding bLUSD during times of low volatility she earns an enhanced yield compared to the underlying LUSD and benefits from the rising price floor of bLUSD.
That way, he could easily bond and mint a NFT for any value and then use it to take out a loan, or even leverage his exposure.
Since each bond is unique, the simplest way for the system to keep track of deposits and make them transferable was to use an NFT, similar to UniswapV3's LP NFT. When a user bonds, an NFT is created representing the claim on the bonded assets: transferring the NFT, transfers control over the bond/the assets.
During the development of Chicken Bonds, we realized that players willing to take part in this game-theoretic experiment should be rewarded, independently of the financial outcome - this is why we decided to develop the dynamic visual NFT component for it.
It leads us to another unique aspect of Chicken Bonds: it's both a DeFi application and a generative NFT collection. While the team is knowledgeable about the first, we needed some help with the latter: the Chicken Bonds' visual component and generation script were established by Luchador who is one of the pioneers of Play 2 Earn NFT games. Check out the Luchador game and collection here.
Depending on the users' interaction and the bond parameters, different NFTs will be obtained. Further, a user's active involvement in the Liquity ecosystem can lead to additional, more rare attributes. Past actions such as owning or staking LQTY tokens, opening a Liquity Trove, or gauge-voting for the LUSD-3pool or LUSD-FRAXbp on Curve (veCRV owners) can result in a rarer NFT for the bonder
Their art is fully onchain (.svg), so your eggs & chickens will forever be yours. But be aware that you can have only one visual representation of the NFT: an egg (while bonding), a chad chicken (after Chickening In) or a run-away chicken (after Chickening Out). Choose wisely, as your decision is irreversible.
Each NFT has a unique number and will be assigned one of the 4’000 different representations of your current state.
To grab the coolest🐔, there is only one path: become a Chicken Bonder! And the bigger your bonds and the more involved in the Liquity ecosystem you are, the higher your chance of obtaining a rare NFT.
The Permanent Bucket which holds the POL will be used to provide liquidity for LUSD on Curve. It further has a shifting function which allows to shift the LUSD funds from Curve to the Stability Pool and back. This will help hold LUSD closer to its peg. Staying close to our principles of decentralization, this function is not controlled by the team or multisig but can be triggered by anyone when it is feasible.
In that regard, the Permanent Bucket works similarly to an Algorithmic Market Operations Controller (AMO), a concept pioneered by Frax Finance. As the LUSD Chicken Bonds grow in usage, so will the liquidity available for peg stability.
The LUSD Chicken Bonds will be released on 4th of October.
Similar to Liquity, the code will be immutable and there will be no official frontend. Instead, the team has extended the current front-end kit so that interested parties can enable the Chicken Bond functionality easily. We ask the frontend operators to update their frontend and will list the ones that support Chicken Bonds at launch.
We hope this article helped you to better understand the LUSD Chicken Bonds design and how you can make the most of it. We’ll release user documentation and audit reports ahead of launch and organize a community call to ensure any questions you have left are answered.