Bond

LUSD Chicken Bonds Introduction

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.

Why did we build Chicken Bonds?

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.

What’s in it for users?

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 👇

LUSD Chicken Bonds Basics

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:

  • It offers higher yield compared to depositing LUSD in the Stability Pool
  • The yield produced is automatically harvested and compounded
  • It’s an ERC-20 token that can be used as collateral with a rising price floor (measured in LUSD)

In summary, bLUSD provides user access to a yield optimizer strategy that amplifies and auto-compounds the existing Stability Pool yield.

How to acquire bLUSD?

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:

  1. Chicken in: Users can claim their bond by exchanging their LUSD for the accrued bLUSD balance. As bLUSD accrues over time, users will usually wait to Chicken In until they have at least reached the break even point, and the accrued bLUSD is worth more than the underlying LUSD.
  2. Chicken out: Users can cancel their bond to recoup the full amount of LUSD initially invested. Thus, the users’ principal is always protected while bonding and a user who cancels their bond only forgoes their yield.

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:

  1. There’s a guaranteed price floor through redemptions (see below) - which can only increase and never decrease.
  2. bLUSD earns an amplified yield, which means that under normal/stable conditions the market price should more or less grow at the same rate as the increasing redemption price.

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)

How does the yield amplification work?

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:

  • While bonding, the user can Chicken Out at any time and recoup the amount invested, meaning that the principal is fully protected at this stage (excluding the yield).
  • The yield amplification is not solely dependent on ever more bonders joining. Over time, the POL of the Permanent Bucket will grow and provide additional yield for the amplification even if there are no new bonds created.
  • In Chicken Bonds, a bank run situation is mitigated as everybody can redeem its bLUSD pro rata for the LUSD in the Reserve. Thus, no one is left holding the bag.

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.

Example strategies to harness LUSD Chicken Bonds

Let's consider four different strategies to understand better how the LUSD Chicken Bonds work in practice.

1. Bob owns ETH he intends to keep for a while: he is looking to generate a return in a stablecoin in the meantime. Here's what he could do to maximize his returns safely:
  • He creates a Trove on Liquity, deposits ETH, and borrows LUSD.
  • He creates a bond with the freshly minted LUSD to optimize his returns. At this stage, if he needed to repay some debt, he could cancel his bond at any time.
  • After a while (~30 days), Bob will surpass the break-even point - meaning the bLUSD accumulated is worth more than the underlying LUSD. Bob Chickens In and receives the bLUSD in exchange for his LUSD.
  • As the market price of bLUSD is high at that moment, Bob decides to swap his bLUSD back to LUSD for a profit and then rebonds with this larger principal.
  • If the market price of bLUSD would have been close to the redemption price, he would have held onto his bLUSD in order to benefit from the amplified and auto-compounded Stability Pool yield.
2. Alice will focus on another strategy as she likes trading and is confident that she can better estimate the fair price of bLUSD than others. Thus, she will follow the market price of bLUSD and …
  • if the price is close to the redemption price, she will buy bLUSD (with a low premium)
  • if the demand and price for bLUSD go up again she will sell it (at a high premium)

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.

3. Charlie believes there will be a lot of trading activity between LUSD and bLUSD because of the activity of Bob (bonding and rebonding) and Alice (trading bLUSD).
  • Thus, he opens a loan with Liquity to have some LUSD at hand
  • Then he starts bonding as soon as Chicken Bonds starts
  • He will Chicken In rather early before he reaches the break even point because he wants to be one of the first LPs in the LUSD/bLUSD Curve pool to capture fees from Chicken Ins and pool trades.
  • He will deposit liquidity in the pool and make sure he has enough LUSD to rebalance the pool when demand for LUSD spikes - this will be the case when bonders will sell their bLUSD to rebond
4. Dave is a NFT collector and always looking for interesting collections. He heard Chicken Bonds NFT’s will be dynamic and offer a fixed price floor.

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.

  • He opens up a loan on Liquity to get LUSD. As a Liquity user he has a higher chance of getting rare traits
  • He starts bonding and as soon as he gets the Egg NFT he goes to a NFT lending platform getting fresh liquidity. He does not have to worry about liquidations due to the fixed price floor
  • The fresh funds he deploys to a stablecoin farm receive a nice yield
  • This way he keeps the NFT in his collection while benefiting from the rising price floor of bLUSD and farming stables on top

Your bond is also an NFT

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.

How will the Chicken Bonds help Liquity?

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.

When will it be live?

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.