What are some strategies I can use?
September 26, 2022
One of the unique things about Chicken Bonds is that there are multiple strategies that a user can take to enhance their yield, depending on what they feel comfortable with.
Let's consider some different strategies to understand better how the LUSD Chicken Bonds works in practice.
The Bonding Strategy
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
- With this freshly minted LUSD he creates a bond by depositing it into Chicken Bonds. At this stage, if he needed to repay some debt, he could cancel his bond at any time.
- After a while (~30 days), Bob surpasses the break-even point - meaning the bLUSD accumulated is worth more at current market price than the underlying LUSD.
- Bob waits a bit more to accrue more bLUSD. Once he thinks he has reached his optimal rebonding time, he Chickens In (claims the bond) 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.
The Trader Strategy
Alice likes trading and she feels that she can better estimate the fair price of bLUSD than others. She believes in her speculative acumen, and that she will be better at timing the market than others. Thus rather than bonding like Bob, she would like to stay fixated on the price of $bLUSD
Her strategy is simple:
1. If the price of $bLUSD is close to the redemption price, she will buy bLUSD (with a low premium)
2. If the demand and price for bLUSD is high, 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.
The Liquidity Provision Strategy
Charlie believes that LP-ing will be the most attractive strategy for him as he will not only be earning trading fees, but also the fee from the Chicken Ins which is directed to the LUSD/bLUSD Curve pool. He expects quite a bit of trading activity because of users like Bob (bonding and re-bonding) and Alice (trading bLUSD). His strategy is as follows:
- He opens a loan with Liquity to have some LUSD on hand
- He starts bonding as soon as Chicken Bonds starts to acquire some bLUSD
- He decides to Chicken In rather early to be one of the first liquidity providers in the LUSD/bLUSD Curve pool
- He will only deposit some liquidity in the pool. He does this because he wants to make sure that he has enough LUSD to rebalance the pool during times when a lot of bonders want to sell bLUSD.
- Every time the pool is imbalanced, he adds LUSD single sidedly to Curve to profit from the deposit bonus (see Curve documentation)
The NFT collector
Justin likes DeFi but he likes NFTs even more. He wants to be part of this novel experiment at the intersection of DeFi and NFTs. He would love to have some of these Dynamic NFTs which he is convinced will mark a milestone in the evolution of NFTs.
Thus, he will optimize for rare NFTs rather than maximize his profit. He figures out that these are the things that will increase chances to get a rarer NFT:
- Opening a loan with Liquity - he uses his ETH to get LUSD for Chicken Bonds
- Voting for the LUSD+3CRV gauge on Curve Finance
- Staking LQTY - as he is a fan of Liquity and real yield, he has a stash of LQTY staked
- He opens a single large loan, as this increases his chances for a rare NFT further
- He runs several times through bonding - sometimes Chickening In, but also Chickening Out to get the full variety of NFTs for his collection
- As he also wants to have an egg, he opens a bond which he decides to keep open for an undefined period of time.
His alarm clock is set to the time of the launch to further ensure he gets the NFTs with the lowest IDs.
The Pro Trader Strategy
Becca wants to open many bonds with different sizes, as she wants to be able to hedge her risk. She believes that by having multiple bonds with different sizes, she will be able to manage her risk effectively by using a mixture of the three strategies above.
Her strategy is as follows:
- She plans to open 3 different bonds worth different amounts on Day 1
- For her first bond, she plans to claim her bond early, so that she can be the one of the first ones to provide liquidity and earn pool fees on Curve.
- For her 2nd bond, she plans to wait until the price of bLUSD is high, and resell it back into LUSD
- For her 3rd bond, she plans to wait until the break-even point, sell BLUSD for LUSD, and start the whole process again.
By having multiple bonds, Becca now has room to hedge. She is able to:
- Collect fees from the LP strategy
- Speculate on the bLUSD price
- Bond and compound yields for optimal returns
The Buy Low and Hold Strategy
James likes the concept of Chicken Bonds and is a big believer of $LUSD. He has opened a Trove in Liquity and holds $LUSD, but he does not have the time to be active with regards to gamification mechanics that are in Chicken Bonds.
He intends to keep his Trove open for multiple years, and wants to follow a passive strategy that fits with his parameters. Yet, he is still keen on getting an amplified yield on $LUSD that is better than the Stability Pool.
James decides that he will buy bLUSD directly on a decentralized exchange (DEX) to get access to the amplified yield without going through the bonding process. In general this is like any trading activity; James is making a calculated bet on the price of bLUSD. But compared to other tokens that fluctuate in price, bLUSD has two distinct advantages:
- There’s a guaranteed price floor through redemptions - which can only increase and never decrease.
- 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.
As James intends to hold bLUSD for multiple years, this strategy suits him well. For instance, say that the redemption price of bLUSD is at $1.1, and James buys in at $1.2. Assuming there is a growth rate of 10% a year, after Year 1, the redemption price would be $1.21. This would be still slightly higher than the price that James initially bought his $bLUSD at, making it a viable long term strategy.
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.
The Arbitrage Bot strategy
Caroline has some liquidation bots running. She wants to make sure that she captures the new arbitrage opportunities that will be available in Chicken Bonds for redemptions:
- She programs a bot that monitors the market price of bLUSD.
- Every time the market prices goes below the redemption price, her bot will buy bLUSD and redeem it for LUSD and yLUSD (LUSD Yearn vault)
As you can see, these are just some strategies that a user can think about when they try using Chicken Bonds. As the launch date approaches, we are sure that the community will continue to innovate and come up with a myriad of strategies that not only combine a mixture of the above, but also some fresh ideas into the mix.