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:
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:
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:
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:
By having multiple bonds, Becca now has room to hedge. She is able to:
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:
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:
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.