Bond

What are the benefits of the Chicken Bonds bonding mechanism?

Bonding is the main use case offered by Chicken Bonds, allowing users to acquire bTokens at a discount upon depositing tokens. Chicken Bonds perpetually accrue a balance of bTokens and thus have no maturity date. Unlike other bonding mechanisms, the bonded funds are always withdrawable since users can choose between the following two options at any time:

1. Claim bond (Chicken In): claim and mint the accrued balance of bTokens in exchange for the deposited tokens.

2. Cancel bond (Chicken Out): retrieve the deposited tokens (principal) forgoing the accrued balance of bTokens.

On a conceptual level, Chicken Bonds can work with any standard ERC-20 token that can be used to earn yield, e.g. in a DEX, a lending protocol or through native staking. For every underlying token, the protocol will mint a separate bToken, which can thus be seen as a derivative asset.

Upon bonding tokens, the bonder starts accruing a virtual balance of bTokens according to a flattening curve approximating a cap:

The bond itself is technically represented as a NFT which can be sold on the secondary market such as OpenSea (the bond NFT may also be visualized through generative art). This might be the preferred option for some users instead of chickening out because they might be able to sell it at a higher price than what the principle is worth (which they would get when chickening out). This specifically makes sense for bonds that have accrued a significant amount of bTokens without breaking even yet.

A bond breaks even when the market value of the currently accrued bTokens exceeds the value of the bonded tokens. Once that happens, a bonder would normally prefer to claim their bond over cancelling it. Note, however, that a market price drop of the bTokens can set the bond back into a state where claiming wouldn’t be profitable.

Depending on the current price of the bTokens, there will also be an optimal time to claim the bond, sell the bTokens for more of the underlying token, and create a new, larger bond. We call this the optimum rebond time, beyond which holding on to the bond would be less profitable than rebonding

To facilitate rebonding and thus compounding the gains, the protocol incentivizes DEX liquidity for the bToken by charging a fee on the bonded amounts upon Chicken Ins.

An active user may thus go through the following cycle:

In summary, bonding allows users to acquire a position of more valuable bTokens without being locked in like in other bonding mechanisms. By repeating the process through rebonding, they can keep earning amplified returns on their principal which remains protected throughout the whole process.

Benefits and downsides of Chicken Bonds vs. other bonding approaches

Key benefits:

Principal protected: users can cancel their bonds and recover their principal at any time

No maturity date: bonds are perpetual and can be claimed at any time

Downsides:

Opportunity cost: users that decide to cancel their bonds only get back their principal but not the yield

For more information, refer to section 3.1 of the whitepaper.

Read next:

Part II: What makes the bTokens valuable?

Part III: How protocols/DAOs can benefit from Chicken Bonds?