Bonding
Buy your favorite DeFi tokens at a discounted rate with another asset.
Bonding is a mechanism in which a user can sell assets to a protocol in exchange for its native token.
To incentivize users to sell to the protocol, rather than the open market, bonds are offered at a discounted rate. Bonds also have a vesting period to prevent users from selling all the discounted tokens at once for a quick profit.
Bond price is determined by the supply and demand of bonds. It trends higher when there is more demand. As a result, bonding is a very competitive space - bonders compete with each other to grab the largest discount.
Bond price can also be controlled by BCV (Bond Control Variable). It is a parameter set by the policy team to adjust bond capacity. When BCV increases, bond price increases, thus resulting in a smaller bond capacity.
As mentioned earlier, bonds are linearly vested over a period of time (5 days by default) to reduce sell pressure due to arbitrages.
Bonding allows a protocol to accumulate their own liquidity.
- Protocol Owned Liquidity (POL) guarantees users that there is always sufficient liquidity for normal market operation. In other protocols, in case of a bank run, liquidity is often pulled from the protocol, exacerbating the situation with less exit liquidity.
- POL transforms liquidity from a liability to a revenue source. Every swap transaction in a pool contributes a 0.3%/0.25% (Uniswap/Sushiswap) fee to the LPs. As liquidity is permanently locked in the treasury, these fees provide a constant source of revenue for the protocol.
- POL allows for additional yield farming opportunities. For example, Sushiswap offers the Onsen program, where protocols could have their liquidity pair listed for SUSHI rewards. Once successfully listed, the protocols could deposit their SLP tokens into the Onsen menu and farm SUSHI tokens.
Last modified 1yr ago