Chicken Bonds

Chicken Bonds are a novel bonding protocol that allows users to earn amplified yield (from multiple yield sources) on their principal which is protected (users can withdraw 100% of their initial investment by cancelling the bond any time, but forgoing the accrued yield) throughout the bonding process (no maturity date, bonds are perpetual and can be claimed any time).

How does the bonding mechanism work?

We'll try to give a short breakdown of the Chicken Bonds mechanisms below in as simple terms as possible.

The flow looks like this:

  1. The first step is to get some LUSD by either buying it on the open market or by opening a Liquity Trove.

  2. The second step is to bond LUSD and get the bonding NFT which accrues virtual balance of bLUSD (boosted LUSD) over time according to a plateauing curve (see picture below).

  3. The next step is to claim bond (aka Chicken-in) to obtain the accrued bLUSD in exchange for deposited LUSD, when the value of accrued bLUSD equals LUSD invested (this moment is referred to as the "Break-even point") or later.

  4. Alternatively, users can cancel the bond (aka Chicken-out, hence the name - Chicken Bonds) withdrawing 100% of their principal back and forgoing the right to claim accrued bLUSD. Reasons could be many, e.g. if the user needs LUSD to pay back debt, or finds better yields elsewhere, or other.

  5. Once users Chicken-in, they may further compound their yield profits by selling the bLUSD for LUSD on the open market (Curve bLUSD/LUSD3CRV pool) and rebonding with a larger amount of LUSD principal, or hold the bLUSD they claimed if they think that would result in higher yield. The deciding factor here would be the premium at which the bLUSD trades.

Strategy of simply holding bLUSD after Chickening-in may be more attractive (e.g. if the market price of bLUSD is relatively close to the redemption price of bLUSD) up to some point. Once the premium at which bLUSD trades gets high enough, it would be optimal to sell it for more LUSD on the market (Curve bLUSD/LUSD3CRV pool) and then rebond with a larger LUSD principal (long-term wise). This moment is referred to as the "Optimum rebond time".

It's also worth noting that users can simply buy bLUSD on the open market, thus avoiding the bonding period, but acquiring bLUSD at the market price instead of the redemption price.

Furthermore, users can also buy (or sell) their whole position in the form of NFT on an NFT marketplace (e.g. on LooksRare).

Behind the scenes

The Chicken Bonds protocol operates a treasury consisting of 3 different buckets, which all contain LUSD and earn yield:

  1. Pending Bucket: holds the LUSD from all open bonds (which have not yet been Chickened-in or out of).

  2. Reserve Bucket (POL): receives a portion of the bonded tokens from the Pending Bucket upon Chicken-ins and captures the yield from all 3 buckets. The Reserve bucket backs the whole bLUSD supply, meaning that bLUSD is fully redeemable for the LUSD in the Reserve. This results in a guaranteed bLUSD price floor, which can only increase and never decrease.

  3. Permanent Bucket (POL): holds excess (other portion of) LUSD diverted from bonds that were Chickened-in โ€œearlyโ€. The LUSD in here is protocol-owned and can never be redeemed.

LUSD Chicken Bonds in DeFi Saver

Before we go over both basic and advanced DFS features we've prepared for LUSD Chicken Bonds, we should mention that our integration is focused around the dsproxy (aka smart wallet), as all of our other integrations, too, meaning that any new bonds you create using DeFi Saver will be created on your smart wallet.

Additionally, the migrate functionality will also be available from day one, allowing all existing bonds/positions on EOAs to switch to the Smart Wallet for any potentially advanced features (e.g. doing claim bLUSD + sell bLUSD + rebond in just one transaction).

First off, looking at our UI, you can now find a new dedicated "Bonds" tab for LUSD Chicken Bonds on the Liquity dashboard, right next to the Notify tab (ICYMI, we've recently released Notification features too).

Users are able to create multiple bonds per account, while their dynamic NFTs representing those individual bonds can be viewed by hovering over their IDs. Important to note that these NFT positions can be transferred to any address at any point in time, transferring at the same time the LUSD principal and the right to claim accrued bLUSD.

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