Today, we are looking at Liquity’s chicken bonds and how it works. We had covered Liquity protocol’s basics last week and would suggest checking it out here before proceeding further. Liquity is a lending protocol with LUSD and LQTY as native tokens with LUSD stated as the most decentralized stable coin, as they don’t even operate a frontend. During times of extreme volatility, LUSD seems to de-peg above a dollar, due to its brilliant design.
Chicken bonds are the new DeFi mechanism of Liquity. They are essentially a gamified bonding model that provides lesser risks and better guarantee for the investors, unlike any other models currently available in the market. Chicken Bonds introduces a novel bonding mechanism which allows protocols to bootstrap liquidity at minimal cost and provides better user protection than existing bonding alternatives. The bonding mechanism can be applied to yield-bearing tokens.
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<source: Google>
Initially Liquity faced issues similar to other protocols such as acquiring protocol liquidity. Although other protocols like Olympus, Tokemak use similar versions, Liquity conceptualized a slightly different version of low cost, strong user protection mechanism to build chicken bonds. As this is completed open sourced, other protocols can fork chicken bonds to suit their requirement, which is likely to happen, given the success of their earlier products.
Before we dive deeper into the workings, let’s look at the Liquity’s tokens.
LUSD: LUSD is a USD pegged redeemable stable coin of the protocol
LQTY: LQTY is the reward token created by the protocol to incentivize users. The stability providers are paid with LQTY for their contribution to the stability pool
bLUSD: bLUSD is a derivative token which accrues an amplified yield beyond what is typically available to holders of vanilla LUSD
When a user deposits ETH in the Liquity protocol as collateral they are provided with LUSD tokens at 0% interest. Chicken bonds are ideally principal protected bonds which means the principle provided is always protected and can be claimed back at any time. A user can buy this bond with LUSD and the bond starts accruing bLUSD which is “bonded Liquity USD token”. Depending upon the calculations, the bond attains break-even point after a certain time after which they can decide to claim the bLUSD accrued from bonding. The user also gets a generative NFT when they buy the bond.
According to Liquity, “What makes these generative NFTs unique is their dynamic nature: the NFT visual will either be an egg (while bonding), a chad chicken (after claiming the bond - “Chickening In”) or a run-away chicken (after canceling the bond - “Chicken Out”). The most chad Chicken Bonders and engaged users in the Liquity ecosystem will get the rarest NFT”. The bond has no maturity date and users can choose one of the following two actions at any time.
Chicken In: As bLUSD accrues over time, users will usually wait to “Chicken In” until they have at least reached the breakeven point, and the accrued bLUSD is worth more than the underlying LUSD
Chicken Out: Users can cancel their bond to recoup the full amount of LUSD initially invested. Thus, the users’ principal is always protected while bonding and a user who cancels their bond only forgoes their yield
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<source: Google>
So far 1,204 Chicken Bonds are in the bonding stage, 179 have chickened in, and 144 have chickened out from 584 unique users, according to a Dune Analytics dashboard after launching the mechanism on Oct. 4. They are seeing a steady rise in the LUSD deposits which sits at 39.6 million LUSD currently. With its rising popularity and ingenious utility, Chicken Bonds may become a useful mechanism for other protocols to own their own liquidity.
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