A Primer on Bonding

6 min readFeb 20, 2021


Olympus does everything a bit different. Thus, it should be no surprise that our LP rewards are unconventional. They are designed to both incentivize and lock liquidity by offering an attractive risk/reward profile, and they should introduce an interesting and net beneficial dynamic into the $OHM market. So, how do they work?


Bonding is the process of trading an LP share to the protocol for OHM. The protocol quotes an amount of OHM and a vesting period for the trade. It is important to know: when you create your bond, you are giving up your LP share. The protocol compensates you with more OHM than you’d get on the market, but your exposure becomes entirely to OHM and no longer to OHM-DAI LP.

Creating a bond

To create a bond, you must first add liquidity to the OHM-DAI Sushiswap pool. You’ll then go to our website and select “Bond.” The protocol will quote a price for you. If you accept, you then send your LP share to the treasury and receive a claim on OHM.

Redeeming a Bond

To redeem a bond, you’ll go to our website and select “redeem bond.” The protocol will recall when you bonded and your vesting term. If you have any pending rewards, you can claim them. Rewards accrue throughout the vesting period.

I’ve Redeemed My Bond…Now What?

Go stake those suckers! When you bond, you receive OHM. You can either sell them (boooooo), you can stake them to earn more, or you can bond them again.

Note that sOHM is the protocol’s profit accruing token and since bonders earn OHM (not sOHM), stakers earn 100% of protocol profits (minus the DAO’s cut). See our staking explainer for more info.

Why Do I Want to Bond?

Because it allows you to buy OHM at a lower cost basis. In return for selling your LP, the protocol will sell you OHM at a discount. You can see the difference in cost below (bonders get the Executing Price):

The Bonding Premium here is 2. The green area is the bonders profit. The yellow area is the protocols profit.

Dynamics of a Bond

The protocol quotes bond prices based on the protocol’s risk-free value (RFV). The Bond Premium is a protocol-governed policy tool that controls the premium charged for bonds. A lower premium means a higher discount and a higher incentive to bond.

Executing Price = RFV / Premium {Premium ≥ 1}

The premium is determined by the total debt of the system and a scaling variable. This ties the price of bonds to the number of bonds outstanding; the fewer bonds outstanding, the lower the premium and the higher the discount.

Premium = 1 + (Debt Ratio * BCV)
Debt Ratio = Bonds Outstanding / OHM Supply

Left to right; BCV = 3, BCV = 2, BCV = 1, BCV = 0

Note: For the rest of the article we will consider the executing price as equal to the risk free value. The real executing price will be somewhere between the two, as determined by the Premium.

The risk free value of the LP share for the protocol is the point at which the pool is balanced (1 OHM = 1 DAI). Since the protocol must protect the backing of OHM, this is the lowest price that it can accept; worst case, it can back every 2 OHM bonded by 1 DAI and 1 OHM. Above this equilibrium, there is an excess of DAI. Below this equilibrium, there is an excess of OHM. Either can be used, and there will always be enough of both. This relationship is visualized and formulated below:

The red box is the protocol’s risk-free point, so it treats all LP as worth that much (black line)

Risk-Free Value = (LP / Total LP) * 2sqrt(Constant Product)

This means a bonder is (generally) selling their LP for below market value. However, this is canceled out by the protocol bonding OHM at below market value. You can see the relationship between the value of the LP sold, and the value of the OHM bonded below:

Logarithmic Scale
Linear Scale

The exponential increase in the value of bonded OHM relative to the value of the LP is expected to create increasing demand for bonds the higher price is. This is an extremely favorable dynamic; the higher price goes (and the more the protocol sells in response), the more liquidity there should be.

Bonders can make this trade, despite time risk, because their breakeven point has been reduced. The higher the price is, the greater that padding becomes.

Price vs Breakeven; Logarithmic Scale (see similar linear view above)
Difference between risk free value and market value

This trade only makes sense when OHM trades for a premium. At a discount, it actually results in a higher breakeven than simply buying on the market. This is favorable because we want more liquidity at premiums (to hold that premium) and less liquidity at discounts (to force supply to sell at lower prices and to more easily recover). To compound this dynamic, the protocol will remove portions of the LP that it holds when price trades below IV, burning the OHM and depositing the DAI into the treasury.


This is how we will incentivize users to provide liquidity. We expect it to:

  1. Permanently lock significant amounts of liquidity
  2. Positively correlate liquidity with price
  3. Lengthen premiums and shorten discounts
  4. Increase participation by introducing a second dominant strategy with a completely different risk profile (compared to buy and stake)
  5. Increase protocol profits by adding a second mechanism to burn OHM (pulling LP)
  6. Pad the treasury balance sheet by marking the value of LP shares at equilibrium (they’re worth more than that any time price != $1). This means the intrinsic value of OHM has a floor at 1 DAI, and the protocol marks at that floor, but it will actually be greater most of the time.
  7. Increase staking profits by deferring LP rewards to a separate mechanism so we can reserve all of the protocols profits for stakers
  8. Help grow Olympus!

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