Bonds have gone quite well since they launched two weeks ago. So far, the treasury has amassed over 50% of the Sushiswap pool, bringing the market value of treasury assets over $6.5 million. However, only ~230k OHM have been minted in response. In this post, we will explore the capital efficiency tradeoffs of LP Bonds, and introduce DAI Bonds as a solution.
There is a big difference between the value of an LP share on the market versus in the eyes of the treasury. Since the treasury is minting OHM against the LP, and it needs to make sure it can always back that OHM, the treasury values the LP at its minimum value; we call this Risk-Free Value, and we discuss it in depth in the initial bond post here.
The higher the premium, the larger the difference between market value and RFV (we will refer to this as the “delta”). For example, an LP share with 1 OHM and 900 DAI (market value $1800) has an RFV of $60 (2sqrt(900 * 1)). The delta here, $1740, is quite significant.
Risk Free Value = 2sqrt(Constant Product) * (% ownership of the pool)
Delta = Market Value - Risk Free Value
It is important that the delta is not thought of as lost value — its not. Rather, it is quantified risk donated to the market. The treasury effectively says “I am willing to take a 97% loss on this LP for you, the market, and therefore I will mark it on my books like I have already taken that loss.” Since the market is comprised of the token holders it mints for, the entire value of the LP still belongs to them in a roundabout way.
However, this is problematic for supply production. In the previous example, instead of minting 1 OHM with 1 DAI, the treasury mints 1 OHM with 15 DAI and 15 DAI worth of OHM. When done with a purpose (amassing locked liquidity) this dynamic is alright, but it is inefficient and can not serve as our main driver of supply growth.
In come DAI bonds
DAI bonds will allow us to utilize the same dynamics as LP bonds while capturing the entire value of what is paid to the treasury. The mechanics are exactly the same: a bonder pays the treasury in exchange for OHM, which vests over a predetermined span of time. The only difference is the bonder pays with DAI instead of OHM-DAI SLP.
Since the bonder is paying in DAI, there is no need to mark down the value to RFV. We can mint OHM 1:1 with the market value of what we receive. Going back to the previous example where $1800 in assets minted 60 OHM, here that $1800 mints 1800 OHM.
DAI Bonds versus Sales
You may be thinking, isn’t this what sales are supposed to do? Yes! But we believe they’ll do it better. Sales were the initial design of the system, but based on the performance of LP bonds we now feel this system is superior.
- Bonds don’t rely on market data. Bond markets are self-regulatory; price is determined by bonds outstanding. When less bonds exist, bond prices get lower; when more bonds exist, they get higher. Market participants choose what prices they want to buy at and thus determine price.
In contrast, sales require up-to-date market data to determine the price to sell at. This is harder to implement from a technical standpoint and creates an angle for exploits.
- Bonds defer market impact of new supply. OHM from bonds slowly becomes available as the bond vests. This spreads out the distribution of this new supply, in contrast to sales which give the OHM to the purchaser at point-of-sale. Sales also create a quick arbitrage opportunity (buy from protocol at discount and sell into pool) that would increase volatility.
- Bonds require less management. Sales were designed to include a DAO-governed discount rate. This discount needs to be high enough to bring in buyers but low enough that they aren’t overpaid. This is a parameter governance could need to micromanage.
In contrast, with DAI bonds the market decides the discount rate. (A good demonstration of requiring minimal management: LP bond parameters have not changed since they launched 2 weeks ago).
- Everything else is the same. The end result is identical between the two: DAI is exchanged with the protocol for newly minted OHM. Volume increases as price increases. Sale price tracks market price. Bonds are simply a more market driven way to accomplish the same goal.
We’d like to roll out DAI bonds next week. They would have the following parameters:
- Vesting Term of 33110 blocks (Roughly 5 days, with vesting occurring linearly — this is the exact same term and mechanics as LP bonds)
- Bond Control Variable of 2500 (a debt ratio of 28%, currently reached with ~$100k, required to exceed the floor price aka minimum premium)
- Maximum order size of 0.05% (a single order cannot buy more than 0.05% of circulating supply. This has been added to protect against excessive accumulation through slippage-free bonds)
- Minimum premium tbd (This is mainly a launch parameter and will be set at a reasonable discount. If we had no minimum premium, the first bond would pay 1 DAI per OHM)
With this, the bulk of the system is complete. There are a few user-facing features we’d like to add in the future, but from a treasury accumulation standpoint we are now in a prime position to capitalize on any market conditions.
The one addition we will need are inverse bonds. These will be the buyback equivalent made for sub-$1 prices. With inverse bonds, users would trade OHM to the treasury at a premium in exchange for DAI or LP.
This plan has been proposed on the governance forum. The vote will open Sunday 4/18 at noon EST, and close Tuesday 4/20 at noon EST. Given the proposal passes, we will initialize DAI bonds on Wednesday. The vote options are as follows:
- Integrate DAI bonds
- Integrate DAI bonds and remove SalesLite
- Do not integrate DAI bonds
Be sure to get out there and vote!
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