Liquity is a decentralized borrowing protocol that allows users to draw 0% interest loans against Ether used as collateral. Their original product is one of the most forked protocols on the open market. Chicken Bonds are now marking a further promising contribution to support mass DeFi adoption. Chicken Bonds are a new open-source bonding standard for DeFi. They aim to create permanent and sustainable liquidity for protocols and increase user yields. How do they try to achieve this?
Chicken Bonds will bond users’ LUSD into bLUSD. This bLUSD is an auto-compounding ERC-20 token. It is directly backed by LUSD deposited in the stability pool with a rising floor price against the underlying LUSD. Additionally, bLUSD holder will also earn extra yields from the curve pool.
The bonding process utilizes the ERC-721 token standard mostly known from NFTs. When a user decides to bond their LUSD a new NFT (bond) will be issued. During the process, the principal value of LUSD is not at risk and can be withdrawn at any time. The rationale of each user should be to hold the (NFT) bond until they can claim an accrued amount of bLUSD worth more than the bonded LUSD.
The target maturity date from bonding varies depending on the bLUSD market price, since once a bond has been purchased for X amount of LUSD the bond needs time to accrue enough bLUSD to hit the initial purchase value of your LUSD. If the market price of bLUSD is high, the bonding time decreases, and if the market price of bLUSD is low, the bonding time increases. To counteract larger time deviations there is an internal control mechanism that increases the accrual speed if the price decreases.
When a user decides to claim the accrued bLUSD out of the bond he can now choose to either supply liquidity in the curve pool or if bLUSD trades at a premium, sell the bLUSD back to LUSD and start over the process.