Before we get started, this is not a recommendation or endorsement to buy any token mentioned or to create your own Chicken Bond.
Previously, we have covered the decentralized lending protocol Liquity. Liquity is known for having an overcollateralized stablecoin called LUSD, backed purely by ETH. Liquity and its stablecoin LUSD are revered as one of the most decentralized and censorship-resistant protocols and stablecoins in DeFi.
Before covering Chicken Bonds, here’s what you need to know about Liquity.
- LUSD is backed 100% by ETH collateral, meaning LUSD is truly censorship-resistant given the underlying collateral cannot be frozen like USDC or USDT.
- Liquidations in Liquity ensure that the protocol remains solvent and maintains the LUSD peg.
- When borrowers open up a loan (aka Trove) of LUSD with up to 90% LTV, backed by ETH on Liquity, the loan is interest-free after a 0.50% borrowing fee.
- Interestingly, there is no governance to Liquity, smart contracts cannot be halted or modified, and the frontends for using Liquity are run by incentivized external parties. Liquity truly sets a bar for decentralization and censorship-resistance.
One of the key underlying mechanisms to Liquity is the Stability Pool, where LUSD holders stake LUSD to earn ETH from liquidations. The Stability Pool is the first line of defense in maintaining system solvency, acting as the source of liquidity to repay debt from liquidated Troves—ensuring the total LUSD supply always remains backed.
When a Trove is liquidated, an amount of LUSD corresponding to the remaining debt of the Trove is burned from the Stability Pool’s balance to repay its debt. In exchange, the entire collateral from the Trove is transferred to the Stability Pool. The debt of the Trove gets canceled and absorbed by the Stability Pool and its collateral is distributed to LUSD providers.
With that understood, Chicken Bonds are a new bonding mechanism, using a boosted yield strategy powered by LUSD and the Stability Pool.
- Instead of simply staking LUSD in the Stability Pool, users have the option to bond LUSD in exchange for a discounted bLUSD (boosted LUSD) and earn a higher yield.
- The higher yield is underpinned by auto-compounding returns in the Stability Pool as well as the fact others are depositing LUSD into bLUSD who will cancel the bond (chicken out) and hence leave behind excess yield earned from their LUSD.
Below is a breakdown of how LUSD providers and the Stability Pool used to work vs how bLUSD creates more yield for bLUSD holders.
The best way to learn is to walk through the UX of Chicken Bonds so here’s an example of my own journey creating a bond on October 12, 2022.
- I “create a bond” on October 12 by depositing 130 LUSD. I have to deposit a minimum of 100 LUSD or more so I just chose 130 for this example. This required an Approval + Deposit transaction. This does not lock in my LUSD or force me to risk my principal deposit of 130 LUSD. I’m in a temporary “pending bond” until a later date when I can either “chicken in” to claim bLUSD or “chicken out”, effectively canceling the bond.
- At the time of the bond creation, the bond creation UI showed me the value of bLUSD as ~1.21 LUSD. Based on the updated market…
DeFi Dad is one of the earliest power users of DeFi, having worked with early Ethereum startups going back to 2018, including Zapper.
