Liquidity Bond — Design Update

Liquidity Bonds have been Optim’s primary focus over the past several months as we approach audit, then mainnet launch. We’ve been hard at work finalizing on-chain contracts, off-chain code, UX/UI, and speaking with SPOs interested in borrowing delegation for their pools (SPO Bonds).

During this iterative process we conceptualized a new design for Liquidity Bonds that is both simpler and more extensible. The change might seem subtle, but it enables powerful new use cases without having to rewrite contracts and undergo additional audits.

The intent of this update is to outline the new design, briefly contrast it with the old, and touch on the three initial use cases for Liquidity Bonds that Optim will focus on over the next 3–6 months.

Liquidity Bonds are a simple primitive unique to Cardano DeFi. They are built on and leverage Cardano’s well-evolved and distinctive staking system.

Liquidity Bonds — New Design

Put simply, Liquidity Bonds allow anyone to borrow or ‘rent’ ADA staking rights and associated staking rewards for a fixed period of time. Bond ‘issuers’ (borrowers) deposit interest into a smart contract, while bond ‘buyers’ (lenders) deposit ADA into a smart contract. Borrowers control the staking delegation of a lender’s ADA, can attach any stake key, delegate wherever they please, and receive all staking rewards associated with the borrowed ADA.

Substantial collateral is not required from borrowers as with normal loans. The only requirement of borrowers is to pay interest into a bond to compensate lenders for the staking rights to their ADA. Lenders do not actually give borrowers custody of their ADA.

Liquidity Bonds — Old Design

Optim’s old bond design implemented a separate model for the initial SPO Liquidity Bonds. In this design both the staking rewards as well as interest paid into a bond by the borrower was directed to the lender. These two forms of interest were paid in exchange for a lender to lock their ADA delegation to an SPO borrower’s stake pool for the duration of a bond.

A lender’s delegation was locked into the SPO’s stake pool with associated staking rewards accrued to the lender like any other delegator. This created a situation where a large portion of a lender’s interest was dependent upon the performance of an SPO. Such a situation necessitated a cancellation mechanism and parameters by which an SPO’s return on ADA was benchmarked and monitored.

Liquidity Bonds — Simplified

Our new liquidity bond model eliminates any notion of interest paid to ADA lenders in the form of staking rewards ‘passed through’ to them. All interest earned by lenders for the right to their ADA stake key/delegation is paid into bonds by borrowers. Every ‘bond issuer’ or borrower fully controls the stake key to all borrowed ADA and can accumulate the associated staking rewards if they choose. Borrowers receive an Ownership NFT that gives them control over the staking key for borrowed ADA. This Ownership NFT can be transferred, sold, etc. to anyone who wishes to pay the required interest and meet the predefined terms for the duration of the bond.

This enables anyone to borrow ADA delegation for any purpose by simply paying interest into a bond.

An SPO can borrow delegation to bootstrap their pool (SPO bonds). An investor/project supporter can borrow delegation to participate in an ISO (ISO bonds). Also, a project can borrow ADA to delegate to any stakepool they choose, earn staking rewards to raise capital, and pay interest only in their token or a future airdrop to bond buyers (IBO bonds)

Bond Types

While all bonds utilize the same smart contract back end, we will separate and differentiate markets through our front end to make it easier to match borrowers with lenders. Sorting bonds by expected market interest rates, interest types (non-ADA or ADA/CNT mix in IBO bonds), and other variables will help bring order to the market and improve the user experience.

  • SPO Bonds

SPO Bonds are intended as a tool for SPOs to bootstrap ADA delegation to their pools in order to mint blocks consistently, boost their ROA, and prove operational proficiency. This can be leveraged to attract sustainable community delegation for long-term success.

SPO Bonds will have a minimum number of months of required interest paid into them (likely 3). This gives lenders a longer-term interest bearing position and allows SPOs to smooth out the luck factor associated with block production. After the period covered by the initial interest expires, SPO borrowers must keep enough interest in the bond for a 1 month/6 epoch buffer of interest to keep bonds active or the bonds can be closed. As long as SPOs pay/deposit this much interest in the bond they can keep the bond active for the maximum term of the bond defined upon issuance (6 months or 1 year for example). The maximum term is the longest a borrower can keep a lender’s ADA locked into a bond for. If a lender wishes to recover their ADA before this term expires, assuming an SPO keeps the bond active by paying required interest, they can trade the bond on the secondary market.

  • ISO Bonds

ISO Bonds are intended as a tool to enable anyone who wishes to participate in an ISO to borrow ADA delegation to do so. Anyone can borrow ADA to stake to an ISO pool and receive associated governance tokens from a project for their participation.

Borrowers can issue bonds offering any terms for a lender’s ADA staking rights. Many bond parameters can be adjusted and offered to lenders. Some examples include: interest rate, maximum bond duration, initial interest paid into the bond (guaranteed t0 lender), and minimum interest buffer (minimum amount of incremental interest that must be paid into/ kept in the bond at all times). A follow-up article will explain these in more detail

  • IBO Bonds

An IBO or Initial Bond Offering enables any project to issue a bond to borrow delegation, stake wherever they please, and receive all staking rewards from the delegation they borrow. We envision the IBO as a tool that allows projects to run Initial Stakepool Offerings (ISOs) and raise funds without operating and saturating their own stake pools.

A project would issue bonds to borrow a delegation, stake in any pool, and receive all associated ADA staking rewards, BUT offer lenders 0% interest in ADA or stablecoins. In return for borrowing delegation they would either 1) airdrop their governance tokens to bond buyers/lenders at a later date 2) embed their tokens in the NFT bond for redemption after bond term expires

A project that decides to operate their own stake pools for an ISO would benefit from issuing an IBO Bond to borrow ADA to use as pledge, thereby increasing the ROA in their pool(s).

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