Bonds

A financial Primitive

Bonds are a contractual agreement (enforced by programs) between protocols and bond buyers to exchange tokens. This financial primitive allows for entities (protocols, DAOs, ...) to acquire a broad range of assets, in exchange for Tokens (governance, Rev share...) at a discount to the market rate.

This mechanism emulates corporate bonds issued by companies to raise capital in public markets. However, DeFi bonds offer much more flexibility, allowing payments to be issued in stable coins, LP's, or governance tokens. In doing so these entities can integrate bonds into various growth strategies.

For protocols, this is the opportunity to extend runway, accrue governance or increase liquidity in pools. It allows them to create blackholes for tokens, offering to purchase the tokens OTC. Lets take an example:

XYZDAO decides it wants to raise capital to grow their Assets under management. They decide they want both ETH and USDC for their treasury.

Now they create 3 bond markets, where they either receive USDC, ETH or a UniV2 ETH/USDC LP, in exchange for their governance token; XYZ token.

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To do this however they need to create a reason for these bonds to be sold. So they discount their XYZ against its current market rate to incentive users to deposit their assets.

This incentivizes two major groups of individuals. The investors who believe in the long term vision of the project can help the protocol gain in stability and in return get to participate in governance and revenue sharing. Or the trader, who sees an opportunity for arbitrage on the discount tokens. Nonetheless the protocol benefits as it how also holds assets.

Once users deposit their assets, the XZY token is distributed linearly over the set limit of the bond until the maturity date is hit. It is at this time that both parties received the total of the exchange. The user the discounted XZY token, and the protocol their capital.

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