As yields across DeFi continue to slide lower, the use of a recently-launched novel mechanism is going up.
Enter Chicken Bonds, a new product from Liquity that offers users an enhanced yield over a period of time in exchange for bonding the LUSD stablecoin.
In Chicken Bonds’ simplest form, users deposit LUSD which accrues a balance of boosted LUSD (bLUSD). bLUSD is a derivative token which accrues an amplified yield beyond what is typically available to holders of vanilla LUSD.
The bonding process happens over time — users can decide to “chicken out” at any time and get their LUSD principal back, or “chicken in” and claim their accrued bLUSD — this choice is part of a complex decision based on multiple factors including how deep into the bonding process a user is and what he or she thinks the future value of bLUSD will be.
So far, of the 203 completed Chicken Bonds, 123 have chickened in, and 80 have chickened out, according to a Dune Analytics dashboard.
Liquity, the collateralized debt protocol which issues the LUSD stablecoin, and the team behind Chicken Bonds, launched the mechanism on Oct. 4.
The goal was to acquire 10M LUSD in the first month, Claude Donzé, an investor at venture firm Tomahawk, which wrote Liquity’s first check, told The Defiant.
But Chicken Bonds are on pace to triple that figure with $28M worth of LUSD deposited as of Nov. 1, according to a Dune Analytics query.
Additionally, when users Chicken In, Liquity permanently acquires a portion of the bonded LUSD. So far, Liquity has acquired 488,000 LUSD through Chicken Bonds. While this isn’t a huge amount, the bigger question is whether the mechanism itself is sustainable.
One of DeFi’s biggest crazes last year was OlympusDAO, a protocol with a bonding mechanism of its own that was used to generate protocol-owned liquidity. This was part of a broader “DeFi 2.0” movement, which spawned in opposition to the inflationary liquidity mining practices of what could be called “DeFi 1.0.”
With Chicken Bonds, Liquity is reawakening the idea of protocol-owned liquidity. The goal in Liquity’s case is to deepen LUSD liquidity, which is pooled with three leading stablecoins on Curve Finance. More liquidity in the Curve Pool means that LUSD can be swapped with minimal price impact for USDC, USDT, and DAI.
Protocols often pay out token incentives to users who provide liquidity. By owning its own liquidity, a protocol can sustainably increase liquidity as it can be left permanently in a pool.
According to Donzé, since the U.S. Treasury’s Office of Foreign Asset Control (OFAC) levied sanctions against privacy protocol Tornado Cash, LUSD has seen increased demand, which has regularly pushed its value above its intended peg of one dollar.
As Liquity only accepts Ether as collateral, has minimal governance, and has outsourced its front-end development, it has made LUSD one of the more decentralized stablecoins, something that the market has valued even more in the wake of the Tornado Cash fallout, Donzé said.
LUSD has arguably been a victim of its own success though — it’s trading at $1.04 as of Nov. 1.
With increased liquidity thanks to Chicken Bonds, LUSD may start to trade closer to $1.
Chicken Bonds’ most significant user appears to be DeFi trader and developer 0xSifu, whose identity as a co-founder of the defunct QuadrigaCX exchange became public in January.
DeBank lists Sifu as having 16.4% of the total deposits in Chicken Bonds as of Nov. 1.
Moving forward, Donzé thinks Chicken Bonds may become a useful mechanism for other protocols to own their own liquidity.
“In the future maybe there’s a way that [Liquity] can provide this service to other protocols as well,” he said.