The Problem with Bonding
Back in February of 2021, the concepts of staking and bonding were introduced into the defi space, which became the basis for many projects from then on. Staking was conceived as a value accrual strategy, where investors would exchange a protocol’s native Tokens at a 1:1 rate for sTokens, which would rebase every eight hours. These rebases created new sTokens, and staked investor holdings effectively grew in proportion with the treasury because their percentage of the overall supply stayed the same. When unstaked, these sTokens would convert back to Tokens at the same 1:1 ratio.
Bonding was created as a treasury inflow strategy that would allow for protocols to obtain their own liquidity, among other assets, by providing an opportunity to purchase their native Tokens at a discount. To bond, an investor would buy into a protocol’s liquidity pool with a pairing of the protocol’s native Token and a compatible stablecoin. Then, in the same transaction, they would sell it back to the treasury at the discount, where it would be distributed to them at the end of its five-day vesting period for its fixed return amount. However, if the discount was higher than the current price premium, it would dilute the stakers. In order to have a good discount, there would have had to be staker dilution as this discount had to come from somewhere.
In theory, new investors would purchase bonds and then stake their Tokens, adding value to the protocol. However in reality, many stakers saw the profitable discounts being provided on bonds, and decided to take advantage of the situation. They would buy the bond at its discounted price, receive and sell their sTokens for market value, generating a nearly instant profit. Instead of developing the revolutionary idea that was envisioned through bonding and staking, the Legacy Bonding and Staking models had unintentionally created a negative flywheel that could be manipulated.
Reinventing the Flywheel
Concave has recognized the value of the Legacy models, and has worked diligently to rebuild them from the ground up and improve upon their flaws. Keeping these issues in mind, we have created a new bonding mechanism that we like to call “Smart Bonding.” Our Smart Bonding mechanism contains both on-chain and off-chain algorithms, which together allow for very precise control of even the most minuscule bonding variables. On-chain, our machine handles all of our bond transactions. Off-chain, our machine handles the issuance of new $CNV supply, as well as the refined adjustment of both a bond’s price and slippage ranges for the most optimal bonding experience. This allows for bond issuance to accelerate or decelerate when needed in order to provide the maximum return to staked investors while also regulating aggregate supply growth. Bond price and slippage rates will also adjust accordingly based on the available bond debt and the size of the bond purchase, as well as current market conditions. As this is an automated process, our model allows for prices to update in real-time, with every individual Token purchased.
To allow our Smart Bonding mechanism to be able to directly handle all of our bonding liquidity pools efficiently, we implemented a Virtual AMM (Automated Market Maker) within it that is capable of modifying our virtual reserves. Our virtual Token reserves are unavailable to the market, however they are used when our machine decides that it is necessary to adjust either the slippage range or bond pricing. Our machine actively monitors and collects data from our real AMM in addition to our virtual AMM in order to make these decisions. Bond prices will fluctuate based on demand, so as time passes, the prices will decrease if there is no volume. This allows for us to control dynamic price decay while also permitting us the ability to establish a floor price and provide premium protection for our bonds.
Not only have we established an all new bonding system, here at Concave we have also created a unique staking system (Liquid Staking) that locks your $CNV tokens up for a period of either 45, 90, 180, or 360 days. During this lock period, stakers will generate rewards based on the active management of the treasury as well as dividends. These dividends represent different flows of income to the treasury from our various products and operations, and will include any future revenue streams as well. Our policy team has formulated some of the best methods to grow our treasury through its assets, including seed investing, delta-neutral portfolio strategies, and stable farming. Every quarter, the performance of the treasury dictates the value of the dividends each staker will receive in stablecoins. Additionally, longer staking periods will receive a larger amount of dividends, leading to less dilution in staking rewards, or potentially no dilution at all.
The amount of dilution is actually now a choice, depending on the length of the lock period that stakers have selected. Shorter lock periods will lead to more dilution, while longer lock periods will lead to less dilution. Stakers may even choose to be completely dilution free if they opt to choose the 360-day lock period. However, some people may change their mind about how long they would like to have their $CNV locked/staking, and so Concave has brought about another innovation.
Our new Liquid Staking system allows for illiquid, locked positions to become effectively liquid. When staking with Concave, users will receive an NFT representing their staked amount and its rewards. These NFTs will also have their own inherent value, as there will be a limited supply of each. All of these NFTs can be sold on Concave’s secondary NFT marketplace if any staker ever wishes to liquidate their position. Thus, no position is ever truly “locked”, as there is always the option to place it on the market if necessary.
Click here for step by step instructions on how to stake and bond: https://concave.lol/blog/step-by-step-guide-how-to-stake-bond
For more info on our Smart Bonding and Liquid Staking mechanisms, please visit our GitBook here: https://docs.concave.lol/introduction/concave/mvp-bonding-stakers
Legacy Models vs. Concave’s Models
While the Legacy Bond model focused on maximizing Token supply in respect of the treasury, the Concave Bond model instead focuses on maximizing the value of the treasury in respect of the Token supply. Our model only increases supply in a manner that is beneficial for the protocol, and will never increase supply without it being relevant to healthy protocol growth or function. Our Smart Bonding model does not dilute 360-day stakers, whereas the Legacy bonding model tends to dilute all stakers. The Legacy model also doesn’t react automatically to market demand, and instead requires manual input to update bond prices, which can lead to bond discounts that are not representative of the current state of the market. Our Smart Bonding mechanism updates itself in real time, and by using our virtual AMM we are able to set a floor on our bond prices and protect our users from inefficient outcomes.
Comparison Chart for Staking & Bonding Model
In comparison to the Legacy staking model, our Liquid Staking model is much more beneficial for our users. Due to the fact that positions are locked up in NFTs, it is impossible for stakers to manipulate the staking/bonding systems. The sale of a staked NFT does not affect Token price at all, however in the Legacy model unstaking and selling actual Tokens does. Liquid Stakers will also receive a variable rate of dilution based on the length of their locked-staking period, while on the contrary the Legacy model requires the dilution of all stakers to function. In fact, the more rewards that the Legacy model generates, the more dilution it creates as the rewards are provided in native Tokens. The Liquid Staking model does not have this issue, its rewards are accumulated and paid out entirely in stablecoins. Furthermore, the rewards in the Legacy model depend entirely upon the price of the Token, and if the Token's price plummets so will its staking rewards. Conversely, rewards in the Liquid Staking system are calculated independent of Token price, and are based entirely on income being brought into the treasury through Dividends and Active Treasury Management.
Ultimately, Concave has proven time and time again that we put the utmost care into our products, and our new Smart Bonding and Liquid Staking systems are no exception. The concepts introduced into crypto through the Legacy models were pioneering breakthroughs, but we saw the potential to innovate and improve upon them, and in doing so we’ve created significantly better and more efficient models. We have carefully constructed new mechanisms and tested our systems to ensure that they work as intended, and to give every user the most optimal experience possible. Our team has worked rigorously throughout this entire process, and our efforts have created a one-of-a-kind protocol that is both sustainable and highly profitable for investors. Bonding and staking have never been as well-structured or rewarding in the past as they are now with the creation of Smart Bonding and Liquid Staking.
Have you bonded and staked with Concave yet, anon?