Liquity Breaks DeFi Doldrums With 'Chicken Bonds' Offering

It’s been some time since DeFi users have been able to work with a new type of offering. Thank the bear market for that.

Yet on Oct. 4 there was an exception — Chicken Bonds, launched by Liquity, a collateralized debt position protocol with a market cap of $176M.

Since then, Chicken Bonds have acquired $5.5M in LUSD, Liquity’s stablecoin, according to a Dune Analytics query.

LUSD deposited with Chicken Bonds. Source: Dune Analytics

Chicken Bonds don’t have anything to do with poultry, or with fixed income securities, for that matter. They’re what’s known as a “bonding mechanism.” Users “bond,” or hand over their LUSD, in exchange for a reward over a period of time.

Amplified Yield

In this case the reward is bLUSD (bonded LUSD), a token which offers higher yield opportunities than those typically available to LUSD.

“With Chicken Bonds the benefit is that you get an amplified yield, compared with what you would get with the Stability Pool yield,” Sam Lekhak, head of growth at Liquity, told The Defiant.

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Yet the new DeFi mechanism gets a bit more complicated by incorporating additional sources of yield, plus NFTs.

The baseline yield for LUSD through Liquity’s Stability Pool, which makes money by buying collateralized ETH which has been liquidated. The boosted yield comes from reorganization and auto-compounding, rather than token inflation, suggesting a more sustainable model.

The difference between LUSD Yield and boosted LUSD Yield.

Lekhak underscored that the bonding process isn’t sealed once a user begins it. Users can actually “chicken out,” if a need for their LUSD comes up during bonding and they will get all their LUSD back, minus any yield accrued during the time since they initiated the bond.

“You can chicken out anytime,” Liquity’s head of growth said. “I think that’s a novel concept in itself.”

One-Way Bonding

Liquity’s mechanism contrasts with OlympusDAO, which became hot last year after it pioneered a one-way bonding mechanism that allowed users to get discounted tokens in exchange for bonding certain assets.

Like Liquity, Chicken Bonds use a decentralized frontend operator model instead of hosting the frontend themself. Five frontends are available as of Oct. 5.

Users can also “chicken in,” meaning that they make bonding permanent. Liquity will permanently own the LUSD, which it will use in the exchange, Curve Finance, to deepen liquidity for LUSD, thus strengthening its dollar peg.

Users in turn will get more bLUSD than the LUSD they deposited. As bLUSD is redeemable one-to-one for LUSD, a simple strategy would be to sell the bLUSD for LUSD and then bond again, thus compounding the boosted yield.

Chicken Bonds also come with what the project is calling “Dynamic NFTs,” which represent the users Chicken Bond and change based on whether a user “chickens in” and takes the bLUSD, or “chickens out” and requests for their LUSD back.

The visualization of the NFTs will also differ based on other factors, like whether a user’s wallet has borrowed against their ETH with Liquity.

Lekhak noted that the NFTs, without which a user cannot receive their bLUSD, can sometimes end up much more valuable than even the boosted yield they represent.

The head of growth at Liquity said one user who had the 100th Chicken Bond NFT capitalized on the round number by selling it for much more than the LUSD amount they had deposited.

Editor’s Note: DeFi Alpha covered Liquity and Chicken Bonds in its latest newsletter.