Chicken Bonds Pecked Their Way Into a Reward-Hungry Market

Novel Liquidity Mechanism Attracted More Than $70M

In a year whipsawed by falling asset prices and yields, it’s easy to forget that there was a whole lot of labor and innovation going on, too.

Spurring activity on DeFi protocols with inflationary token rewards proved to be unsustainable, leaving DeFi protocols scrambling to establish themselves as real businesses. 

One of the promising projects to emerge bore a laugh-out-loud name. Yet Chicken Bonds proved to be an attention-grabbing mechanism introduced by the team behind Liquity, an overcollateralized debt protocol. 

Not Too Shabby

Chicken Bonds attracted $71M worth of Liquity’s LUSD dollar-pegged stablecoin as of Dec. 22, according to a Dune Analytics query. That’s not too shabby for a product that launched in early October. 

The mechanism riffs on “bonding,” a concept popularized by OlympusDAO, a much-hyped project which emerged as one of the figureheads of the “DeFi 2.0” movement of 2021. Olympus’ OHM token is down over 97% this year.

Liquity Breaks DeFi Doldrums With ‘Chicken Bonds’ Offering

New Mechanism Quickly Amasses More than $5M in Deposits

Chicken Bonds allow users to deposit LUSD in exchange for a token called bLUSD, which accrues a higher yield than is otherwise available to its sister token. The boosted yield comes from automating strategies available to depositors in Liquity’s Stability Pool, which profits from ETH liquidations on the protocol.

With Chicken Bonds, users first create a bond by depositing LUSD. They then begin progressively accruing bLUSD tokens. The value of the bLUSD will initially be below that of the deposited LUSD. The rate at which the yield accrues, decelerates progressively. 

As the yield accrues, users can “chicken in” or “chicken out” at any time — chickening in means a user permanently gives the LUSD to Liquity in exchange for the accrued bLUSD. In this case, the yield accrued to the bLUSD likely outweighs that of the straight LUSD, hence the choice to “chicken in.” 

A Bounty

It’s not clear exactly how to value bLUSD yet — Liquity even has a bounty for 100,000 LQTY tokens, worth almost $60,000 as of Dec. 24, for a model which gives a fair price of bLUSD.

Chickening out lets users recover their LUSD principal, forgoing any yield accrued. 

What Liquity gains out of the mechanism is, when a user chickens in, the protocol permanently gains a portion of the LUSD. The protocol-owned token is partially used to provide liquidity on Curve Finance, an automated market maker. The deeper liquidity makes LUSD more stable and pressures it to stay close to its dollar peg. Some portion of the protocol-owned LUSD is used in the Stability Pool as well. 

The other portion of the LUSD which Liquity acquires when a user chickens in goes to what is called the “Reserve Bucket,” which fully backs all bLUSD. 

Chicken Bonds were covered in The Defiant’s DeFi Alpha newsletter when they launched. 

Interestingly, Chicken Bonds are represented by NFTs, making the bonding positions tradable. In a novel twist, their visual representation also changes based on users’ previous interactions with the Liquity ecosystem, as well as whether they choose to Chicken Out. 

Looking ahead, the Chicken Bonds team is aiming to expand the product’s scope beyond Liquity and LUSD — the project’s website shows plans for a “generalized” mechanism for other protocols and decentralized autonomous organizations (DAOs) to be introduced in the second quarter of 2023.