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A unique borrowing protocol called Liquity prioritizes decentralization and immutability. It enables users to mint LUSD stablecoins in exchange for ETH provided as collateral. Chicken bonds are Liquity’s most recent offering.
In this article, we’ll learn about chicken bonds and their relation to NFTs.
Let’s get started! But first, let’s have a quick look at Liquity – a new borrowing protocol.
Introduction to Liquity
A decentralized borrowing protocol called Liquity enables you to obtain loans with no interest by using Ether as security. Loans must maintain a minimum collateral ratio of 110% and are paid back in LUSD, a stablecoin tethered to the US dollar. In addition to the collateral, the loans are highly secured by a Stability Pool that includes LUSD and a group of other borrowers who act as last-resort guarantors.
Key advantages Liquity provides include:
- Interest-free liquidity.
- Low collateral ratio, i.e., 110%.
- Hard price floor.
- Algorithmic monetary policy without governance.
- Censorship resistance.
- Growth rewards and incentives.
Now, let’s get to the part where we explain chicken bonds.
What are chicken bonds?
Chicken bonds are the latest DeFi mechanism of Liquity. They are a gamified special bonding model, offer consumers better guarantees, and have fewer drawbacks than current approaches. Principal protection will be advantageous to bondholders because they will always have the choice to cancel their bond and receive their principal back. In addition, the mechanism freely acquires treasury assets over time in a self-bootstrapping way instead of purchasing or renting liquidity.
The increased yields that bondholders can obtain encourage liquidity acquisition. Bonds gradually accrue a virtual balance of boosted LUSD tokens (bLUSD). The bonders have either of the two options. Either they can claim their bLUSD (“chicken in”) in exchange for their LUSD or cancel their bond (“chicken out”) to get their deposited LUSD back.
The NFT aspect of the chicken bonds
The mechanism’s gamification element is another innovation. The dynamic NFTs in the protocol will change as a result of how the user interacts with it.
When bonding, the NFT visual will either be an egg, a chicken (after claiming the bond), or a chicken that is running (after canceling the bond). When a user creates a bond, the NFT is minted. The characteristics of NFT artwork vary depending on a number of factors, including the bond size, the size of the Liquity Trove, the amount of LQTY staked, and the veCRV gauges on Convex. The rarity of the NFT is determined by and influenced by each of these factors. Since the NFT and the bond are inextricably linked, moving the NFT would also result in a change in bond ownership, giving bondholders access to new market opportunities. Bonds that have amassed a considerable quantity of bLUSD may find it appealing to sell NFTs on the secondary market.
In addition to Liquity’s Stability Pool, chicken bonds offer new earning potential. The bLUSD captures an enhanced, automatically compounded yield that can be traded or held. Additionally, bLUSD has a floor price that is guaranteed and supported by pool reserves.
Types of tokens in chicken bonds
LUSD: The protocol’s redeemable stable coin, LUSD, is pegged to the US dollar.
LQTY: The protocol developed LQTY as a reward token to encourage users. In exchange for their contribution to the stability pool, the stability providers are compensated with LQTY.
bLUSD: A derivative token called bLUSD offers holders of vanilla LUSD an enhanced yield over and beyond what is generally provided.
How does the chicken bond work?
Users receive LUSD tokens at 0% interest when they deposit ETH in the Liquity protocol as collateral. Chicken bonds are principal-protected bonds because they guarantee that the principal will always be safe and can be claimed at any moment. A user can purchase this bond using LUSD, and once it is, bLUSD, or “bonded Liquity USD token,” begins to accrue. In accordance with the calculations, the bond reaches the break-even point after a specific period of time, at which point the holders can choose to take the bLUSD accrued through bonding. When purchasing the bond, the user also receives a dynamic NFT, as explained in the previous section.
Chicken bonds aim to find a lasting solution to the issue of providing enough liquidity. They are essentially a tool for capturing liquidity over time. It is not like liquidity mining, where you can allocate a huge budget and expand a huge pool.Disclaimer: Cryptocurrency is not a legal tender and is currently unregulated. Kindly ensure that you undertake sufficient risk assessment when trading cryptocurrencies as they are often subject to high price volatility. The information provided in this section doesn't represent any investment advice or WazirX's official position. WazirX reserves the right in its sole discretion to amend or change this blog post at any time and for any reasons without prior notice.