For decentralized finance (DeFi) protocols to operate effectively, it is essential to have large amounts of liquidity in token pairs, commonly known as liquidity pools, to allow users to carry out token swaps with low slippage.
To bootstrap liquidity, protocols incentivise liquidity providers (LPs) to deposit liquidity in token pairs, usually the protocol governance token paired with a stable coin. As a reward for providing liquidity, LPs are rewarded with the protocol’s governance token, usually at an attractive annual percentage yield (APY). This is commonly known as liquidity mining or yield farming.
Bonding is a mechanism where a user can sell liquidity pool tokens to a protocol in exchange for its native token through what we call a bond.
To incentivize users to sell liquidity pool tokens to the protocol, rather than the open market, bonds are offered at a market discount. Bonds have a vesting period of 5 days to prevent users from selling all the discounted tokens for a quick profit.
Protocol owned liquidity (POL) is an essential part of DeFi as it guarantees users that there will be sufficient liquidity in token pools. Bonding allows a protocol to accumulate its own liquidity.
POL transforms liquidity from a liability to a revenue source. Since protocols will become a liquidity provider themselves, they will receive a share of the generated fees.
The Bond Marketplace is the heart of Karma Bond. It provides the user with a suite of different bonds they can purchase.
It allows users to buy their preferred DeFi governance tokens at a market discount and protocols to accumulate their own liquidity. This is beneficial for both parties.
Karma Bond is a service offered by Karma Finance. Karma Finance provides infrastructure, expertise, and exposure to other protocols via the bond marketplace in exchange for a fee.
Yes, you will receive the Karma Bond token, bKARMA. bKARMA will be distributed to the LP token provider in addition to the native governance token offered by the bond. For example, protocol X would reward the LP token provider in token X at a market discount and Karma Bond would reward the buyer with bKARMA.
At times, you'll see that the bond discount turns negative, meaning you'd pay a premium from the market in order to bond. You should not bond during this time, as you can buy the same tokens but at a cheaper price from the market. As time goes on, the discount will slowly increase, until it reaches a positive discount again. The negative discount can be caused by different factors:
1. High demands for bonds: Bonds offer users the ability to purchase tokens at a market discount. However, this price is dependent on the demands of bonds. When there is a high demand, the bond price goes up, and vice versa. The demand may be so high that it may cause the bond price to inflate above the market price.
2. Sharp decreases in price: At times, when a token experiences a sharp decrease in price, it takes time for the bond price to decrease to match the new token price. This causes a temporary negative discount, until the bond price matches the market value again.
The bond discount is determined by the following formula:
Bond Discount = (Market Price - Bond Price) / Market Price
The bond price is determined by the debt ratio of the system and a scaling variable called the Bond Control Variable (BCV). This allows Karma Finance to control the rate at which the bond price increases. Note that the bond price is independent of the market price, as no data from price oracles are used when determining the bond price.
Bond Price = Debt Ratio * BCV
What is the debt ratio? The debt ratio is the amount of reward tokens owed to the bonders by the protocol, divided by the total supply of the reward tokens. A higher debt ratio implies a huge demand for bonds, resulting in a higher bond price, and vice versa.
Debt Ratio = Tokens Owed / Token Supply
Tokens purchased through a bond are not released to the bonder all at once. Instead, they vest linearly over time. This prevents the bonder from selling their tokens all at once for a quick profit.
BCV directly affects the bond price - the higher the BCV, the higher the bond price. As a higher bond price makes bonds less attractive, the protocol can adjust this value to tune the bond capacity.
Maximum Bond Size
This controls the maximum amount of reward tokens a user can purchase through a bond. It is set as a percentage of the total supply and typically ranges between 0.03% - 0.05% of the total supply.
Bond Vesting Term
A bond vests linearly to the bonder over a length of time, called the bond vesting term. This means the bonder can claim a portion of the reward tokens each day, with all rewards being claimable at the end of the term.