Rebonding

[cvalkan]

Rebonding

In order to compound their returns, bonders may have an incentive to occasionally chicken in or chicken up, sell the earned sLQTY for more LQTY than their original investment and create a new larger bond (“rebonding”). This issue aims to analyze the effects and feasibility of rebonding both from the system's and the user's perspective.

Rebonding raises a number of questions:

• When do bonders have an incentive to rebond? How does the shape of the sLQTY accrual curve impact the incentives?
• How does rebonding affect the overall health parameters of the system and the price of sLQTY?
• Can rebonding be facilitated by flash transactions?

Incentive to rebond and optimal compounding strategy

Depending on the shape of the sLQTY accrual curve (bonding curve), the optimal strategy for rebonding/compoudning may differ.

Effects of rebonding on the system

While rebonding doesn't impact the POL ratio, it does affect the bonding ratio and thus the reserve ratio of the system. The effect mainly depends on the price at which sLQTY can be converted back to LQTY. The higher the conversion rate, the more the new bond increases of the bonding ratio. Under the neutral assumption that (1) the market price doesn't change as an immediate reaction to a chicken up/in, and that (2) the bonder can exchange the sLQTY to LQTY at the respective spot price (assuming any slippage), the bonding ratio before the chicken-in is restored upon rebonding. This holds for early and late chicken-ins alike, as shown in this table
.

The situation is more nuanced for rebonding after chicken-ups. It can be proven that under the same neutral assumption about the price impact, the reserve ratio increases after the combined transaction. Under a pessimistic assumption (where the chicken-up reduces the market price as the fair price decreases), there is still a wide range of system states for which rebonding is positive for the resulting reserve ratio. See this document.

The effect on the reserve ratio is important since it's relevant for the fair value of sLQTY.

Flash rebonding

Issue #6 describes a method that allows bonders to chicken-up without actually needing to provide the topup themselves, but by letting the protocol flash-mint and exchange the accrued sLQTY for LQTY. Going one step further, we could allow bonders to automatically rebond in a single transaction, by bonding the LQTY that would otherwise be paid out the bonder after the chicken-up.
For chicken-ins, rebonding is even simplier since we only need to exchange the sLQTY for LQTY using the AMM and create a larger bond.