Liquity is a platform that offers overcollateralized stablecoin LUSD. My colleague Nivesh wrote about the platform back in June, exploring how it could be efficiently used to buy cheap ETH. 

You can use Liquity to earn fairly average yields by supporting its stability pool or Curve pool. In the first case, you help to keep the platform solvent. In the second, you decrease price slippage for LUSD. These two mechanisms are pretty standard, but the recent addition,  Chicken Bonds (CB), turns the familiar concept in a completely new direction. 

CBs offer individuals to pool their LUSD and earn yield collectively. A large chunk of LUSD can earn a large yield in absolute terms. Some of you may wonder what the product’s purpose is if yields are then divided pro-rata between the pool’s participants. That’s where CBs become a little bit complex.

The gist of the system is that CBs users give away some of their LUSD to the protocol. This money eventually should amount to some chunk that always generates yield. This yield is then distributed among the pool’s participants in addition to their regular yield. 

If enough people participate in the system, the protocol-controlled chunk should become sizeable, resulting in meaningful additional APY for depositors. So, CB is on track to becoming more attractive than individual farming.

What’s more, users’ CB positions are represented by generative NFTs that can be sold at a premium to what has been spent on creating a position. More on that later. 

To create a CB, you’ll need some LUSD. You can borrow it on Liquity using one of the front-ends or buy it from Curve. Then, go here, and click the ‘Create Bond’ button.

Source: Liquity.

Once you create the bond, you will see the bLUSD balance going up from zero. Without getting into the weeds, that bLUSD theoretically should trade at a premium to LUSD because of that additional yield I talked about earlier. Plus, bLUSD represents the regular yield that you’d get by farming on your own.

The goal is to capture bLUSD when its value is higher than what you deposited, sell it for LUSD, and re-deposit to farm even more bLUSD. To do it, you gotta “chicken in.”

By chickening in, you will give away a portion of your LUSD to the protocol forever. The other portion will go to the so-called Reserve pool. bLUSD is your redemption ticket to a portion of the Reserve pool. 

Since you’re giving away ownership of your LUSD, you take additional risks. What if users suddenly decide to redeem assets from the Reserve pool en masse? What if there’s a large bLUSD sell-off, and you can’t convert it back to LUSD without losing money? That’s why the “chicken out” option exists.

You can think about risks while accumulating yield in the form of bLUSD. If at any point you think that taking bLUSD while giving away LUSD is too risky, you can walk away from the pool. Although that would mean giving up on the accumulated yield, your principal will be safe.

The only challenge is being forced to make the decision. At some point, bLUSD issuance for your bond (in other words, the yield) slows down, so not delaying the decision has an opportunity cost. If you don’t make a decision for a long time, your yield will be lower than what you could get by farming on your own. 

The bonding app has tools to help users know when to act. These allow you to specify the current market price for bLUSD, from which the CB app will estimate when you will breakeven (how long until you accrue bLUSD equal in value to your LUSD deposit) and the best time for you to chicken in and re-bond (how long until bLUSD accumulated is higher than your LUSD deposit and emissions start to slow down). 

The bonding app’s helpful tools. Source: Liquidity.

Time the re-bonding well, and depending on the price of bLUSD, you can compound yields of up to 420%. Sounds pretty good for a low-risk stablecoin-based yield during a bear market. 

There’s more. Bonds are generative NFTs that will change according to the user’s actions. While funds are bonded, but no decision has been made, your NFT will show an egg, with its size relative to the size of the position.

Once you decide to chicken in or out, the NFT updates to show either a scared chicken running away or a proud chad chicken. Again, the chicken’s size will reflect the size of the position.

CB NFTs adapt to the state of the bond, position size, and more. Source: Liquity.

For those that support CB in other ways, there is the chance to mint an NFT with rarer traits. Activities include using ETH to borrow LUSD, staking LQTY to earn rewards, or voting for the platform to receive enhanced rewards from Curve’s gauges.

Each NFT also has a unique ID number, which like Ethereum Name Service NFTs, shows signs of making NFTs more valuable on the secondary market. Depending on the current hype, ENS names sell for high prices (i.e., 000.ETH was sold for 300 ETH), so your bond’s NFT may end up costing far more than what you spent on creating it. 

Overall, Liquity has created a way to get more out of the platform through Chicken Bonds. It’s a relatively safe idea that lets you earn more than you could otherwise. The generative NFTs are a nice touch that adds some flex and profit potential to top off the yields on offer.

Until next time

Disclosure: At the time of writing, the author held several NFTs, ETH, and other cryptocurrencies. Read our trading policy to see how SIMETRI protects its members against insider trading.