Chicken Bonds

Chicken Bonds is a novel bonding mechanism first applied to Liquity's LUSD stablecoin. Users bond LUSD to accrue bLUSD (boosted LUSD) tokens that capture amplified yield compared to standard LUSD yield sources. The system features principal-protected bonds with no lock-up periods, dynamic NFTs representing bond states, and can be adapted for any yield-bearing token to bootstrap protocol liquidity.

Chicken Bonds creates amplified yield through a three-part treasury system. The treasury has three buckets:

• Pending bucket holds newly created bonds
• Reserve bucket backs the bLUSD token
• Permanent bucket provides protocol-owned liquidity

All yield earned across all three buckets flows only to the Reserve bucket. This means bLUSD captures yield from a much larger pool of capital than just what directly backs it, creating an amplification effect.

bLUSD earns yield from two main sources:

1. LUSD placed in B.Protocol's Stability Pool earns rewards from liquidations and LQTY token emissions.
2. LUSD in Yearn's Curve vault earns trading fees and CRV token emissions.

The bLUSD annual percentage rate (APR) is calculated by taking the combined yield from both sources and dividing it by the size of the Reserve bucket. This creates a multiple—an amplification—over the basic Stability Pool APR.

A key price floor, called the redemption price, equals the LUSD in the Reserve divided by the bLUSD supply. This floor rises over time as yield accumulates. bLUSD typically trades above this floor in the market because investors value its expected future yield.

The system includes a 3% fee when users "Chicken In" (withdraw early), which is distributed to Curve gauge stakers to encourage bLUSD trading liquidity.

Finally, a controller adjusts a curve parameter (alpha) to maintain an optimal bonding time of about 30 days. If bonds are being held too long on average, the controller speeds up bLUSD accrual to encourage earlier withdrawals.