📈Token Model
DECO's bonding curve is a crucial component of the token model, responsible for maintaining the value of DECO and determining its market price.
The token model offers three significant features:
Single-sided liquidity provision: Allows liquidity provision for DECO without the risk of impermanent loss, leading to deeper liquidity pools, and better price stability.
Emission of call options: Provides a sustainable emissions mechanism through oDECO call options.
Borrowing against vDECO: Enables borrowing against vDECO without risk of liquidation, no interest, and no oracle, creating a risk-free borrowing mechanism.
The bonding curve is the contract that governs the price dynamics of DECO via a dual bonding curve mechanism. It enforces strict supply control policy for DECO and ensures that whenever DECO is minted, it is backed by liquidity. There are two bonding curves that make up the reserves of DECO: the floor reserves and market reserves.
The primary purpose of the Floor Reserves is to guarantee a predetermined floor price for TOKEN. This ensures that the DECO's value never falls below this threshold, providing stability and confidence for users within the system. The concept operates on a fixed-price curve y = c, where the DECO price remains constant at 1 MNT/DECO, termed as the floor price.
Constant-option bonding curve for the Floor Reserves, which is continuous and doesn't cap the reserves it can hold. This mechanism allows for a potentially infinite DECO supply.
oDECO, which is the emission token, acts as a call option on DECO. It has a strike price equal to the floor price (1 MNT/DECO) and does not expire. When exercised, users can acquire DECO at a rate cheaper than the current market rate, allowing them to profit.
oDECO can be created without affecting the strict supply control policy of DECO because exercising will inject the bonding curve with the floor price equivalent of MNT
Users have the ability to redeem their DECO to the floor reserves at the floor price, ensuring a guaranteed minimum value for all circulating DECO.
Exercising oDECO with MNT brings DECO into circulation. Redeeming removes DECO from circulation.
The Market Reserves dynamically adjust to market demand, determining the market price of DECO. This curve ensures that the market price of DECO remains above or equal to the floor price, providing ample liquidity and promoting price discovery. This bonding curve employs a virtual bonding curve based on the xy=k formula for DECO price discovery.
Virtual bonding curve for the Market Reserves, negating the necessity for upfront capital. This strategy offers deep liquidity and minimal slippage for DECO right from its inception, without the dependence on external liquidity incentives.
In its initial state, the complete DECO supply is minted into the market reserves, balanced by an equal quantity of virtual MNT. Virtual MNT is used solely for accounting purposes in the xy=k equation and will not back circulating DECO because initially the circulating DECO supply will be 0.
DECO's pricing within the market reserves varies, ranging from a minimum of 1 MNT/DECO (the floor price) to a theoretical maximum of infinity MNT/DECO. Users are free to buy or sell DECO at the prevalent market price from these reserves at any time.
Buying DECO from the market reserves brings them into circulation. Selling DECO to the market reserves removes them from circulation.
To better understand the bonding curve's functionality, let's consider a scenario that begins with an empty bonding curve, undergoes some operations, and then winds down to empty again. This example will illustrate how the bonding curve works and demonstrate how 1 DECO is always backed by ≥ 1 MNT.
Initial State: The bonding curve has 0 circulating DECO and 0 MNT backing it. The Floor Reserve price is set to 1 MNT/DECO, and the Market Reserve equation is set to (100 virtual MNT) * (100 DECO) = 10,000.
Buy DECO: A user spends 33.33 MNT to purchase DECO from the Market Reserves. The calculation is as follows: (100 virtMNT + 33.33 MNT)(100 DECO- y DECO) = 10,000 y = 25 DECO
What does slippage look like if we set X and Y higher? X, Y = 100 -> 25 MNT => 20 DECO -> Slippage = 20% X, Y = 1000 -> 25 MNT => 24.4 DECO -> Slippage = 2.4% X,Y = 10000 -> 25 MNT => 24.94 DECO -> Slippage = 0.24%
The deployer of this system determines X and Y and they can be set to any amount.
This example illustrates how the bonding curve achieves single-sided liquidity without any upfront liquidity provision. DECO itself serves as the "LP" (although users won't earn swap fees unless they stake it for vDECO). Note that there are now 25 DECO in circulation, backed by 33.33 MNT, maintaining the 1 DECO ≥ 1 MNT relationship.
Exercise oDECO: A user converts 25 oDECO+ 25 MNT to receive 25 DECO, exercising their oDECO to purchase DECO at the floor price. This adds another 25 DECO to circulation, and since MNT was deposited into the bonding curve, the circulating DECO remains backed by at least 1 MNT/DECO.
Sell DECO: The user who exercised 25 oDECO for 25 DECO now wants to take their profit. They can do this by selling DECO at the market price to the bonding curve. The calculation is as follows: (100 virtMNT + 33.33 MNT - x ARB)(75 DECO + 25 DECO) = 10,000 x = 33.33 BASE.
The total profit is 33.33 MNT - 25 MNT = 8.33 MNT (25 MNT used to exercise oDECO to DECO, and 33.33 MNT from selling DECO to MNT).
A liquidity pool can also be created for oDECO so that farmers can directly sell into it instead of exercising options. Arbitrageurs would then exercise the options to rebalance the pool and turn a profit.
Notice that there is no more MNT liquidity in the Market Reserves (100 virtual MNT)(100 DECO). There is still 25 DECO circulating, however they can't be sold to the Market Reserves since there is no real MNT in them. In this case the user wishing to exit must redeem their DECO to the Floor Reserves at the floor price (1 MNT/DECO).
Redeem DECO: The user redeems 25 DECO for 25 MNT from the Floor Reserves.
With the system winded down completely, there is no longer any DECO in circulation and no need for MNT in the bonding curve to back it. However, the bonding curve still functions as needed, with DECO available for purchase from the market reserves, and the floor reserves expanding as needed to fulfill call option exercises.
When purchasing DECO, the transaction involves only inputting MNT and in return, receiving DECO. Consequently, holders maintain just the DECO, subjecting them exclusively to DECO's market variations in relation to MNT. This concept mirrors a single-sided liquidity position. Once DECO is staked for vDECO it will also start earning the swap fees from that single-sided liquidity on the bonding curve.
Taking inspiration from Balancer's novel ve-model, which utilized a 80%/20% BAL-ETH liquidity pool for their vote escrow token, this model further refines the idea, presenting 100% liquidity as the voting escrow token.
One of the bonding curve's distinct features is the ensured floor price, which guarantees that DECO's value will never descend below 1 MNT per DECO. This structure introduces a unique borrowing mechanism. vDECO holders can borrow an equivalent amount of dormant MNT, risk free. For example, by holding 25 vDECO, one is eligible to borrow 25 MNT. This is attributed to the borrowing occurring at the floor price and the assurance that the DECO's worth won't go beneath this threshold. Thus, liquidation is non-existent. The system elegantly sidesteps the need for liquidation measures or oracles, as it's inherently built into the bonding curve with a floating loan-to-value (LTV).
Fundamentally, individuals borrow their exit liquidity, given DECO's resemblance to a single-sided liquidity pool. The last DECO to ever exit this system will always be redeemable for 1 MNT/DECO, which is why liquidity at this floor price can be borrowed when vDECO is locked away as collateral.
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