GTON Academy. Bonding: What It Is And How It Works On GTON Capital - GTON Capital

In this article, we'll explain bonding as a financial tool, the concept of bonding in the crypto industry and its implementation on GTON Capital.

In crypto, the concept of bonding is closely linked to that of protocol owned liquidity (POL). While many protocols borrow liquidity from users, some prefer to buy assets in a process similar to issuing real-world bonds. Hence the term 'bonding,' which means selling a protocol's tokens to users at a discount rate in exchange for another coin, such as, for instance, ETH. The protocol tokens bought by users remain vested for a certain period, which could be compared to the maturity period for traditional bonds.

Bonding in TradFi

The bonding concept was apparently inspired by traditional finance (TradFi) where a bond is a fixed-income instrument representing a loan provided to a borrower by a lender. A bond operates as sort of a debt security that is similar to an IOU note. The issuer - such as a government or a company - uses the instrument to borrow money, offering lenders a fixed annual interest.

Compared with stocks, bonds offer lower yields but are significantly less risky for investors. While stock prices could be extremely volatile and often as likely to go up as to go down, bonds are more stable and secure - unless the issuer defaults on their obligations, which doesn't happen very often.

Bonding in DeFi

In decentralized finance, bonds enable protocols to attract liquidity from the market. Instead of borrowing liquidity from users, a protocol actually buys tokens, paying for them with its own tokens offered at a discounted rate. Another way of looking at this is that a protocol or a DEX uses its tokens as bonds, selling them for other - often, more popular - crypto.

Unlike buying tokens in the market, a user 'bonds' tokens, which means they are vested over a certain period to avoid creating immediate arbitrage opportunities. This, again, can be compared to real-world bonds' maturity period, upon which ROI is paid to investors. Here, the discount at which protocol tokens are bought creates ROI.

Meanwhile, a protocol that has acquired highly liquid coins in exchange for its native tokens, can, in turn, provide them to DEXes and AMMs to earn additional revenue.

Let's consider an example. A protocol has issued the token XYZ. It can subsequently offer XYZ to users with a discount of 5-10% for other tokens – for instance, ETH or DAI. Alternatively, the protocol could create a liquidity pool with XYZ and a popular token, such as ETH, and offer users liquidity pool tokens (XYZ/ETH) with a similar discount. ETH or DAI received from buyers are reinvested, bringing revenue, part of which is paid to buyers as ROI.

Thanks to bonding, protocols can acquire large amounts of valuable tokens in their treasury. This is, in a way, similar to holding lower-risk bonds.

Olympus and other implementations

The POL concept, including bonding, was originally pioneered by the Olympus DAO.** **

On Olympus, users are incentivized to sell their tokens for the protocol's token, OHM, sold at a discount. Bonding makes it possible for the Olympus DAO to own substantial liquidity - POL. The higher the amount of POL the protocols accumulates, the more options to facilitate market operations and protect token holders it obtains.

OHM buyers - bonders - commit an amount in other coins upfront for a promise of a fixed return at a certain point. Returns are paid in OHM, making bonders' profits dependent on OHM price.

However, since the very launch, Olympus' implementation of the POL/bonding concept has been criticized for being too complex and relying too much on investors' confidence in OHM as opposed to offering a sustainable liquidity management model.

Other observers pointed out that Olympus failed to present a viable model for calculating ROI based on OHM supply and demand.

Eventually, in early 2022, long before the UST/LUNA debacle and other events that shook the crypto space, OHM saw a substantial decline, and investors even accused the project of being a Ponzi scheme that enriched early OHM buyers at the expense of latecomers.

Some other protocols have also been exploring the bonding concept. For instance, the Anchor protocol offers Bonded Assets (bAssets), but that model is based on borrowing rather than acquiring assets.

A user can borrow stablecoins below the protocol-defined borrowing ratio, locking up other tokens as collateral. The locked up assets are converted to bAssets and can be redeemed back into the original tokens when the lock-up period is over. bAssets are added to a global pool of collateral, generating yields that are converted to stablecoin and paid to the lender.

Bonding on GTON Capital

On GTON Capital, bonding is implemented as an NFT that fixes a user's liquidity provision position to the treasury. This tool facilitates GTON Capital's treasury revenue and growth of medium-term and long-term token holders.

A bonding mechanism similar to what is described above is used here. Users are offered to buy GTON with a discount directly from the Treasury but with a vesting period lasting from one week to three months.

What differs GTON Capital's implementation is that, first, this opportunity is gated through whitelisting, a bond limit per an account and the number times bonds can be purchased per year, and, second, that bonding is interconnected by Pathway and thus contributes to the entire GTON ecosystem's capitalization growth.

Pathway tracks the protocol's fundamental metrics, such as TVL, volumes, the number of users etc to calculate a reasonable target price for the token and triggers the market making operations performed using POL. If the amount of bonds locked in the system grows, it increases TVL and treasury reserves which allows for higher target prices.

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