IV.8.1 Why bonds are beneficial to a node protocol
At the moment, when a user purchases a native token in order to create a node, 2 swaps happen.
- 1 swap (15% of the value) goes to the treasury
- 1 swap (15% of the value) goes to the liquidity
That mechanism works well during the first phase of the project (the launch and the post launch period) because buying pressure > selling pressure. You will therefore have more inflow of capital into the liquidity.
But as soon as you’re entering into the second phase (stabilization and compound), or once the hype is decreasing, you have less inflow of capital into the liquidity. And this is problematic because the liquidity is removed in favor of the investment treasury.
To illustrate with a simple example:
Let's say you need 100 tokens to create a node at a price of 1 $USDT per node and there is 1,000 $USDT in the liquidity.
The first swap will be 20% of 100 $USDT, so it removes 20 $USDT from the liquidity. 1,000 - 20 = 980. So the liquidity is now worth 980 $USDT.
After the second swap (10% for example) the liquidity will receive 10% of 100 $USDT. 980 + 10 = 990. So the liquidity is now worth 990 $USDT.
In the end, more and more investors will compound their nodes and drain the liquidity little by little. And if you add the extra selling pressure from the daily rewards, then the price decreases drastically.
The higher the liquidity is, the more volatile the price will be. That mechanism reduces the price sustainability of the native token. Therefore, your daily rewards are worth less and less. Encouraging investors to sell more instead of compounding.
That's where the bonds come into play:
The bonds will cancel these two swaps, which will result in less selling pressure.
Once the bond PHI-BNB is available, we will be able to raise the volume of liquidity faster than most of the other protocols. More liquidity = more price stability and sustainability.
With the previous example, the investment treasury will receive only 20 $USDT.
But the protocol gives a daily reward of 1% per day in native token. So in order to maintain a price sustainability, the protocol has to take these 20 $USDT to make a daily return of 5%/day every single day. Which is just impossible to maintain over a 1 year period.
This impossibility would result in a price action that keeps going down.
But with the bonds, we will be able to receive much more than these 20%. Which results in less % of return obligation on a daily basis.
And if you add the daily rewards decay, in the long term we will be able to produce more return with the investment treasury than the average amount of rewards given from the nodes.
So we will be able to buy back & burn much more $PHI than the protocol will reward every day. Which will result in a true price sustainability.
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Last modified 11mo ago