Inverse Bond

The core mechanism where users sell the protocol's native token (e.g., OHM) to the protocol's treasury in exchange for a discounted amount of a stable asset (e.g., DAI). This creates a price floor and reduces sell pressure by removing tokens from circulating supply. The discount rate is algorithmically set, often increasing with bond demand.

Proceeds from the bond sale (stablecoins) are used to provide liquidity in decentralized exchanges (e.g., SushiSwap, Uniswap V3). This creates protocol-owned liquidity, making the treasury a permanent market maker. This reduces reliance on third-party liquidity providers and generates fee revenue for the protocol.

Purchased bonds do not deliver tokens immediately. They have a linear vesting period (e.g., 5 days). This prevents immediate dumping of the discounted tokens and aligns the bonder's incentives with the protocol's long-term health. The bonder receives a pro-rata share of their tokens over time.

The discount is not fixed. It is controlled by a Bond Control Variable (BCV), which adjusts the bond price based on demand. High demand increases the BCV, reducing the discount for subsequent bonds. This automated mechanism manages treasury outflow and stabilizes the bonding process.

Each bond sale adds stable assets to the treasury, increasing the treasury backing per token. This is a key metric (e.g., $ value of treasury assets / token supply) that represents the intrinsic value supporting each token. A rising backing per token strengthens the protocol's perceived solvency.

• Traditional Bond: Investor lends capital (buys bond) to issuer for future interest payments in the same currency.
• Inverse Bond: User sells the issuer's asset (token) to the issuer for an immediate, discounted payment in a different asset (stablecoin). The protocol's goal is treasury management and supply control, not fundraising.

The core objective is to acquire and own liquidity directly on the protocol's balance sheet. Instead of relying on liquidity mining incentives paid to external LPs, the protocol uses its treasury to provide liquidity, creating a self-sustaining flywheel. This reduces sell pressure from mercenary capital and aligns long-term incentives.

Projects use inverse bonds to exchange volatile native tokens for stable assets like DAI or USDC. This diversifies the treasury, providing a stable war chest for operations, development, and hedging against bear markets. It's a strategic move to de-risk the protocol's core finances.

When a token's market price falls below its intrinsic or backing value, an inverse bond creates a non-dilutive buyback mechanism. Users are incentivized to sell tokens to the treasury at a premium to market, providing price support and absorbing excess supply without new emissions.

A common variant involves bonding native tokens for LP tokens (e.g., OHM-DAI SLP). This directly increases the protocol's ownership of its own liquidity pools, deepening liquidity and earning trading fees. It's a direct method to execute the POL strategy.

By removing tokens from circulating supply and locking them in the treasury (often to be burned or used for future bonds), inverse bonds can act as a deflationary mechanism. This reduces sellable supply, which can positively impact tokenomics if demand remains constant or increases.

Bonding periods (vesting) and discounts target committed participants rather than short-term traders. This builds a base of stakeholders economically aligned with the protocol's long-term health, as their bonded assets are locked and subject to the treasury's performance.

The primary risk is the asset's market price falling below the bond discount before the vesting period ends. If the market price of the bonded asset (e.g., OHM) drops significantly, the user receives a lower dollar value than anticipated, potentially incurring a loss compared to simply buying on the open market. This makes inverse bonds highly sensitive to short-term price action and negative sentiment.

The bond's value is contingent on the protocol's treasury health. An inverse bond sells protocol assets (e.g., DAI, ETH) to buy and burn its native token. If the treasury lacks sufficient backing per token or is composed of illiquid or depreciating assets, the fundamental value supporting the bond payout erodes. Users must audit the treasury's composition and risk profile.

Capital is locked for the duration of the vesting schedule (e.g., 5 days). During this period, users cannot react to market movements. This creates opportunity cost and impermanent loss risk, as the bonded assets could be deployed elsewhere for yield or sold to prevent further downside. Early exit is typically not possible.

The protocol must execute a swap on the open market to buy and burn the token. Large bond sales can cause significant price impact and slippage, reducing the effective number of tokens received by the bonder. This is especially acute for tokens with low liquidity. The stated discount may not reflect the final execution price.

Inverse bonds mint new tokens, which is dilutive to existing holders. If used excessively to raise treasury assets, it can lead to hyperinflation of the token supply, undermining its value. Users must assess if the protocol is using bonds for sustainable growth or as a short-term fix for treasury deficits.

As with all DeFi primitives, inverse bonds are exposed to smart contract risk within the bonding contract or the underlying DEX used for swaps. They also face systemic risk from failures in related protocols (e.g., stablecoin depeg, oracle malfunction) that affect treasury assets or token pricing.

The foundational mechanism where a protocol sells its native tokens at a discount in exchange for liquidity provider (LP) tokens or stablecoins. This creates protocol-owned liquidity (POL), a treasury-owned asset that generates fees and reduces reliance on mercenary capital. Inverse bonds are a specific application of this principle.

A treasury management action where a protocol uses its reserves (often stablecoins or revenue) to purchase its own native token from the open market and permanently removes (burns) it. This is the core action triggered by an inverse bond; the discounted token sale provides the capital to execute the buyback.

The key economic lever in bonding. It's the percentage below market price at which the bond is sold.

• A higher discount increases incentive for buyers but dilutes existing holders more.
• In inverse bonds, this rate determines the efficiency of the buyback; a steeper discount means more buyback capital per token sold.

The time over which the bonded tokens are linearly distributed to the buyer after purchase. This prevents immediate sell pressure in standard bonds. For inverse bonds, the protocol typically receives the stablecoin capital immediately, but the concept is critical for understanding the broader bonding landscape.

The strategic handling of a protocol's asset reserves. Inverse bonds are a tool within this discipline, used to:

• Increase treasury stability by swapping volatile native tokens for stable assets.
• Signal confidence by using new capital to support the token price via buybacks.
• Manage token supply through the subsequent burn.