Bond

The principal or face value is the amount the bond issuer agrees to repay the bondholder at maturity. This is the loan's original sum, distinct from the bond's market price, which may trade at a premium or discount.

• In DeFi, this is often a fixed token amount (e.g., 1,000 DAI).
• The principal is returned upon successful completion of the bond's term.

The coupon is the annual interest rate paid on the bond's face value, typically distributed at set intervals. It represents the cost of borrowing for the issuer and the yield for the holder.

• Can be fixed-rate (constant) or floating-rate (pegged to an index).
• In DeFi, coupons are often paid in the protocol's native token or a stablecoin.
• Yield is often quoted as Annual Percentage Yield (APY).

The maturity date is the specific future date on which the bond's principal amount is scheduled to be repaid to the investor. It defines the bond's lifespan and is a key determinant of its risk and pricing.

• Bonds are classified by term: short-term (<3 years), medium-term (4-10 years), long-term (>10 years).
• In DeFi, maturity can be defined by a specific block number or timestamp, enabling automated settlement.

The issuer is the entity (corporate, government, or protocol) that borrows funds by selling the bond. The credit risk is the probability that the issuer will default on its principal or interest payments.

• Creditworthiness is assessed via credit ratings (e.g., AAA, BB) in TradFi.
• In DeFi, risk is often mitigated by over-collateralization, bond insurance pools, or protocol-owned liquidity.

Bonds can be traded on a secondary market before maturity. Their market price fluctuates based on interest rates, credit risk, and time to maturity, moving inversely to yield.

• A bond's price is calculated as the present value of its future cash flows (coupons + principal).
• Yield to Maturity (YTM) is the total return anticipated if the bond is held until it matures.
• DeFi bonds are often tokenized as ERC-20 or ERC-3475 tokens for seamless trading on DEXs.

Covenants are legally binding clauses in a bond's indenture that impose certain obligations on the issuer or grant rights to the bondholder. They are designed to protect investors by limiting issuer risk.

• Affirmative covenants require actions (e.g., providing financial statements).
• Negative covenants restrict actions (e.g., prohibiting additional debt beyond a certain level).
• In smart contract-based bonds, covenants can be enforced automatically by code.

Protocol treasuries use bonds to manage assets and generate yield. By issuing bonds against treasury assets, a DAO can raise specific assets (like stablecoins) for operations without selling its native token on the open market. Conversely, they can offer bonds that let users deposit volatile assets (e.g., ETH) in exchange for a yield paid from treasury revenue, effectively acting as a yield-bearing vault.

• Asset Management: Converts diversified treasury holdings into needed operational capital.
• Revenue Distribution: Allows token holders to earn yield directly from protocol revenue streams.

New tokens use bonding curves or liquidity bootstrapping pools (LBPs) as a fair launch mechanism. Instead of a standard AMM pool, the bonding curve algorithmically adjusts the token price based on buy/sell pressure, helping discover an initial market price while mitigating sniping bots and extreme volatility.

• Price Discovery: The bonding curve formula (e.g., linear, exponential) controls price sensitivity.
• Capital Efficiency: Allows projects to bootstrap deep liquidity with less initial capital than seeding a traditional pool.

These hybrid instruments combine debt with an option to convert into another asset (usually equity or tokens). A convertible bond allows the holder to convert the bond's principal into a predetermined number of the issuer's tokens. This provides downside protection (as a bond) with upside potential (as an option).

• Use Case: Used in venture financing and some DAO fundraising rounds.
• Key Terms: Conversion ratio, conversion price, and conversion premium define the option's value.

New projects use bonding as a capital-efficient fundraising tool, selling future token supply at a discount for upfront capital. This is an alternative to traditional venture capital or public token sales.

• Example: A project sells 20% of its token supply via bonds for 1,000 ETH, with tokens vesting linearly over 12 months.
• Advantage: Aligns investors with long-term success, as they are incentivized to hold vested tokens.

Bonding curves are smart contracts that algorithmically set a token's price based on its supply. Projects use them to bootstrap initial liquidity in a decentralized manner.

• Process: Users bond (deposit) a base asset (e.g., ETH) to mint new project tokens at a price that increases as more are sold.
• Outcome: Creates a deep, automated market from day one without a centralized exchange listing.

Bonds are used to align voter incentives in Decentralized Autonomous Organizations (DAOs). Governance tokens can be bonded (locked) to gain voting power or access to premium features, ensuring participants have 'skin in the game'.

• Vote-Escrow Models: Protocols like Curve Finance require users to lock CRV tokens as veCRV to boost rewards and voting weight.
• Outcome: Reduces governance attacks and promotes long-term decision-making by the community.

The punitive mechanism that enforces bonding in Proof-of-Stake (PoS) networks. Validators who act maliciously or go offline can have a portion of their bonded stake (or "skin in the game") permanently destroyed. This creates a strong financial disincentive for bad behavior, securing the network.

• Example: A validator double-signing blocks may be slashed 5% of their total stake.
• Purpose: Aligns validator incentives with network health.

The primary action of locking crypto assets (staking) to participate in network consensus and earn rewards. Bonding is often the final, irreversible step in this process. While staked funds may be "unbonding," bonded funds are typically locked and subject to slashing.

• Relation: Staking often involves a bonding period where assets become non-transferable.
• Use Case: Earning block rewards and transaction fees in PoS systems like Ethereum.

A DeFi primitive where protocols sell their native tokens at a discount in exchange for liquidity provider (LP) tokens. Users bond their LP tokens (e.g., DAI-ETH UNI-V2 LP) and receive the protocol's token after a vesting period. This helps protocols build deep treasury reserves and bootstrap liquidity.

• Mechanism: Protocol owns the LP, user gets discounted tokens over time.
• Goal: Protocol-owned liquidity (POL) and treasury growth.

A mandatory time-delayed withdrawal or cooldown period required after a validator or delegator initiates the unbonding of their staked assets. During this period, the funds are still locked and subject to slashing for past offenses, but no longer earn staking rewards. This provides network stability.

• Typical Duration: Ranges from days (e.g., Cosmos: 21 days) to weeks.
• Function: Prevents rapid validator exit and allows for slashing to be applied.

The economic principle underpinning bonding, where a participant has a significant financial stake (their "skin") that is at risk if they act against the system's interests. This aligns individual incentives with the collective good. Bonding is the mechanistic implementation of this concept in blockchain networks.

• Core Idea: Financial commitment ensures honest participation.
• Application: Used in PoS security, decentralized insurance, and governance.

The active network participant who runs software to propose and validate blocks. To become a validator, one must bond a minimum stake (or have it delegated to them). This bonded stake serves as their collateral, which can be slashed for misbehavior. Validators are the entities directly engaged in the bonding contract with the protocol.

• Role: Block production and consensus.
• Requirement: Must have bonded capital to participate.