If you are reading this thread, you must be interested in DeFi!However, have you ever wondered what goes on in the background of DeFi protocols? Today, join me in my deep dive into bonding and BaaS (Bonding as a Service) platforms, the backbone of the DeFi ecosystem! 🧵 👇
1/ Bonding (often referred to as staking, but we will refer to it as bonding in this thread) is a mechanism used in cryptocurrencies to incentivize network participants to act in the best interest of the network.
2/ This mechanism requires participants to deposit a certain amount of cryptocurrency as collateral to participate in the network. This collateral is often referred to as a "bond".
3/ These bonds (collateral) are used to ensure that participants have skin in the game and are incentivized to behave honestly and cooperatively.
4/ Oftentimes, bonding is used in Proof of Stake (PoS) consensus algorithms, where network participants stake cryptocurrencies to validate transactions and create new blocks.
5/ Bonding has several advantages over Proof of Work (PoW) consensus algorithms, where participants have to solve complex mathematical problems to validate transactions and create new blocks.
6/ Because of this, PoW requires a significant amount of computational power and energy consumption, whereas PoS requires only a fraction of energy and resources.
7/ Bonding is also commonly used to participate in network governance, where network participants can vote on proposals and make decisions regarding the future of the network
8/ Additionally, bonding also enables greater network scalability, allowing for more participants to participate in the network without requiring additional computational resources, making it a more environmentally friendly alternative to PoW.
9/ As we can see above, bonding is crucial to DeFi protocols as it allows us to create secure and decentralized networks that are trustless!
10/ While bonding is very important for DeFi protocols, what if I told you there is a new approach to bonding that aims to make the process more efficient and secure? I will touch on this new approach below. 👇
11/ Bonding as a Service (BaaS) is a new approach to bonding that increases security and efficiency. Instead of liquidity providers interacting directly with DeFi protocols, BaaS platforms act as an intermediary.
12/ Acting as an intermediary, BaaS platforms provide a range of services that make it easier for liquidity providers to bond and earn rewards.
13/ These services include:- Automated market-making (AMM)- Risk management- Liquidity provision- Token emission control, among other things!
14/ BaaS platforms employ various strategies to optimize the capital efficiency of liquidity pools. To achieve this goal, these platforms use dynamic pricing mechanisms, such as bonding curves.
15/ Bonding curves are used to determine the price of a token in relation to its supply. A bonding curve is a mathematical function that maps the relationship between the price of a token and the supply of that token.
16/ When a user buys a token through the bonding curve, the price of the token increases according to the curve. If a user sells a token, the price of that token decrease according to the curve.
17/ Thus, we can see that the price of the token is dynamically determined by the curve in relation to its supply and demand.
18/ There are different types of bond curves that have different formulas. However, the general mathematical formula for a bonding curve is P = m * S^c. Below is a graphical representation of a traditional bonding curve. (Source "Can we save the utility token?" from John Griffin)
19/ As for the formula P = m * S^c, P represents the price of the token, m represents an initial constant that determines the initial price of the token, S represents token supply and c is a constant that determines the curvature of the bonding curve.
20/ Would really recommend checking out this Medium post, very interesting and informative section on bonding curves!
21/ Additionally, here is another great primer on token bonding curves!
22/ Outside capital optimization and bonding curves, BaaS platforms also offer user friendly interfaces and tools for liquidity providers to easily stake their tokens and earn rewards!
23/ While we are on the topic of BaaS platforms, it would be criminal not the mention OlympusDAO (@OlympusDAO), who have been at the forefront of developing the concept of Bonding as a Service.
24/ In fact, OlympusDAO actually coined the term "Bonding as a Service" in reference to their unique approach to providing liquidity to DeFi Protocols.
25/ In September of 2021, OlympusDAO launched Olympus Pro, a liquidity provision provider service that caused a wave of liquidity-as-a-service competitors to pop up all over the DeFi space. However, one project, in particular, is by far my favorite and I will touch on it below 👇
26/ Bond Protocol (@Bond_Protocol), with 33M+ in total value bonded, 20+ bond markets, and 2k+ bonds issued, is fastly becoming a force to be reckoned with in the BaaS space.
27/ Bond Protocol has rolled out a permissionless system that enables the creation of Olympus-style bond markets for any token pair! This means anyone can create a bond market for any token without needing permission from a centralized source, creating an open financial system!
28/ If you are interested in BaaS platforms or just DeFi in general, I would highly recommend checking out this project! Bond Protocol is actively helping many DAOs and DeFi protocols to acquire liquidity, serving as the backbone for many projects.
29/ Below, I will attach some documents that will give you a nice introduction into the project! 👇
Website: Bond Protocol
bondprotocol.finance / dApp: BondProtocol / app.bondprotocol.finance
Docs: Protocol Overview - Bond Protocol
30/ Personally, I am very excited to see this project's continual growth! Bond Protocol solves very pressing issues within DeFi protocols and DAOs, such as token emissions and treasury diversification, among other things.
31/ In conclusion, bonding and BaaS platforms are integral for the health of the DeFi ecosystem. They incentivize participation in protocols, creating self-sustaining organizations and ecosystems. Simply put, bonding and BaaS platforms are the backbone of the DeFi landscape.
32/ Want to keep the conversation going? My Twitter DMs are open, so please feel free to reach out to me!
33/ Special thanks to @nonieengel and the rest of the @chapterone team for their insightful feedback on my thread!
34/ Interested in reading more content from the @chapterone researchers? Check out the Chapter One Research Twitter List!