2022 / 10 / 19 15:00
Bifrost
DeFi markets in all ecosystems are maturing as they continuously improve and innovations are implemented on a monthly basis. Although a lot of new functions are provided, bond markets seem to be on hold. Besides, as a tool for increasing protocol liquidity in rebase token projects, they were simply a static product. The lack of a bond market was also prominent in the Polkadot and Kusama ecosystem as well until Bifrost introduced their vsToken based version of the bond market. This gave users new tools on hand to manage their contributions to projects going for a Parachain slot.
From day one, this offers a lot of interesting opportunities and strategies for users and traders. Users who engage in this market will have the security of a known return on investment when they enter a trade, as the goal of the trade is a clear equation. This stability is contrary to the highly fluctuating APYs a lot of farms are offering.
With the introduction of SALP, Bifrost introduced two new token categories. The first being vsToken as in vsKSM / vsDOT, and the second vsBond. Although not differentiated by name, vsBond is split into a Kusama and a Polkadot version. To redeem your KSM or DOT, you will need the corresponding vsToken and a redeemable vsBond version. You can only get back your initial contributions with these two tokens.
Because vsToken is a liquid token which can be traded or redeemed at any time, a time locked token is necessary to represent the time commitment a Parachain auction demands from a contributor. With this in mind, vsBond represents the locked counterpart to the freely tradable vsToken.
When contributing to a project in a Parachain auction, you will receive a vsToken and a vsBond marked with the specific Parachain you contributed to. This vsBond is redeemable as soon as the lease from the Parachain slot is up, which is after one year for projects on the Kusama relay chain or two years for projects on the Polkadot relay chain. Once vsBond is redeemable, you can pair it with the correct vsToken depending on the relay chain this vsBond relates to. You then redeem your one vsBond and one vsToken for one native token. This equation is set in stone and always true, but there are other ways to get liquidity out of vsBond.
Note: After a vsBond is redeemable, it only stays redeemable for 72 days to discourage hoarding of vsBonds. After the redeemable phase is up, a vsBond can be redeemed for 0,5 vsToken as a courtesy. This implies a heavy malus on the value and is never a viable option.
One way to free your vsBond is via the convert function in the Bifrost App. This will come with a converting malus which is decreasing the closer the redeem date is out. With 336 days out you can convert your vsBond to vsToken with a swap rate of 0,68. The swap rate is increasing at defined intervals until you can convert your vsBond for 1 vsKSM.
Another option is to sell your vsBond on the Bond market, a unique feature to BiFrost. Bifrost introduced the Bond market as a brand-new feature to the Polkadot and Kusama ecosystem. The Bond market is where all vsBonds can be traded P2P. The art of trading is closely related to how NFTs are traded than the experience DEXs offer. For every trade there needs to be a buyer and a seller for the same vsBond. The introduction of the bond market is an exciting step into a more diverse DeFi ecosystem within Polkadot and Kusama. Normal users and professional traders can utilize the bond market to leverage their KSM and DOT position even more than before.
In the next paragraph, we will try to introduce some strategies you can pursue on the bond market to leverage your flexibility in the ecosystem.
As the vsDOT functionality is not fully there yet, we will refer to vsKSM and vsBonds related to Kusama Parachains in the following section. These strategies are 100% compatible with the vsBond Polkadot Parachain market when it’s fully live. The only thing that changes is the duration of the lease.
The first and most straightforward strategy is buying vsBonds at a price lower than half a Kusama and redeem them in combination with a vsKSM when they enter the redeemable period for one KSM. You can either buy the vsKSM manually or use the vsKSM you received through crowdloaning via Bifrost.
On May 22nd, a certain vsBond were available at a cost of 0,3 KSM. If you had bought it at that time and held it until the bond was redeemable, you would have made an increase of 66,67% based on that period. If you would keep doing that for the whole year you would have earned an APR of 180,25% on your initial invest
This strategy is based on the delta of the buy price to the redeem price on a longer timeframe. It becomes less and less viable the lower the difference between these two becomes. If the difference between buy price and sell prices gets too low you need to look for a shorter time frame until the vsBond is redeemable. Although original vsBond holds a value of 0,5 KSM and vsKSM holds a value of 0,5 KSM when redeemed, vsKSM trades for lower than that and has been fluctuating in the last months between 0,42 KSM and 0,47 KSM. In the case of 0,42 KSM, you could buy a vsBond for as high as 0,57 KSM and make a very small profit.
Another simple and common strategy for trading in the bond market is buying low and selling high. When you see a deal, scoop up the vsBond tokens and sell them for more.
As the vsBond market slowly gains traction more and more buyers and sellers will take advantage of the opportunities it offers, and there will be an increase in the amounts of vsBond up for sale.
If you are a long-term investor in the ecosystem and want to maximize your liquidity in the future, this long-term strategy might come in handy. This strategy is especially viable in a state of the market where entry prices are not overinflated.
When going for this strategy, keep in mind that your contributions to projects going for a Parachain slot in the first year will set the base on how much free liquidity you will have in the following years.
Over the course of the first year, you need to spread out your KSM contributions to promising projects. This strategy will give you a spread-out flow of vsKSM and vsBond tokens during that year. Instead of putting the vsKSM into a farm or swapping it at a malus to KSM, you need to buy a redeemable vsBond and redeem them together for one full KSM. This comes at the investment of 0,5 KSM per 1 KSM. These KSM are not gone as you still have them in the form of vsBonds which will be redeemable in a year. The real pain is the opportunity cost for a year on 0,5 KSM per redeemed KSM. But this cost exists when you let your vsBond sit in a dark place for a year until you redeem it, as well.
Note: It is double that, when you use the normal Parachain mechanism the Kusama Relay chain offers. Your whole contribution will be locked for the time of the lease.
From year two on, you will harvest what you planted in the first year. There is no need to buy redeemable vsBond tokens anymore, as you have your own redeemable vsBond token, which you can use to redeem your full KSM back after contributing to a promising project. You contribute 1 KSM, receive the project tokens, and immediately have your 1 KSM back to invest in whatever you please to do. You can even put it in another Parachain auction. As long as you have your own redeemable vsBond, you can immediately redeem the full KSM without any extra cost. In doing so, you created the vsBonds for the next round in a year.
With a bit of a long-term view, you can set up this strategy, which will grant you a great amount of flexibility.
Bifrost vsBond market brings an old TradFi classic to the Polkadot and Kusama DeFi ecosystem. With the introduction of the vsBond market, Bifrost started to fill the missing part of a fixed return market for buyers. For sellers, this market provides an opportunity to gain control over their liquidity and bring back flexibility in a system which was originally intended to be inflexible. There are multiple opportunities and strategies for all users from various backgrounds. Even in these early stages, there is an abundance of opportunities, and the more accepted it will become, the greater and diverse the strategies will be.
