Preparing for Bond Market Deployment (1/3)
Before bond market deployment, preparing and ensuring all key considerations have been discussed with your community is essential. Proper preparation can significantly impact the success of your bond market and enable you to achieve your goals. In this blog post, we’ll explore the key considerations and steps to take before launching a bond market.
Determine Issuance and Acquisition Goals
Understanding the desired payout token, quote token, quantities, and speed of acquisition is crucial as it forms the foundation of your bond market strategy.
Below, we provide general use cases that bonds enable throughout a project’s life cycle, but many others may better suit your situation. If you need help during this ideation phase, join our Discord community!
Acquiring Protocol-Owned-Liquidity (POL)
New protocols often face challenges in gaining control over liquidity incentives, managing outflows, and ensuring project stability. However, these issues can be addressed by utilizing bonds to acquire and manage POL. By issuing your native token as the payout token and selecting a liquidity-pool (LP) token as the quote token, you can navigate liquidity challenges and establish a strong foundation of permanent POL.
Diversifying Your Treasury
When using bonds to diversify treasury holdings, consider issuing your native token as the payout token. This allows you to use bonds to acquire quote tokens such as stablecoins and ETH without dumping treasury assets on the open market. Diversifying your treasury helps mitigate risk, enhances stability during market volatility and downturns, and provides flexibility in managing the project’s funds — all of which any project can benefit from.
Acquiring Strategic Assets
Later in a protocol’s life cycle, there may be a need to acquire strategic assets in order to accelerate growth. If you have identified tokens that are vital for your project’s ecosystem (e.g. CVX/CRV), bonding can provide a means to source them in an open and transparent manner.
Funding Growth Initiatives
Launching a bond market can be an effective way to fund growth initiatives within your project. By selecting your native token as the payout token, you can attract bonders who are long-term aligned with the protocol. Tokens acquired through the bond market can fuel expansion, development, marketing efforts, or other growth-related activities — all of which drive value back to the protocol, creating a healthy flywheel for all parties involved.
Bootstrapping Cross-Chain Initiatives
Projects seeking to expand into other Layer 1 or Layer 2 blockchains can make use of bonds as well. In addition to overcoming technical hurdles, most protocols will need sufficient liquidity for their native tokens on a new chain. To achieve this, protocols can run a bond program to acquire base assets needed for liquidity provision, and/or acquire the LP tokens themselves.
By clarifying your goals and intentions regarding the desired payout and quote of tokens, you can effectively design your bond market strategy to align with your project’s strategic priorities. It establishes the foundation for you to tailor the configuration of the market, select appropriate vesting periods, determine the auction type, and set capacity levels that align with your objectives.
Conduct Treasury and Token Analysis
During the preparation phase, it’s also important to conduct a thorough analysis of your project’s token metrics. This provides valuable insights into the current state of your token’s supply, demand, and distribution, allowing you to make informed decisions during the bond program setup and assess its performance. Below are some key areas to focus on:
Treasury Composition
When it comes to managing your treasury, capital preservation, liquidity, and income must be prioritized — in that order as outlined by a16z. Analyzing and optimizing your treasury composition to unlock these core tenets introduces a few questions:
- Covering operational expenses and treasury outflows should be the priority (i.e. capital preservation). If you’re emitting excess tokens through liquidity incentives, what % of POL would allow you to taper down said incentives? Generally speaking, it’s recommended to have a specific % of POL in your token’s key pools that give you control over outflows.
- Are you paying contributors in tokens that are promptly swapped into other tokens in order to off-ramp? Is your runway entirely dependent on token price performance (e.g. treasury composition is 85%+ native token)? If yes, it may be wise to transition into a warchest of stablecoins to cover audits, payroll, and extend runway in case of market and token price decline.
Consider gradually shifting the percentages of your treasury holdings in native tokens, LP tokens (POL), stablecoins, and ETH. While the ideal percentages are subjective to your situation, it’s recommended to implement the shift in increments through successive bond programs and gradually ramp up over time. Holding a high percentage of native tokens in your treasury poses the risk of being forced to sell during market downturns, potentially jeopardizing your project’s stability.
Current Emissions
Quantify the rate at which new tokens are being emitted into circulation. This includes rewards from liquidity mining programs, staking incentives, payroll, investor unlocks, or other mechanisms contributing to token issuance. Understanding the emission schedule and its impact on token supply helps you select the appropriate bond market configurations.
Bond markets will issue vested tokens as additional circulating supply, so emissions should be reallocated to support the bond program; as you acquire assets via bonds, you can reduce emissions elsewhere to more sustainable levels. Bonds should cause minimal month-over-month inflation from issuance. Otherwise, too much circulating supply is being introduced too quickly.
Identification of Large Holders
Identify and analyze the distribution of your token among large holders. Large holders can significantly influence market dynamics. By understanding the concentration of token ownership, you can assess the potential impact of large holders on the bond market’s performance and design strategies to address any potential hurdles, as well as engage with them to participate in your bond market.
Success Metrics and KPIs
Keeping Success Metrics and KPIs at the forefront indicates to your community that you’re taking a thoughtful, deliberate approach to bonds and helps you understand if the market is performing to expectations.
KPIs will differ per market, but the general ones we recommend keeping track of are:
Engage with the Community and Receive Governance Approval
Engaging with the community and obtaining governance approval are necessary steps before deploying your bond market. Through open discussions, AMAs, and sentiment analysis, you can validate the project’s goals and gather feedback from your community. Community support and involvement are key to the success of any bond market, as they build trust and encourage participation, driving positive outcomes for your project through bonding. Focus on communicating the long-term benefits that bonding will provide to your project and how the acquired quote tokens align with strategic initiatives for sustainability and growth.
Once you’ve engaged with the community, the next step is to seek official approval for the bond market, its configuration, and a timeline for deployment. Typically, this process includes creating a forum post, engaging in back-and-forth discussions, making adjustments based on feedback, and ultimately conducting a governance vote.
Keep in mind that it’s important to involve all necessary stakeholders, particularly holders of large token amounts, in the governance process and guarantee their active participation in the bond program.
Closing Thoughts
Preparing for bond market deployment is critical to increase its effectiveness and the odds that it positively contributes to your project. By carefully considering your issuance and acquisition goals, conducting thorough token analysis, engaging with your community, and following governance procedures, you can set the stage for a well-structured and impactful bond market.
With that said, take the time to plan and strategize, and reap the benefits of a thriving bond market that fuels the growth and sustainability of your project.
Remember, anyone is welcome in our Discord community if there are any questions or concerns about deploying a bond market.
Note: This is a general guide, and it’s important to tailor the preparation process to your project’s specific needs and circumstances.
Bond Protocol is the permissionless bond marketplace. Our mission is to power sustainable treasury growth and support protocols to acquire strategic assets, including their own liquidity.
