A novel DeFi instrument on Telos for unlocking liquidity
Overview
T-Bonds are a new innovation in decentralized finance (DeFi) that allows tokens to be locked into a transferable non-fungible token (NFT) that can be traded on a secondary market. They are in many ways analogous to a US Treasury Bond aka “T-Bill”. The T-Bond NFT holds other fungible tokens with an economic or currency value until a condition is met (typically a time in the future) that brings the tokens to maturity, which point the fungible tokens locked within the T-Bond are made liquid and released to whatever account is the current owner of the T-Bond. T-Bonds are sold by their issuer to an initial buyer for another currency at a discount to face value to compensate the issuer for its illiquid nature. Like with T-Bills, the owner of a T-Bond can trade it to subsequent buyers on a secondary market which provides ongoing liquidity to holders. The T-Bond concept was first introduced in RFC: Creating an Innovative New DeFi Instrument to Bring New Exchanges to Telos.
The T-Bond Lifecycle
A T-Bond has a set lifecycle with three periods: Creation, Hold/Trade and Maturity.
Creation Period
A T-Bond NFT is created by its issuer (a company, DAO or other entity) by issuing a T-Bond NFT that has a fixed maturity condition (when the condition is a fixed point in time, which is typical, this may be called the maturity date) locking tokens equal to the face value of the T-Bond within the token until the maturity condition is satisfied — in the case of a maturity date, this will be the date arriving. T-Bonds may be created in advance or on-demand upon purchase by the initial buyer. The difference between the face value and the purchase price is known as the discount.
Hold/Trade Period
From creation until the maturity, the T-Bond NFT may be traded on any NFT marketplace that supports its standard. (The initial implementation of T-Bonds is on Telos using the Marble NFT standard.) The current owner of the NFT has total control of its transfer.
Like any bond, the valuation of any given T-Bond NFT will be a function of its face value related to its expected time to reach the maturity condition/date which is expressed as a discount offered to the new buyer by the present owner. Trades may continue for any period of time until the maturity period is reached.
Maturity Period
Once a maturity date or other maturity condition is reached, the current owner of the T-Bond NFT may claim the tokens locked within, turning them into liquid tokens and destroying the T-Bond.
Using T-Bonds
T-Bonds can be used by an issuer of fungible tokens. They serve a very specific utility in that fungible tokens may sold in a locked form that cannot be unlocked, divided, or used for any other utility purpose, but may be sold on secondary markets to provide liquidity to owners.
T-Bonds provide a unique advantage to any project seeking to raise initial or later-round funds in that tokens may be sold but not used until the maturity condition arrives. A date in time will be a common maturity condition, but the launch of a token mainnet or specific feature could just as easily be the maturity condition. This allows any project to raise funds without allowing those funds to be accessible until a particular condition is satisfied (verified by an oracle determined at creation). Therefore, a DAO may issue funds in the form of tokens (that may also be Telos Decide™ voting tokens) that do not become available for use until a particular condition exists — a time or the launch of a feature or similar. This helps projects reach for particular milestones and allow supporters to purchase discounted tokens that will be unlocked at the completion of that time/milestone. This is extraordinarily powerful for any project seeking funding based on future technological achievements.
Unlocking Liquidity with T-Bonds
T-Bonds address a common problem in unlocking liquidity for technical projects. When a project seeks to unlock some of its liquidity, it does not want to create a condition where it’s tokens can be instantly sold on a broad market. Often, fundraising occurs to enable specific goals such as meeting a technical milestone, expanding liquidity to new pools and markets, or similar. However, if tokens sold through this fundraising are instantly available on common markets, then there is the opportunity for buyers to immediately capitalize on any discount they received by selling all tokens. This undermines the goals of the initial token sale.
Typically, a project will sell tokens from its reserve with the expectation that the new improvements (additional exchange listings, partnerships or feature development) will create greater value in the project overall. However, there is usually a time lag between token sale and full execution, which is undermined by instant sales. By locking fungible tokens into a T-Bond NFT, the issuer can ensure that time may pass between its sale and the end-buyer’s sale before these tokens can be sold on common markets and depress the price of the token. Within that time lag, projects may execute their intended actions with the expectation that these actions will increase the value of the project/token overall. When this happens, every participant wins.
T-Bonds Initial Use
T-Bonds will initially be used by Telos to unlock liquidity by selling tokens from its unallocated pool in the account ‘tlosrecovery’ reflecting accounts given to EOS genesis token holders that never used these tokens within 54 weeks of distribution and therefore surrendered ownership of them, per the Telos Blockchain Network Operating Agreement. In accordance with the Telos Amend proposal ‘tbonds’, if accepted by a majority of Telos voters, these tokens will provide a pool of funds, sold for harder currency by the elected Telos block producers at any given time, to provide harder funds needed to expand the listings of TLOS tokens on additional exchanges and liquidity pools for these exchanges. It’s expected that other projects are likely to take advantage of this novel funding mechanism, and therefore, all code is offered on an open-source basis to facilitate broad usage of the T-Bond standard on Telos.
T-Bond Specifics
This initial implementation of T-Bonds is on the Telos Blockchain, using the Marble NFT standard, issued by the Telos elected block producers on behalf of the chain and sold through the AreaX NFT Marketplace as its secondary market. An online purchase site for newly issued T-Bonds will be created as well prior to launching the service.
Are T-Bonds a Security?
Crucial to the concept of T-Bonds is that all fungible tokens locked by the T-Bond NFT are transferred entirely into the control of the purchaser, except for their locking condition, which is controlled by the T-Bond NFT smart contract. Where a T-Bill or other bond is a promise to pay by the issuer at a future date, and dependent on the future execution of the issuer, a T-Bond NFT vests all ownership and control with whoever holds the NFT and does not rely on any other party to fulfill a promise to pay. Therefore, a T-Bond NFT is non-custodial and there seems to be no reason T-Bonds should be considered a security. The initial sale of a T-Bond is simply the sale of time-locked tokens. The T-Bond NFT does not add anything substantial other than the convenience of allowing future trade or transfer of these locked tokens. Time-locked tokens have never previously been deemed a security. T-Bonds in the form envisioned here neither pay interest nor confer any governance rights. They are a fixed amount of tokens sold at a discount. A T-Bond is a “bond” in name only and solely because this helps convey its function to a much more common financial instrument.
Ultimately, only a securities regulatory body or a court can ultimately rule as to the status of this type of instrument and whether it is a security, commodity or some other classification. T-Bonds do not fit the description of a financial security as described in the US Securities and Exchange Commission’s “Section 21(a) Letter” of July 25, 2017. The author has not obtained a legal opinion regarding T-Bonds directly, however the Telos Foundation has obtained a legal letter from a respected attorney specializing in cryptocurrency, Josh Lawler of the firm Zuber Lawler specifying that TLOS tokens would not be considered a security under current SEC guidelines. Anyone considering issuing or buying T-Bongs should research the matter to their satisfaction. This article is a description of the concept of T-Bonds and not an offer to buy or sell anything.
More information about the usage of T-Bonds is available in the article: Using T-Bonds to Unlock Liquidity.
Glossary
Issuer ………. The entity that creates any given T-Bond NFT, locking tokens with them and setting the maturity condition/date.
Face Value ………. The amount of a specific token that is locked by a T-Bond smart contract and will become liquid when that maturity condition/date of that T-Bond NFT is satisfied. Also referred to as par value in traditional bonds.
Maturity Date ………. The specific time and date at which the fungible tokens held within a T-Bond NFT become liquid.
Maturity Condition ………. The specific condition (if not time) and associated oracle reporting on that condition that determines when the fungible tokens controlled by a T-Bond NFT become liquid.
Discount ………. The difference between the face value of a given T-Bond NFT and the price paid for it by either the initial buyer or a subsequent purchaser.
Initial Buyer ………. A person or entity that buys a T-Bond NFT directly from the issuer.
Subsequent Buyer ………. Any buyer subsequent to the initial purchaser of the T-Bond NFT.
Secondary Market ………. Any marketplace enabling the sale and purchase of a T-Bond NFT following its initial purchase from the issuer.
About the author: Douglas Horn is the Telos architect and whitepaper author and a Telos core developer. He is the founder of GoodBlock, a Telos block producer and blockchain development company currently building the dStor decentralized data storage system.
