Getting ready for (re-)launch — How does the Arbor Bond auction work?
Time has passed since the first bond issuance with Ribbon Finance and the preparations to re-launch our protocol are at full speed. We plan to host the second bond auction with Shapeshift DAO within the coming weeks.
Lenders will be able to purchase convertible bonds at a significant discount to the face value. The auction to bid for the bonds will be hosted on our platform under the “offering” tab.
https://app.arbor.finance/offerings
How does an auction on Arbor work?
Once you click on an ongoing auction under the “offerings” tab, you will see the auction details with all the necessary information available.
As seen in the screenshot above, you will find the following information:
Offering amount: The total amount of bonds offered during this auction
Current bond price: The current price you can purchase the bond for. The price might change depending on the total order volume. We will dive deeper into bond pricing in the next section.
Total order volume: This amount shows the total amount of USDC already deposited for the offered bonds.
Current bond YTM (Yield to maturity): The number shows what annualized yield you will receive in total if participating in the offering. It reflects the delta in-between the bond price and the face value.
Min. Funding threshold: If the total order volume did not reach this threshold, the auction failed. All deposits will be returned. The threshold needs to be reached within the auction period.
Min. Bond price: The DAO offers the bond for that price at the beginning auction. The minimum bond may be lower than the current bond price if the auction is over-subscribed.
Max bond YTM: The maximum yield to maturity is the total delta in-between the minimum bond price and the face value at maturity. The shown YTM is an annualized rate and is similar to the term “APY” in defi.
Market-driven bond pricing
During the launch, the DAO offers its bond at the minimum price. They define the price during the offer creation. Once the offering is public, lenders can deposit USDC to participate in the auction. During the deposit, the lender defines which maximum bond price and hence minimum yield he accepts.
In the example above, the lender deposits 100 USDC and accepts a maximum bond price of $0.98. Therefore, the minimum yield accepted is 2.1% until the maturity of the bond. How could the bond price increase during the auction?
The answer lies in our market-driven bond pricing:
As seen in the previous section, the DAO defined the total amount of bonds issued and sold during the auction. It may happen that the auction is oversubscribed, meaning that more USDC had been deposited than the DAO planned to raise.
In that case, the market dynamics for the bond pricing starts to show its effect. Lenders accepting a higher bond price will have their bid filled first. The auctions algorithm collects all bidders including their maximum accepted bid prices. It fills the bids in a top-down approach until the total funding is reached.
It then builds the lowest price based on all filled bids, so each investor will purchase the bonds at the same price. You can think of it as a floor price that is being raised according to additional higher bids offered.
Investors on the lower end who did not accept any price above the minimum bond price might not have their bids filled. They will have their deposits returned.
TLDR: In summary, investors who want to bid during the auction need to define for themselves which minimum yield they want to receive on their investment. If the bond price stays below the defined minimum, the investment gets included in the auction, and the Investor purchases the bonds at the auction-wide floor price.
More questions?
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