Similar to other DeFi protocols, you can deposit assets into Ripe to earn yield, and you can borrow against those assets. And as with other protocols, when you borrow against your collateral, it’ll be at a safe, responsible loan-to-value ratio to account for risk and volatility in crypto markets.
But the big innovation for Ripe is that it has the capability to reach 100% capital efficiency. We don’t want the value of your assets sitting around, unproductive. So Ripe will borrow the remaining value (collateral value minus your loan value) and put it to work earning yield on your behalf. You can think of Ripe as a trusted borrower (the rules, policies, and constraints are all transparent, automated, and open source). And it’s all powered by Ripe’s native stablecoin, jUSD.
Let’s say you deposit a crypto punk with a floor price of $100k. While we love punks, NFTs are not very liquid, so your loan-to-value ratio might be something like 20%, making your max loan $20k. But even after you borrow, your Punk has $80k more of value, just sitting there not doing anything. It’s not capital efficient. While you won’t be able to borrow that remaining $80k, the protocol can.
In this example, Ripe can mint up to $80k of jUSD, as a loan to itself. That debt algorithmically increases or decreases based on the value of your punk (your collateral), to ensure jUSD always remains fully backed and collateralized.
Ripe then uses a bonding mechanism to swap the jUSD for a stablecoin like USDC, and puts it to work in classic, risk-adjusted yield-farming strategies like Curve, Convex, and Yearn. That activity occurs in The Endaoment. That yield is then shared back with you, the depositor. Your Punk is earning yield! That is capital efficiency! And you can rinse and repeat with every digital asset in your wallet. This is how Ripe lets you “earn yield on everything.”
It’s a revolutionary idea.
Today let’s go into a little more detail about how Ripe’s bonding mechanism works — as that’s a crucial component to transforming jUSD into a productive asset and helping the protocol achieve greater capital efficiency.
What is a Bond?
Bonds are a tool used by governments and corporations to help raise capital for specific projects and operations. When you buy a bond, you are basically giving the issuer a loan. A bond could be thought of as an IOU, where the issuer commits to pay you back a specific amount (principal + interest) at a specific date (maturity).
Market participants are often drawn to bonds because they are typically a low-risk, predictable method of generating yield. The issuer often has access to government money printers (municipalities, states, sovereign governments) or has strong credit history and/or balance sheet (major corporations).
Bonding in DeFi has similar characteristics. You lend money to the protocol, and the protocol commits to pay you back (principal + interest) at a specific time. The payback asset is typically one that the protocol can mint (money printer go brrrr).
Olympus shout out (3,3)
The Olympus bonding mechanism was the most unique, innovative primitive to come out of DeFi in the last 18 months (don’t @ me). OHM became one of the most forked protocols because of their novel approach to absorbing assets (including their own liquidity) via this mechanism. It helped dozens of projects bootstrap their treasuries to hundreds of millions of dollars in aggregate. I was an early Ohmie (3,3). Despite the many skeptics and haters, I’m still rooting for their success.
Much of our bonding mechanism is inspired by their work. We are building on the shoulders of giants. Zeus, Apollo, Wartull, Jawz, and so many others (too many to name)… are gigabrains whose work we appreciate. None of this would really be possible without the incredible work they did with Olympus bonds. It opened up an entirely new world of DeFi innovation. My DMs are open if they wanna chat/advise/consult on our bonding program.
How the Ripe Bonding Mechanism Works
Let’s remember the problem we’re trying to solve: how do we transform jUSD into a stablecoin like USDC so that we can then earn yield. The protocol has access to a lot of jUSD because it is the trusted borrower against the value of all deposits (minus user debt). We’re trying to turn every asset (like your punk) into a productive, yield-bearing asset.
Here’s more on how Ripe bonding works. Each of these parameters are configurable by governance/policy:
- Ripe operates on epochs. Each epoch lasts a certain number of Ethereum blocks. This allows the protocol to throttle bonding activity where/when needed, and to create an element of competition/scarcity.
- The bond capacity is the maximum number of jUSD bonds that can be purchased in a given epoch. When that limit is reached, you’ll have to wait until the next epoch to buy a bond.
- There’s a max discount. At the beginning of each epoch, the bond discount is 0%. The discount slowly, gradually, linearly goes up thru the duration of the epoch. The maximum discount is reached just before the end of the epoch. If you wait too long for that max discount, there may be no bond capacity remaining!
- The bond assets are the assets that can be used for payment in bond purchases. This will mostly be blue-chip stablecoins (USDC, DAI, USDT) so that The Endaoment can be earning. But there may be occasions where the protocol absorbs other assets (LP tokens, Curve Wars tokens, etc).
- The bond vesting length is how long it takes to be able to claim/withdraw ALL of the jUSD you purchased. Basically determines the maturity date of the bond.
- There is also a parameter for linear vesting. If linear vesting is turned on, then the bond participant can claim the proportional jUSD thru the vesting period (half way thru vesting, they can claim half the jUSD).
Those are some of the most important parameters for Ripe’s bonding mechanism.
Example: Alice buys a bond
Alright, let’s do an example. I’ll try to keep it simple enough that even a caveman can understand. The high discounts in this example are unlikely, but they make the example easier to understand.
- Let’s say the max bond discount in the epoch is 20%. We are halfway thru the epoch, which means current bond discount is 10%. There is still plenty of bond capacity remaining for Alice.
- Alice has 90 USDC and is searching for a strong, short term yield opportunity.
- A 10% discount would mean that for every 1 jUSD bond that Alice buys, she would only need to spend $0.90 of her USDC.
- Alice decides to participate in Ripe’s bonding program. She swaps her 90 USDC for a bond of 100 jUSD (10% discount).
- The 90 USDC that Alice spent was immediately sent to The Endaoment where it started earning yield (perhaps unlocking yield for your Punk!).
- Alice’s bond vesting length is 6 days and linear vesting is turned on. After 3 days, Alice can claim/withdraw 50 jUSD (half of her ultimate 100 jUSD payout).
- Alice could stake her claimed jUSD (to earn part of the gains from The Endaoment) or sell it back to USDC in our curve pool.
- Alice gets a juicy return! These returns are not realistic for Ripe in production, but hey it’s fun to dream!
Cost of Capital
In Alice’s example, the “cost of capital” for Ripe was 10 jUSD. Ripe acquired 90 USDC and gave out 100 jUSD. That puts the protocol in a deficit of 10 jUSD for that bond purchase.
As I said earlier, I don’t think these discounts will be real (they are too high). But nonetheless, there will be a cost of capital to run the bond program.
Having deficits from time to time isn’t a big problem. But to build a protocol that is sustainable longterm, it’ll be essential that we offset these costs with protocol revenue. I’ve mentioned some of those revenue sources in our post about The Endaoment.
I know the Olympus bonding program in the early days required a lot of experimentation, fine-tuning, iterations, and learning. I expect the same for Ripe. We will keep a very close eye on it to ensure it stays healthy, helpful, and net-positive for the protocol and its participants.
Creating demand for Bonds
The bonding program will only work if we can keep the cost of capital low. Another way of putting it: the Ripe bond market needs to be competitive so that discounts stay in a low-ish range that is sustainable. Big facts.
Here are a few factors that we think can drive demand for bonding. Much of this is a teaser for what’s to come in future posts:
- Demand for jUSD: Bonding mechanism allows people to obtain jUSD at a discount. Why should people want jUSD? Where and how can we create demand for jUSD? We’ll go thru that in a future post.
- Peg of jUSD: If people know they can swap jUSD back to USDC at a very, very low cost (ideally 1:1), they’re much more likely to participate in bonds. We’ve already talked a little bit about our Endaoment stablecoin redemption mechanism. In a future post we’ll talk about our Curve Wars strategy, and how crucial it will be to have thick, fat liquidity in our jUSD stablecoin pool.
- Juice Score impact: This is basically Ripe’s loyalty program. The higher your Juice Score, the better your Ripe economics will be (yield, loan terms, etc). Bonding is one of the best ways to increase Juice Score. We’ll have a whole post dedicated to Juice Score soon.
- Ripe Token distribution: Okay you’ve come this far, you deserve some alpha. Ripe’s bonding program will be one of the primary mechanisms in which Ripe governance tokens get distributed. Beyond the promised jUSD in a bond, you’ll also get some $RIPE. This won’t be a forever thing, but a way to really create demand for bonding early and bootstrap The Endaoment. The Ripe token ($RIPE) — and how value accrues to it — will have its own dedicated post soon.
That’s all for now. I hope this helped answer a lot of questions on how Ripe’s bonding mechanism works, and how jUSD is transformed into a productive asset. If we get this component dialed-in and working smoothly, then you’ll be able to earn yield on everything. 🚀