TOSv2 phase 1 parameters: ETH bonding
How parameters work for ETH bonding in phase 1 of TOSv2
Special thanks to Keven.J, Suah.K, Praveen.S, Zena.P, Ale.S, and Darren.K for productive feedback on the posting
You can check the Korean version of the article here.
Bonding is the minting mechanism of TOS in TOSv2. TOS is minted only if users provide designated assets like ETH with Treasury through bonding.
For TONStarter, bonding allows the TOS ecosystem to grow based on demand with decentralized minting logic. Additionally, bonding can attract liquidity into the platform, based on which promising projects flourish.
As for users, bonding boosts the intrinsic value of TOS. It is also an opportunity to purchase TOS at a discount with staking or locking benefits.
For now, all the descriptions of the bonding market above may be hard to understand. You do not have to worry about it. I will guide you through the working mechanism by explaining each relevant parameter carefully.
Note 1: Only ETH bonding is available in phase 1.
Note 2: You can check the article on parameters related to staking and locking here.
Bonding
Market duration
All sorts of markets have their opening hours. The bond market in phase 1 of TOSv2 is not an exception.
The bond market in phase 1 of TOSv2 is open for 2~3 months. We may open bond markets multiple times based on market conditions.
Minimum lock-up period for bonding
Bonders have to wait a certain amount of time to get TOS. Otherwise, everyone bonds ETH for discounted TOS and immediately swaps bonded TOS for ETH, taking big profits without risks. Of course, it will bring down the TOS price.
The minimum lock-up period for bonding in TOSv2 is five days, the same as Olympus DAO. If you want longer-term bonds, lock-up periods ranging from one week to 156 weeks are possible. While a five day bond gives only LTOS, a longer-term bond offers LTOS and sTOS. Bonders garner such benefits because bonded TOS are auto-locked.
Bonding price & Bonding price discount rate
The bonding price determines the amount of TOS given to bonders. It is the current TOS market price discounted by the bonding price discount rate.
For instance, if the TOS price is 1 TOS = 100 ETH and the bonding price discount rate is 10%, the bonding price equals 1 TOS = 100 ETH * (1–10%) = 90 ETH. You can buy 1 TOS with 90 ETH through bonding, 10 ETH less than the average swap.
In phase 1 of TOSv2, instead of applying the fixed discount rate to bonding, we will manually adjust the bonding price based on fluctuations in the TOS price. It is to discourage attempts to manipulate the bonding price.
Let’s continue to assume a 10% bonding price discount rate. A malicious user can get an artificially low bonding price by dumping TOS right before bonding. In the example above, the user obtains 1 TOS with only 45 ETH.
As the five day lock-up period comes to an end, the attacker tries to pump the TOS price up by buying TOS. After unstaking 1 TOS and swapping it for 100 ETH, the attacker takes 100 ETH — 45 ETH = 55 ETH in profits. Unless the costs related to price manipulation outweigh such profits, it would be hard to resist the temptation. TONStarter can struggle with the issue without proper actions, given that the TOS liquidity is relatively thin now.
Then, how can we adjust the bonding price to tackle the problem? First, we set the initial bonding price so that the initial bonding price discount rate equals approximately 7%. The number enables us to obtain the desired minimum/maximum bond per transaction, as discussed later. Considering the TOS price at the deployment date(2022. 11. 17) is 0.57 USD, the initial bonding price in the first bond market would be 0.57 * (1–7%) = 0.53 USD. After that, we can think about two scenarios: 1) TOS price goes down and 2) TOS price goes up.
- If TOS price goes down
If the TOS price goes down, the bonding price discount rate will fall. For instance, the discount rate becomes negative if the TOS price is less than 0.53 USD. Of course, potential attackers cannot accept such an unfavorable condition.
After assessing the situation around the price drop, we will consider cutting the bonding price so that the discount rate again becomes around 7% to stimulate demand. Dishonest actors must wait for a certain amount of time and hope a share of the capacity is left for them even after the positive decision, which is risky. They may end up paying the price manipulation costs only.
- If TOS price goes up
If the TOS price goes up, the bonding price discount rate will rise. For example, the discount rate doubles if the TOS price is up by 8%.
We believe it is unlikely with the remaining capacity. Few people will choose to swap ETH for TOS when they can get a better price in bonding.
2022. 12. 12 updates: The initial and target bonding discount rate may not be 7% if we change other parameters. For example, if we increase the maximum bond per transaction, the initial and target bonding discount rate can be less than 7% to discourage short-term profit-seeking activities.
Minimum bond per transaction
The minimum bond per transaction is the minimum amount of ETH recommended to bond per transaction. Although it varies depending on the gas price, the minimum bond per transaction in phase 1 of TOSv2 is supposed to be approximately 0.1 ETH.
Why? First, bonding, like staking, also involves gas costs, so if you bond too small, the gas costs will be too much compared to the benefits. At the same time, we want to ensure that average users who do not have many ETH afford to bond. 0.1 ETH satisfies both conditions.
Then, if you bond a minimum bond per transaction, what happens? The answer is that you take staking rewards at the expense of staking and unstaking costs, similar to staking. Based on the cost/benefit profiles of five day bonding and staking, the following relationship should hold:
bonding gas costs -discount benefits = staking gas costs
The table above shows the combinations of bonding price discount rate and gas price meeting the equality for minimum bonding per transaction. We get the desired number with a 7% bonding price discount rate.
Maximum bond per transaction
The maximum bond per transaction is the maximum amount of ETH that can be bonded in a single transaction. The maximum bond per transaction in phase 1 of TOSv2 is 0.3 ETH.
Without limitations on the amount of ETH bonded in a single transaction, whales can easily reap enormous short-term profits because bonding gas costs are fixed, and discount benefits are proportional to the bonding amount. For example, swapping a large amount of bonded TOS for ETH right after a five day lock-up period can be lucrative as long as the TOS price is relatively stable. The problem can get more serious when gas prices are low because it will further reduce the bonding gas costs.
The repetitive version of such an example is called ‘bond cycling attack.’ An attacker can obtain more TOS and ETH by repeatedly bonding ETH and swapping TOS. Most importantly, no additional ETH gets bonded; instead, only the initial bonding amount gets bonded and swapped continuously. Of course, it will drain ETH from liquidity pools, and the TOS price will crash accordingly.
With a 7% bonding price discount rate, the maximum bond per transaction worth 0.3 ETH effectively restricts the rate of return for five day bonding. It will reduce incentives for short-term profit-seeking activities.
2022. 12. 12 updates: The maximum bond per transaction can change to stimulate demand.
Target runway
In TOSv2, bonding is the minting mechanism of TOS. Users bond ETH for TOS, and Treasury mints TOS with ETH. By the way, the staking APY is 10% in TOSv2. Thus, without bonding, we cannot print new TOS, and stakers may not be rewarded due to insufficient TOS reserves in Treasury.
We set the target runway to avoid such unfortunate events. The runway shows how long we can distribute staking rewards without bonding. The target runway in TOSv2 is about six years. Of course, the target runway assumes that all the ‘stakable’ TOS are staked. Therefore, the actual runway may be much longer.
Note: The stakable TOS are TOS held by EOA accounts.
Minting rate
The minting rate is the amount of newly minted TOS per ETH when users bond ETH for TOS. For example, if the minting rate is 100 TOS / ETH, 100 TOS gets minted whenever users bond 1 ETH.
In TOSv2, with 14,000 TOS / ETH as the target minting rate, we will start with the higher minting rate and gradually lower it towards the target.
Then, why 14,000 TOS / ETH? As already mentioned, we must be prepared for a ‘no bonding’ scenario where new TOS cannot be minted, and stakers may not obtain rewards. In other words, a sufficient amount of initial treasury reserves is necessary to cover staking rewards. 14,000 TOS / ETH enables us to amass six years(target runway) of staking rewards.
Then, why do we begin with a minting rate higher than 14,000 TOS / ETH? You should know that the existing TOS in circulation has no ETH as collaterals. Therefore, we plan to deposit 2,000 ETH to maintain consistency with the newly minted TOS supported by ETH in the future.
By the way, if the initial minting rate is too low, the size of initial deposits gets too large. It makes TONStarter susceptible to unexpected events. For this reason, we will deposit 200 ETH in Treasury every month for ten months. Of course, the initial TOS supply, including the initial TOS reserves, should be the same. Consequently, the initial minting rate will rise.
As time passes, the minting rate will fall with additional ETH into Treasury. If necessary, we can burn some TOS in Treasury to reach the target minting rate.
You can check more details on the minting rate here.
Capacity
Capacity is the maximum bondable amount of TOS in a bond market. It is also the maximum amount of ETH TONStarter wants to procure through a bond market.
The capacity of the first bond market in the phase 1 of TOSv2 is 12,384 TOS or 6 ETH.
The number reflects the lack of TOS liquidity and recent market turmoils. If the capacity is too large, an excessive amount of TOS may be minted. Combined with abrupt meltdowns, it can ravage the thin liquidity, thereby bringing down TOS price.
So, it is evident that we need to limit the capacity, but how much? Well, If the TOS price goes down by more than benefits for bonders, there is no reason for bonding. Such benefits include 1) discount and 2) staking rewards during the lock-up period. Therefore, our goal is simple:
% of TOS price(ETH) down ≤ discount rate + five day staking rewards (7.7%).
TOS is traded in Uniswap liquidity pools. Uniswap utilizes the concept of ‘ticks’ for adjusting token prices. For example, in TOS pools, prices change by 0.6% per tick. Therefore, we can calculate the number of ticks corresponding to a -7.7% change in TOS prices (in ETH) and add the liquidity in these ticks to the capacity. 6 ETH is the product of such calculations.
Note: We assumed that all bonders chose five day bonds and swapped bonded TOS for ETH right after the lock-up period. With the liquidity situation in mind, the capacity in the following bond markets can vary if the assumption does not hold.
Allocation for Tokamak Network team, TOS DAO, and TON DAO
A certain percentage of the newly minted TOS through bonding goes to the Tokamak Network team, TOS DAO, and TON DAO to cover operating costs. More specifically, after bonders get their share, 15%, 5%, and 1% of the remaining TOS are distributed to Tokamak Network team, TOS DAO, and TON DAO, respectively.
Implications
- Encourage user-centric growth
Bonding enables TONStarter to grow based on demand with decentralized minting logic. In other words, the platform can expand its reach only if users sympathize with its ideals and values.
- Attract liquidity
Bonding can attract liquidity, based on which promising projects flourish. For example, if users are allowed to bond not just ETH but TOS/ETH liquidity in the future, bonding can help us reinforce the lacking TOS liquidity.
The ample liquidity within TONStarter will reassure stakeholders by laying the ground for efficient trades. Of course, it will facilitate the funding for nascent projects.
- Boost intrinsic value of TOS
Bonding boosts the intrinsic value of TOS. Since the initial minting rate is 125,000 TOS / ETH, 1 TOS is now backed by 1/125,000 ETH.
As we approach the target minting rate, the intrinsic value of TOS will also increase. In other words, 1 TOS will be eventually supported by 1/14,000 ETH.
