Liquity's Chicken Bonds: Will They Fly?

Bootstrapping liquidity is a challenge that many protocols face at some point in their existence. Typically, protocols distribute their “precious” governance tokens via liquidity mining programs to attract capital. However, these incentive programs are often expensive and ineffective in retaining liquidity over the long run. When rewards start to taper off, mercenary capital leaves to a more lucrative yield farm, leaving the liquidity pool no better off than before.

In response to this issue, Olympus DAO and Tokemak both individually developed mechanisms to accumulate protocol-owned liquidity (POL) — i.e., liquidity controlled and retained by the protocol as opposed to the unpredictable and fleeting liquidity owned by users. Yet another solution in the market is “chicken bonds” — a bonding mechanism developed by Liquity Protocol and currently applied to Liquity’s LUSD token. In this report, we will be exploring how chicken bonds wo