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All about ARC bonds
DeFi is without a doubt the cutting edge evolution of the finance industry, but one of the more recent exciting developments in the space is actually a concept that dates back over four millennia.
What has been will be again, what has been done will be done again; there is nothing new under the sun.
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The pictured stone tablet was unearthed in present-day Iraq and is denominated in grain. While things have moved on somewhat since those early days, the core concept of a bond has remained unchanged and hence they have clearly been proven as a sound financial instrument that has truly stood the test of time. Like the rest of our products, ARC is intending to first implement a basic bonds infrastructure as an Alpha release, before following up with enhanced offerings. The purpose of this article is to introduce the concept of bonds.
BONDS BASICS
Simply put, a bond is an instrument of debt, signifying an obligation for the bond issuer to repay a bond holder. You can pay someone money now, to receive a little bit more money back in the future. A popular low-risk investment during the previous century, the easiest way to understand bonds might just be to ask your grandparents!
Traditional bonds are frequently issued by governments — for example at the time of writing you could purchase a bond from the US government for $1000, and in turn receive $1004.20 back in a year’s time (nice). Companies can also issue bonds, which work in exactly the same way as a government bond.
BONDS MOVE TO THE BLOCKCHAIN
Bonds have become quite the hot topic in the cryptocurrency world recently. There are some nuances in how various crypto projects have implemented the concept of bonds on different blockchains, which will inform ARC’s approach.
Much like how it’s currently possible to swap ETH for ARC, bonds will soon be available for purchase with a predetermined set of tokens representing stable assets, specifically Bitcoin, Gold, & the US dollar. But once an investor makes their payment, instead of receiving ARC tokens in return a bond will be issued that entitles the holder to receive a payout of ARC tokens on a future date.
BONDS FOR HOLDERS (INVESTORS)
In return for postponing their receipt of the ARC tokens into the future, holders get to enjoy a discount to the market price of ARC. For example, instead of swapping $1000 of ETH to receive 3,000 ARC, a bond that pays the holder 3,000 ARC in one week’s time might only cost $910 to buy now, meaning the bond holder gets to enjoy a 9% discount on their purchase. The end result for the investor is essentially the same however, being an exchange of funds for tokens.
BONDS FOR ISSUERS (ARC)
The bond transaction is not facilitated by a DEX and instead ARC receives the bond payment directly, hence improving transaction efficiency and reducing the reliance of the provision of liquidity. Accumulated bond payments are held in a project treasury which maintains an optimized mix of stable assets to ensure maximum short- and long-term support. This helps to provide a degree of inherent value and financial stability to ARC, making it a much more attractive investment and hence providing positive pressure on the token price.
In theory, the market cap of ARC cannot fall below the total value of the treasury
In the event that ARC’s market cap (the number of circulating tokens multiplied by the price) were to fall below the total treasury value, treasury funds could be deployed to purchase ARC tokens on the open market on behalf of the project. This process that could be repeated indefinitely to ad positive price pressure and defend the market cap.
As an example, consider the following theoretical calculations using the total value of ARC farms as the treasury value. These figures are for illustrative purposes only:
→Circulating ARC tokens: 300m
→ARC token price: $0.30
→ARC market cap: $90m
→Treasury value: $45m
→Buy-back below token price: $0.15
LIQUIDITY BONDS
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A slightly more complex option that we are investigating is to allow the purchase of ARC bonds using LP tokens. In this case the holder is still receiving a bond that will pay out in ARC tokens. However, once LP token payments are transferred to ARC’s treasury, they can then provide liquidity for the token indefinitely. ARC assumes the risk of impermanent loss of the LP tokens, but benefits from not having to pay out LP rewards to incentivize liquidity provision and also receives passive income from transaction LP fees.
CONCLUSION
We know you’ll still have lots of questions about ARC’s plans for bonds! Our developer team is still building up the bonds interface and smart contracts, so closer to the release date this guide will be updated with more detailed information about how to purchase bonds on the ARC dApp.
Last modified 2mo ago