Shade Bond Issuance

Hi Shade community!

The next big product launching for Shade Protocol is Bonds! Why are bonds so great?

Bonds allow the ShadeDAO to sell SHD (or any snip20 it owns) directly to a user at a discount in order to acquire a different asset it desires. Price oracles are used to determine the exchange rate so that a user won’t have to worry about slippage they would normally experience on a DEX. What prevents users taking discounted SHD and immediately dumping it for profit? The user has to wait a lockup period before receiving the SHD. This lockup period is totally configurable so it could be any period, something like 7-21 days might be typical, but you could theoretically do 1 year or even longer. One of the things I’m personally most excited about with Bonds is the opportunity for the DAO to purchase LP tokens from users to begin building it’s protocol owned liquidity. This will be especially important with the coming launch of ShadeSwap in a few months.

We really want the community to be involved in how bonds are issued and what assets the ShadeDAO would acquire. Once governance functionality is live for Shade Protocol, SHD stakers will be able to vote on bond issuance.

  1. What assets would you like to see the ShadeDAO purchase using bonds?
  2. What lockup periods would you like to see if a user is buying SHD from the DAO?
  3. What discount rates should be applied based on the above lockup periods?

If you have any other question about Bonds and how they work, feel free to drop those in here as well.

I look forward to the discussions!


I’m really excited for Shade Bonds. I think it would be very good when we begin to start with lower discounts and shorter lockups. This is important because bonding can also be thought of as arbing the difference between the book value and market value of Shade. The higher discounts given the more you should assume the market price will reach that value. I made some samples of what different lock ups might look like in APR/APY terms.

sample yields

I would suggest we focus initially on assets supported by IBC until the Cosmos has some consensus around bridging solutions. There are two which I believe make the most sense: SCRT and ATOM. I believe SCRT as our native chain token is important, and this bond can be done in the form of SCRT:stkSCRT LP perhaps. The second is ATOM as the reserve currency of the Cosmos and a signal that Shade is an IBC protocol.


Love the shade bonds. I think a minimum lockup of 7-14 days should be implemented, I also like the idea of locking up for a longer period, however, especially this year has shown us 1 year in crypto is a lifetime.
In terms of assets, I would love to see SCRT and ATOM first (yeah I’m biased) and of course other IBC assets, I think it would be great and important to show love and welcome other IBC communities, showing them a “second home” in the cosmos. Furthermore, I think we should consider BTC, I believe nomic is about to launch the protocol and personally, I would like to see ETH (haha, that’s sth I’m biased as well), though, we should agree on one bridge or bridged asset respectively, whatever this might be.
I really like the idea of protocol owned liquidity. I think all LPs should be paired solely with stables and not only SILK but also some others. In this case the treasury will be able to accumulate and diversify non volatile assets, providing sustainability during volatile markets or simple crumbling of the prices.

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Thanks for initiating this discussion Austin.

I believe that the DAO’s bonding policy needs to be crucially thought of, and should always aim at the long-term growth of the protocol and avoiding any emotions.

  • What risk are we willing to take with our Bonding policy? Will we go only for risk free assets or are we willing to take the bet on emerging protocols?
  • What sell pressure on SHD are we willing to endure while growing the treasury ?
  • What revenues should we expect for the treasury ? Will we hold or put assets at work?
  • Do we focus on our own liquidity or do we start looking for yield-generating treasury?
  • Would we be willing to put at work our treasury on other protocols, following bribes, partnerships or change in strategy ?

A short sighted investor (which are the most common in the space) would approach Shade bonding as follow:

  • Provide the requested asset for discounted SHD
  • Wait for the end of the lock period
  • Dump and take profit

During DeFi Summer 2.0, Olympus innovated in this scene by emitting bonds to own the majority of its liquidity on the Ohm-DAI pair, before aiming at other assets.

In this case, if a short sighted investor as above decides to dump the discounted asset, he would be doing it within the liquidity owned by the treasury.

At the moment, liquidity on the main SHD-sSCRT pair is as follow, according to Secret Analytics

  • 139K $ on SecretSwap
  • 187k $ on SiennaSwap

I would be in favour we focus initially on the above pair SHD-sSCRT, so the treasury owns most of the SHD liquidity, to compensate with the SHD sell-pressure that may result from investors taking advantage of the discount.

Once this liquidity is secured, I would completely agree with @Ranger_Ranger in opening up to other IBC assets such as ATOM, safe yield generating pairs such as scrt/stkd-SCRT, or even go with broader single-sided reserve assets such as sWBTC, or paired with the soon-to-be-released sBTC from Shinobi.


Is Shinobi still a thing?

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Yes, they released a Medium article for their V2: New Shinobi V2 Model - Shinobi Protocol - Medium

So a stable pair sBTC/sWBTC (from Axelar, as our bridge will be decommissioned) is a very good way for the treasury to be exposed to Bitcoin in the mid-term future, once the treasury depth is secured.

But that is for the third-step of the bonding policy imho.


Greetings community,

I’ve been thinking about Bonds lately and the role they will play with ShadeSwap. Fundamentally, the current model of LP rewards is quite simply not cost effective in relation to bootstrapping long term sustainability, and I feel that Bonds are actually a more efficient means by which we can sustainably build out compounding growth that is owned and not rented.

Before I make the petition for bonds to be the primary mechanic bootstrapping ShadeSwap (as opposed to LP emissions), let us first define terminology to make this claim as easy to understand as possible.

Disclaimer: the following terms below will be used for educational purposes due to the terms being helpful for transmitting concepts, and in no manner represent actual underlying definitions of Shade Protocol mechanics and definitions.

Equity: decentralized ownership of a protocol - decentralized governance collectively can determine where long term revenue and rewards are directed too (please see above disclaimer)

Asset: tokens that hold value

Service: the act of helping or doing work for someone

Inventory: assets that a business holds for the ultimate goal of resale, production, or utilisation.

Let’s start with the problem of DEXs:

DEX “Z” provides a trading service by creating a liquid market of digital assets that can be traded between. Z is obsessed with deepening liquidity because the deeper the liquidity, the better the service that is provided to users (deeper liquidity means less slippage and less volatility).

In order for Z to be sustainable into perpetuity:

trading fees >inventory expenses

That is to say, revenue (trading fees from trades) from providing the service must be greater than the cost of providing the service (cost of emissions & development). In order to attract sufficient liquidity, Z feels the urgency to emit rewards at those who can bring liquidity to Z such that users will trade on Z versus alternative options.

In DeFi, LP providers are happy to provide the service for the DEX assuming the following assumption holds:

(LP rewards on DEX + trading fees) / risk) >alternative yield options

But what is Z giving to LP providers in return for their service of renting liquidity to the DEX? Z is emitting equity at liquidity providers in exchange for a service that the LP provider is giving Z.

Think about the significance of this in relationship to a fictional real world example:

Bob runs a racing track. Bob has a problem: he has no race cars for people to use. Zach has race cars - he agrees that Bob can use his race cars on a daily basis, but instead of paying a fixed amount of assets to Zach for providing the race cars, Bob instead has to pay equity to Zach. Zach is earning not only a claim on the underlying assets and revenue of the racing track, he also has the ability to sell his equity whenever he’d like to anyone else at any time. Finally, Zach has no fixed obligations to the race track. He can take his race cars away to the next highest bidder whenever he’d like: damaging the service that Bob is providing and reducing the number of customers that will use the race track.

I’d like to reiterate the absurdity of what DEXs are doing: they are emitting equity at individuals that are providing a temporary service - and what is even more absurd is that the revenue captured from the service provided by LP providers does not outpace the value emitted at LP providers. This is fundamentally not sustainable.

But Carter, this DEX model clearly is operating under a “loss leader” assumption, once there is enough liquidity, trading fees, and proof that Z is safe then surely this equation starts to turn around? I would agree with you except that LP providers can pull their liquidity whenever they would like based on their risk/reward profile and projections of alternatives. Under the Z model, liquidity that is present on a DEX today is not a promise that it will be there tomorrow.

So what is the alternative? Simply put, stop emitting equity for a service that is not permanent and is not creating value accrual that outpaces the expense. Instead, emit equity for assets that the protocol will own into perpetuity. This is conceptually what Shade Bonds unlock: the sale of SHD for assets that ShadeSwap can use, forever.

This is significantly more sustainable: if depth of liquidity is the service that ShadeSwap is providing, and the deeper the liquidity the better the service, than we should aim to create the following feedback loop:

  1. Acquire assets
  2. Liquidity provide the assets
  3. Fees are generated from the service provided
  4. Use revenue from use of the service to acquire more assets
  5. Liquidity provide the assets acquired by revenue (service just got BETTER because liquidity is now deeper)

With an extremely patient approach to building out a DEX (say a decade long vision) as long as the DEX is able to continue to grow, this feedback loop should create a compounding effect where the service is always improving, and the nominal number of assets being used to create liquidity that is traded across should never decrease.

How do you kick-start the above loop? Simply put, by trading one valuable resource (SHD) for another desired asset (SCRT, ATOM) using Shade Bonds. A shout-out to DRO here, they are attempting to jumpstart the above loop using revenue from derivatives, which is another fascinating way of kickstarting the above feedback loop. Shade Protocol plans to use its various DeFi primitives (derivatives, lend, stablecoin) to all help contribute to the above feedback loop.

So, we swap out bonds for LP emissions - what does this tangibly look like? First, let’s briefly return to LP rewards.

What a user might do with their LP rewards:

  1. Sell 100% of LP rewards
  2. Stake LP rewards
  3. Some combination

If we assume a user will sell 100% of LP rewards, then by the same logic we should assume that all SHD acquired by a user from bonds will 100% be sold on the open market. In the previous model of Z, DEXs have been okay with this assumption. They didn’t have a choice really, they had to be okay with that trade-off. Well, with bonds we have to be okay with that assumption too. They might sell all of the SHD tokens acquired from bonds, but we end up with permanent assets vs a rented service, so all around we are pretty content with the trade.

Osmosis is an interesting case study on LP providers and how much they sell versus stake. 45% of 300M emissions in Y1 went to LP rewards. 25% went to staking. What was the net result? The staking ratio of Osmosis is ~35%, with the staking/LP ratio being 0.55 (you could think of this that for every $0.55 of rewards for staking, there is $1 worth of LP rewards).

Some Osmosis data

This is very interesting data as (45% LP rewards + 25% staking rewards) / 2 = 35% staking ratio! That is to say, roughly speaking the staking ratio will be a meeting-in-the-middle of LP providers taking a percentage of rewards and putting it towards the staking opportunity. This is a simplification of a number of variables, but as a general rule makes sense. Some rules Shade Bonds should take away from this rough data:

  • The higher the staking rewards in relation to Shade Bonds emissions, the more that Shade Bond purchasers will stake their acquired SHD vs selling it

This is where SHD protocol has an interesting conceptual advantage over other staking protocols. In traditional staking schemas, staking is essentially a scarcity mechanic where users that are staking get paid rewards for absorbing volatility by not being able to sell their equity immediately.

With Shade Protocol, SHD staking collateral provides a service: arbitrage + scarcity + liquidity provision (via SHD ←→ Silk bounded conversion minting). As such, having a high staking ratio in relation to Shade Bonds is not a disadvantage as the service being provided by SHD stakers is quite compelling. This follows one of the original principles of Shade Protocol:

“In order to realise the rewards of SHD staking, you must take on some level of risk to help stabilise the underlying protocol.”

Now onto the asset acquisition participant: I call this “Asset Providers” i.e. “AP” instead of LP “Liquidity Provider”. An AP participating in “Bond Mining” (the process of continually rotating through bond opportunities in a profitable fashion) has a different set of risks compared to an LP provider. Let us examine them:

  • If an AP provider deposits assets in Shade Bond, and the price of SHD decreases beyond the discount rate then the AP provider is net negative
  • AP provider must absorb the cost of slippage when they receive their SHD, as they need to retrade SHD back to the demanded asset by the new set of issued Shade Bonds. This process of continual rotation is what I call “Bond Mining”.
  • Vesting length

So how can we reduce risk for the AP here?

  • Deeper the discount, the less risk the AP is taking on
  • Have a deep liquidity for bond miners rotating through bonds, the deeper the liquidity on, say, an ATOM/SHD pair, the less risk the bond miner is taking. Note that this feels like a pretty intuitive risk that gets resolved as the protocol will immediately turn around and deepen the exit liquidity that the bond miner is rotating through.
    • ATOM → Deposit in SHD Bond
    • User receives SHD at end of vesting period
    • Sell SHD for ATOM
    • ATOM → Deposit in SHD Bond (but with a grown position due to discount)
  • Short vesting lengths

Now to inverse the perspective, when the protocol reduces AP risk how does this increase protocol risk?

  • Deeper the discount, the worse trade that is being made by the protocol (I’m giving you equity at a cheaper rate than what it is actually worth)
  • No real additional risk here, the opportunity cost here is that the liquidity used on the DEX by the protocol can’t be used in other Shade primitives
  • The shorter the vesting length, the quicker bond miners can negatively impact SHD price, but note we have already accepted the fact that 100% of SHD may be sold - as this is the same assumption that LP emissions assumes. Obviously you want to reduce the risk of SHD being market sold directly, and this brings us back to our above point about having SHD staking emissions be quite high

Osmosis daily LP emissions in Y1 (in relation to Y1 emissions) is ~0.037% of rewards per day. Osmosis daily staking emissions in Y1 (in relation to Y1 emissions) is ~0.021% of rewards per day. I would posit that SHD protocol should mirror these numbers but instead swap out LP rewards for daily bond emissions.

This would look like the following: ~902k SHD earmarked for Y1 staking & LP rewards. We want to mirror the 0.55 stake/LP ratio initially which would put us at the following:

Staking: 9.75% down from 12.36%

AP / LP: 17.61% up from 15%

SHD originally had a staking/LP ratio planned at .824 → this ratio puts a higher emphasis on rewarding those providing the service of scarcity + locked rented liquidity + arbitrage + ownership of tokens in comparison to AP providing. I would posit that the currently planned ratio suffers from the same issue we are trying to avoid with DEX Z, which is overvaluing rented services. Grant it, staking is a unique component of any protocol as it is the feedback mechanism that rewards tokenholders for being….tokenholders. But hopefully we can all collectively understand the wisdom behind not overemphasising on the value of staking out of the gates in relation to where emissions can be directed towards permanent stability in the form of services built on top of protocol owned assets and liquidity that eventually is kickback to stakers.

Some questions at large I have on my mind:

  • If we know X amount of SHD is earmarked on a daily basis, do we keep deepening the discount until someone APs the bond until max-out?
    • That is to say, do we have a floor value of issuing bonds at?
  • The role of Silk bonds
  • Minting bonds vs using existing SHD assets on the treasury
  • The split of emissions between renting LP vs bond miners

In summary, I would posit that ShadeSwap should be built out with a ten year vision in mind. This means patience with emissions, and making sure emissions are maximising long term sustainability & ROI. I would posit that protocol owned assets are the best emission trade. Bob should be selling equity in return for the business permanently owning Zach’s race cars as opposed to selling equity for the temporary service of Zach providing race cars.

If we bootstrap the DEX properly, we will eventually hit a level of protocol owned assets where revenue from the protocol can continue to deepen liquidity via protocol asset purchases (perhaps in the form of a bond sale using a non-SHD asset) instead of token emissions in the form of SHD. That is what true sustainability looks like. Note, LP rental is in essence, a user attraction mechanism - and should be thought of as such.

If done properly, the service provided by ShadeSwap will only continue to improve. Things like UI/UX is of course a moat, but sustainable tokenomics that create compounding growth are the greatest moat of them all.

-Carter Woetzel


Carter - in this regard, would it be more beneficial for ShadeBonds to attract wider but thinner liquidity rather than narrow but deep liquidity?

ShadeDAO will have to acquire a wide range of assets so that it can provide liquidity to a number of high-value assets. Having exposure to each of these as early as possible means you can earn more and more of each asset slowly over time - and there’s no immediate rush to gain terminal velocity on any of these pools.

This also shouldn’t be a problem because there is an understanding that SHD will need to be emitted to obtain liquidity providers for assets until we reach a healthy size and I don’t think the amount emitted would vary with each of these approaches.


Fascinating point,

I really like your use of the word “terminal velocity” - I guess the greatest risk of thinner liquidity / wider coverage is the DAO may invest in an LP position tied to an asset that does not have trading demand over the long haul. I.e. Shade Bonds are speculating on the long term viability of the assets it is acquiring. Just worth considering. But at a high level, you bring up an interesting point. Would be curious to have others chime in here :slight_smile:

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Of course there is more demand for certain assets. But users want variety and choice. Crescent for example has good UI/UX but only 4 assets. This in my case, was not enough for me to keep using it.
Osmosis is a good reference as it is the most used in cosmos and offers many assets but still;
Dexes that have most users are uniswap and pancakeswap. I believe it is mainly because people can buy almost any crypto there.
I really couldn’t agree more with what Orageux expressed.

I know this is about bonds but since it’s so heavily about dex liquidity, I want to share some thoughts on dexes as they stand.

Fundamentally, LPing is not really about providing swap liquidity for a token pair. LP positions being used for swapping is an emergent property of a volatility-neutral market making position. What I mean by that is, when someone enters an LP position, they are taking the position that the two assets in this pair will not deviate from their current price ratio. Any deviation from the current price ratio when the position was entered is a loss - this is the impermanent loss. As it happens, the constant product formula is useful for both a volatility-neutral automatic portfolio balancing algorithm and a “bottomless”, price-agnostic token swapping pool, but the true origins of the constant product formula lie in the early days of algorithmic market making and very specific portfolio construction techniques for very specific outcomes.

So, what this means is that for liquidity providers, it’s a losing proposition to provide liquidity on a token pair where the underlying assets will change price. Does that make sense to anybody? Can you tell me any crypto, or really… any equity that obeys that rule in the long term? Stablecoins do, and, well, unsurprisingly, they attract orders of magnitude more liquidity than any other liquidity pool. So what that means is that it’s literally bad investing to LP basically any token except stables for any reasonable amount of time with the expectation of profit unless those yields are subsidized by artificial token incentives.

The protocol can “circumvent” this problem with bonds, but that just means the protocol is going to take on the “incorrect” position of LPing volatile assets, distributing those losses among the rest of the token holders over time.

One partial solution is what Uniswap V3 has done, which allows LPers to select the liquidity range they want their funds to apply to. This is still fundamentally a volatility neutral position, but you are allowed to select the range you are expecting volatility to remain neutral within, and the worst case scenario is that you just don’t make any money from fees when it trades outside of that range, as well as suffer a bit of impermanent loss (but significantly less than you would have if you LPed ‘normally’)

Another solution is the central limit order book (CLOB), which is well documented to be by far the most capital efficient exchange format (fun fact, AMMs have existed for decades! there’s a reason nobody uses them for exchanges outside of crypto). The downside here of course is the complexity involved in LPing in this style of exchange. This can be abstracted slightly with a “market making” protocol but, really, at that point you’re just building a slower Uniswap V3 with extra steps.

All this to say that I think the long term solution to the liquidity problem is more capital efficient markets. The objectively correct answer is all exchanges in the future will tend toward CLOB once crypto has enough active power users (specifically, high net worth individuals and competent market making firms to LP on CLOBs). But that doesn’t help us right now, I guess. So what conclusions do I think we can draw from all of this?

Ask oureslves this question: if we go the route of using bonds to build liquidity for our dex, operating under the assumption that we simply have no choice but to use the Uniswap V2 style pool for now for the sake of user experience, are we okay with the protocol accepting the losses involved with holding LP positions long term?

The advantage of “renting” LP is short term capital efficiency - $1,000,000 of invested capital in the form of emissions will attract more liquidity immediately than market selling $1,000,000 worth of our token in low-liquidity pools and using that money to buy our own LP. If we use bonds, we do avoid that problem, but we are also kind of trading the short term pain (in the form of depressed token value) for sustained long term pain (in the form of decreasing treasury value, as well as limited dex liquidity duing the critical growth phase), so I think we will still need some kind of long term strategy for solving liquidity issues that doesn’t rely on either renting liquidity or buying liquidity with bonds.

One thing is definitely true with the bond approach - the cost of taking this “losing” position is equal to the impermanent loss incurred from holding the position + the upfront equity cost of buying the LP, which will likely cost much less than renting liquidity with emissions will long term, so it’s a better immediate solution, but I don’t think it’s the solution.

The last point I’d like to make about dex liquidity is that the problem we’re really talking about here is not really liquidity, but swap depth. $1m of liquidity in a well managed uniswap V3 pool is multiple orders of magnitude better than $1m of liquidity in a uniswap V2 pool. Per the uniswap V3 docs, in a uniswap V2 stablecoin pool, like USDC-DAI, only 0.5% of the liquidity in that pool is allocated to trading around $0.99 and $1.01. So if there is $1m of liquidity in a balanced USDC-DAI pool, you can only make a $5000 swap before you exceed 1% slippage. That’s completely asinine! But I think it highlights just how god awful uniswap V2 pools are for facilitating exchanges, and I think that means there’s just no good solution to the liquidity problem that isn’t just using an entirely different method of exchange.


If we are talking 10 years, order book needs to be on our minds. Will trade fees help to grow protocol owned liquidity? Maybe half to Treasury half to POL?


Wow, a lot to digest here. Outstanding thread and super important.
I absolutely support the long term sustainable vision for the protocol but will have to digest a bit more before adding my 2 cents apart from these thoughts, i would like ro see order book in the roadmap. And love where we are foing with bonds to bootstrap.

For now thank you to all contributing :muscle:

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Interesting point. I think this goes back to the question of how we should determine what assets go to the DAO? In my mind, there should be more emphasis on hard, proven L1 assets. In the scenario you’re bringing up, I’d rather narrower but deep liquidity. Especially protocol owned liquidity on the highly regarded assets.


Well stated. I would agree the ‘solution’ that Carter is bringing up is likely not the final, best solution. However, in my mind I would like to think that bonds are a better, safer solution that can be deployed ASAP. I would say there’s no real downfall over this compared to traditionally renting LP.

If the purpose of the thread is to see what we should implement shorter term, then I would say yes let’s push bonds out for narrow but deep liquidity on assets we want the DAO to hold. Outside of that I think we should still be planning long term strategies like this, but short-term (less than 10yrs) we should be looking into other DEX alternatives.


Can we consider a volatility index for DAOs assets? Something like VIX for USD but we could adjust the index to include for example 7 assets out of whole 20 assets for example depending on what is needed to be calculated
So when our volatility index is showing low volatility, we can use longer lock-ups with deeper discount and shorter lock-up periods with low levels of discount for when the assets are being volatile

Just a random thought

This is a fascinating topic and thread.

One thing that might be worth pointing out is that the bond ‘discount rate discovery’ could be framed as a dutch auction, which might help the research into the game theory mechanics and answer questions such as:

If we know X amount of SHD is earmarked on a daily basis, do we keep deepening the discount until someone APs the bond until max-out?

If there is a daily quota for SHD bond issuance, the discount rate could begin at 0% (e.g. around 00:00 UTC) and increase by a fixed amount of basis points (or fractions of a basis point more likely) every block until an AP/bond farmer deems the rate advantageous enough to take the offer. This could create a game of chicken between participants vying over a fixed amount of potentially profitable opportunities per day.

The same principle could be applied to the vesting time parameter separately or it could be bundled with the discount rate parameter (higher discount, longer vesting).

This brings up a number of questions such as:

  • What happens if the quota is not filled by the end of the day?
  • What should the increment be per block? This essentially sets the max discount assuming it’s reset every day.

Very interesting stuff, can’t really add much because Im not super educated in finance or economics. But what does the community think about accepting Monero for bonds? I see Atom and Secret mentioned a lot, which makes complete sense to me. But also I think many of the things that attract users to Monero also will attract the same users to Shade. Could be a way to entice new users to join the community?


Hi and thanks for the opportunity to provide my suggestions:

  1. Assets purchase by ShadeDAO - BTC, ATOM, SCRT, USDC
  2. 14 days min or allow user to determine with corresponding discount rate adjusted to lockup period
  3. This would depend on the market but best discount rate available at time of purchasing the bonds and duration of lock up

I think we should have a longer option as well. Maybe 3 or 6 months for a larger discount. Maybe 15 or 20% or so?