Editing BOND tokens (section)

== Overview ==
Suppose a DAO wishes to raise capital, say for the purpose of incentivizing improvement in one of the DAO’s smart contracts, by offering a bounty for development. Centralized companies in a traditional economy have several options. First, they can maintain a [[treasury]] of capital holdings for the purpose. This is suboptimal due to holding costs. A second option is to secure a loan, which is suboptimal because they would be paying an outside fee. Third, they can issue stocks, which carries the threat of diluting power, eroding faith in the company, and inevitably the market for stocks is not perfectly efficient. In some cases a fourth general option is ideal, to issue bonds. Bonds avoid some of the pitfalls of the previous three options. Like a loan, a bond can be constructed with a payout schedule which optimizes for the company’s current purpose, for instance paying out at a particular future time when the company expects a contract to close. Further, bonds do not have the same collateral security requirements. Finally, the most likely bond purchasers will be most familiar with the company, and will be more likely to have a predilection for improving the company so their bonds are secure, instead of harming it (by shorting the stock, e.g.). Thus bonds have the added advantage of building solidarity.

Many DAOs have implemented the obvious solution to raising capital: building a treasury. Many blockchain networks have amassed a treasury by setting aside ICO<ref>An Initial Coin Offering, similar to an IPO, is a smart-contract program created initially on the Ethereum network, which allows a DAO to mint new tokens to sell to investors in exchange for ether, the digital currency of Ethereum. This is the primary use of the Ethereum network as of this writing. The secondary use of Ethereum has been a second-order variation on ICOs, selling NFTs (non-fungible tokens), which represent further fractures of ownership in DAOs.</ref> money, or by taxing their transactions with a fractional fee in order to build such a reserve to pay for future development or paying off early investors. The existence of a treasury gives the signal that the DAO is valuable, which is often used to attract more investment before the DAO begins to earn outside fees. In the case of stable coins, a treasury of some type is necessary (though the treasury for [https://makerdao.com/en/ MakerDAO] is distributed). However the holding costs of such a fund are entirely wasted, which betrays the unsophisticated design and juvenile state of most DAOs which rely on treasuries. More dangerously, the existence of a treasury is a focus of competition which erodes solidarity in a DAO and erodes the incentive to collaborate for the purpose of increasing the value of REP tokens.

The already suboptimal solutions of loans and issuing equity are exacerbated in a decentralized environment. Traditional loans are fundamentally more difficult for a decentralized blockchain-based organization to secure than for a centralized company because of the coordination problems in a group owned by a dynamically shifting multitude of international pseudonymous participants. And issuing equity in a DAO is a greater threat than in a centralized organization, because offering ownership to the highest bidder undermines its decentralization.

With the new technology of smart contracting, however, we have more tools available than just treasuries or ICOs. A DAO can now make a type of internal loan. A DAO may arbitrarily choose to mint a new type of financial token, called a BOND, which can be sold at market to amass capital for sellers immediately, then algorithmically pay off buyers later, through smart contracts. (The [[BOND tokens#BOND market|market for BONDs]] can be external or internal to the DAO.)

There are several types of contracts that can be made in the attempt to match the BOND reward to the proposed bounty . Assuming no treasury, the BONDs are paid out by the DAO’s REP salary as fees come in. The DAO does not control when outside customers choose to engage the DAO’s Work Smart Contract, so it cannot entirely anticipate the fees it earns. Therefore, there is necessarily some variability in some aspect of any BOND, whether it be the rate of payout, the lifetime of the BOND, or the amount ultimately paid. However, BONDs can be programmed to mitigate for any of these factors. 

In the next section we detail several complicated algorithms for programming BONDs and make the effort to rigorously derive the formulas for their accurate valuation. The reason we go to the trouble is that the more accurate the valuation is, the more efficient the capital raising mechanism becomes. Whatever uncertainty exists in the valuation is paid for by the risk the buyers take. If there is more risk on the return from a BOND that promises to pay back  over the period of  years, then the buyer will only accept a lower price than when there is less risk. So any clarity we can bring to the pricing of a BOND token will increase the efficiency and profitability of the DAO.