Fixed-period BOND

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A fixed-period BOND is a BOND token which expires after a fixed lifetime . This page details the design of the contracts which govern these tokens so their valuation is fair. The variables of payout rate, the expiration time[1], and the value of the BOND are dependent on each other. A DAO can choose two of the variables at will, then solve for the third to determine a fair contract using REP tokenomics theory.

The results and notation from the reputation tokenomics page are used here derive the formulas governing fixed-period BOND contracts under the assumptions that a DAO's underlying REP tokens have infinite lifetime and when they have finite lifetime, under the further assumptions that the fees the DAO earns are constant.

Variable-period BONDs can be programmed with more complicated formulas as discussed here.

Overview[edit | edit source]

Suppose we wish to pay a developer a bounty worth , but we do so BONDs which have a fixed expiration date of . These fixed-period BONDs pay out the same as a REP token would by participating in the REP salary. Our goal is to find formulas determining how large we should set the expiration date given the rate of payout and the value.

When we pay the developer with  newly minted BOND tokens, which dilutes the total REP in the DAO as fees are now shared with the  tokens. The number  of tokens determines the rate of payout, as a larger  means a larger share of the REP salary. The exact rate of payout for  BOND token is proportional to the incoming fees as .

Depending on whether the REP token design of the DAO has REP tokens with finite or infinite lifetime we get different formulas for how long the lifetime should be set for a fixed-period BOND.

Mechanism design[edit | edit source]

Fixed-period BOND contracts under infinite-lifetime REP[edit | edit source]

Under the assumption that a DAO's REP lifetime is unbounded, , we wish to find the lifetime we should set for a BOND so that it will have a particular value. In this case the income stream  of one BOND token is the same as one REP token

until the BOND expires. In general, we have  The term  represents all the BONDs which are active at time .

Now suppose you want to find the lifetime  of a BOND that will give an expected payout of  for  tokens. We therefore hope to solve the equation

However, the terms  and  are complicated.  is a stopping time, and  is a stochastic process. Nevertheless, these terms behave relatively well, since we know the expected value  will be an increasing function of , because  is increasing, because . Simply taking the expected value

setting it equal to  and solving for  gives you the desired stopping time . There is no simple formula for the expected values of fractions, so we make no further elaboration of the general case in this presentation. However, Jensen’s inequality allows us to give an estimate of the general case, and the following calculations give an upper limit.

Now assume the rate of fees is constant  and no further BOND tokens are minted during the lifetime . Then there is a minor change in the previous formulas

Therefore, to pay a developer  tokens that will have payout with value  at time  we solve the equation for . We get

Further, we can find the present value of a single BOND token with arbitrary lifetime  under the assumption of constant fees is

Therefore we have the following solutions:

Proposition 5: Assume the rate of fees is constant  and that no further BOND tokens are minted during the lifetime .

Then  BOND tokens will have payout  by time  at a payout rate of  by setting the lifetime of a BOND to be

Again, assuming constant rate of fees, if you wish to pay a developer  BOND tokens with arbitrary predetermined lifetime  that will have expected present value worth  solve the following equation for

Equation 7 has no elementary solution, but admits efficient solutions through standard numerical approximation algorithms. However, next we assume the REP tokens have finite lifetimes, which guarantees explicit elementary solutions.

Fixed-period BOND contracts under finite-lifetime REP[edit | edit source]

Next, we consider the situation when there is a finite lifetime on a DAO's REP tokens. We make the further assumptions of constant minting ratio  and constant fees . We assume the BOND tokens are minted after the system reaches equilibrium. In this case, there are always  of the REP tokens in the system. Then diluting the system with  artificially minted BOND tokens at time  which have the same lifetime  gives

So

Therefore we solve the equation for   to get

Proposition 6: Assume the rate of fees is constant, and the lifetime of all tokens (REP and BONDs) is . To pay a bounty with present value worth  a DAO can mint  BOND tokens where

Similar calculations can be made to get the formula for the number  of BOND tokens when we choose the lifetime  independently of the lifetime  of the normal REP tokens.

Notice Proposition 6 gives a bound on the value of BOND tokens that can be minted based on the amount of fees the DAO is earning .

The major problem with these formulas is that the assumption that the rate of fees  is constant is false and will often be very inaccurate, especially when a DAO is small. The above solutions make BONDs a gamble for both the developer and the DAO. If the rate of fees  increases during the lifetime  then the reward’s value will be greater than , and if the rate of fees decreases it will be worth less. However, as mentioned above, Jensen’s inequality gives us a bound, showing these results are conservative. Specifically, if the fees’ rate is not constant, but that the fees merely have expected value  then these formulas will be generous to the BOND holder. If however, the actual values of the fees have an average less than this expected value, the BOND holders can still end with less than  remuneration in present value.

Such uncertainties can be eliminated by more complicated contracts which have variable lifetimes.

Code[edit | edit source]

Applications[edit | edit source]

See Also[edit | edit source]

Notes & References[edit | edit source]

  1. Expiration date, lifetime, term, and period are all interchangeable terminology for the amount of time a BOND is active, denoted .