BIP-6

Title: Bond Proposal

Author: angelo_bounty0x, dennet Category: Economic (Bond Issuance) Summary: Limiting bond minting

Current protocol design:

Whenever the 1 hour TWAP (Time Weighted Average Price) of the $BAC price is below $1, unlimited Basis Bonds (hereinafter “$BAB”) can be minted at a discount. The discount is determined by the 1 hour TWAP. With a Basis Cash oracle price of P DAI, bonds are sold off at a price of P BAC (effective price being P^2 DAI), promising bond holders a premium when redeemed. For example, when the TWAP is $0.9 , then it is possible to mint one $BAB by burning 0.9 $BAC. A speculator can purchase $0.9 $BAC for $0.81 DAI, burn 0.9 BAC for 1 BAB, resulting in an effective price of 1 BAB = 0.81 DAI.

Problem

Unlimited $BAB issuance capacity will lead to over issuance of $BAB debt. There is likely to be a time lag between the reduction in supply caused by $BAB issuance, and the twap price adjustment towards $1. The one hour window between each twap adjustment guarantees an unlimited amount of $BAB bonds will be available for speculators to purchase as long as demand exists.

The Basis protocol should disincentivize issuance of unnecessary $BAB debt because long term overissuance of debt will lead to numerous protocol risks and vulnerabilities, including but not limited to the following:

A decline in value of $BAS. Only when the level of debt no longer exceeds the treasury balance will $BAS resume receiving seigniorage rewards. If there is a large pool of outstanding debt to be redeemed then there will be an increasingly long wait period for $BAS holders to resume receiving $BAS seigniorage rewards. This will result in a decline in $BAS price, as the present value of $BAS will be reduced.

A larger pool of outstanding $BAB Bond debt. A rapidly increasing debt pool will result in reduced demand to purchase new bonds, due in part to a longer bond redemption waiting period. In order to offset increasingly lengthy redemption time a correspondingly larger bond discount will be needed to entice new bond purchasers. If the debt issuance outpaces debt redemption there is a greater risk of systemic protocol failure due to inability to repay outstanding debt.

Over contraction of the $BAC supply: Over issuance of $BAB will result in an over contraction of the $BAC supply, resulting in increased volatility as the over contracted supply of $BAC will swing in the opposite direction, above $1 necessitating further issuance of $BAC to expand the supply. This instability hinders the chief goal of the protocol which is to provide consistent price stability.

Opportunity for bad actors: An unlimited $BAB issuance enables an attack vector whereby bad actors artificially manipulate price to below $1 in order to purchase a large quantity of $BAB bonds at a discount.

Proposed Solution:

This proposal suggests altering the bond issuance mechanism by setting a maximum bond issuance cap. The cap will be of the following size: ($1-1hTWAP)*(Circ $BAC), where 1hTWAP is the 1h TWAP of the $BAC price and “Circ $BAC” is the Circulating $BAC supply. The cap will last for one hour; after an hour a new TWAP will be calculated and the cap is reset based on the new TWAP value.