Announcing FSD Bond System: A Completely Novel Approach

We’ll be honest.

Freqset Dollar started with the bootstrap phase exactly 1 week back. And as we end bootstrap today, it’s been a brutal week. Couldn’t be worse.

With $2.2 as fixed TWAP during bootstrap and 1-hour epochs, we targeted a supply of around 7 million FSDs by the end of bootstrap, and corresponding market cap of around $15 million.

Instead, we are at around $350k at the end of bootstrap right now.

We couldn’t have predicted it, as one can only test in production, but now we think that it may be because of a low 6-hour lock/unlock period for LPs, which incentivized them to dump their rewards. When most LPs started following this same route, FSD got into a vicious cycle as its market price got below $2.2 first and then below $1 next, with hyperinflationary rewards continuing due to bootstrap.

But though there has been a short-term setback, it has forced us to think hard about how to handle the upcoming “contraction” cycle post-bootstrap in the best way.

Contraction cycles are the real test for any algo stablecoin and we have come up with a completely novel approach to address this, through a state-of-the-art bond mechanism.

Learning from ESD/DSD experience, we first thought of a modified more effective coupon system (FIP#1). But on further thinking, we realized a bond mechanism (FIP#2) would be more effective as an incentive method during contraction cycles.

Here are the details of FSD Improvement Proposal 2 (FIP#2):

We propose an innovative bond (FSDB) mechanism in which incentive structure is designed to balance the needs of investors with different risk-reward appetites

i) Buyers of FSDB at higher prices get to redeem back at lower prices above $1 but with less premium (e.g. Burnt TWAP = $0.9)

ii) Buyers of FSDB at lower prices get to redeem back at higher prices above $1 but with a high premium (e.g. Burnt TWAP = $0.1)

The more near TWAP is from $1 peg, the lower the premium but the quicker to redeem.

The floor and cap of Redeemable TWAP are proposed as $1 and $1.2

Prerequisites:

• This change will not affect the expansion rewards on DAO and LP. The bond will share the reward pool with the existing coupon.
• This change will not impact the existing coupon system, but we may retire the coupon system when all existing coupons are redeemed.

Design details to FSD Bond System

• FSD Bond (FSDB) can only be obtained by burning FSD at a premium.
• FSDB can only be used to redeem FSD at a 1:1 ratio, and cannot be sold.
• FSDB will not expire.
• FSDB cannot be redeemed until the FSD reaches the target TWAP, i.e. Redeemable TWAP, which is calculated base on the purchase TWAP and cap/floor of Redeemable TWAP. Higher-cost bonds can be redeemed earlier. The Redeemable TWAP formula is as following:

• The premium is calculated base on the TWAP at the epoch being bought. You will get a higher premium at a lower FSD price. The premium is calculated as below:

Following is an example to show the relationship between Purchase TWAP, Premium, Red. TWAP and Estimated Profit (at redemption)

• When purchasing bonds, the Purchase TWAP, Premium, and Redeemable TWAP will be displayed on the web page.
• Bonds can be purchased many times at any epoch or within one epoch, and redeemable TWAP will be calculated separately. Only partial of your FSDB can be redeemed if not all target TWAPs are reached. Below is an example of partial bond redemption.

We are currently working on executing FIP#2 and hope to release it soon after rigorous testing.