Short Bonds

Short Bonds exist to control the total debt in circulation and allow the protocol to reduce its total debt burden at a discount.

• If CDT trades below $1, it may become economically rational for the protocol to buy back and burn outstanding debt.

• If users bond CDT they receive STRAT after 6.9 days.

• Protocol burns the CDT, reducing protocol debt.

• Mechanically onchain, the user will receive a NFT option for STRAT with a 0 strike price and a 6.9 day vest period which after they can burn the NFT for the STRAT value of the NFT.

By bonding CDT, the protocol reduces its debt load and its risk profile.

Pricing

Short bonds are priced similarly to long bonds but invert the Debt-to-Market-Cap ratio:

$$\text{Bond Price} \propto (\text{Price of STRAT}) \times \text{BCV} \times (\frac{\text{Market Cap}}{\text{Debt}})$$

Long bonds use the pricing to determine a strike price on the NFT options, whereas Short Bonds use the pricing to determine a STRAT/CDT price.

Short Bond options have an effective 0 strike, they simply calculate how much STRAT you will receive for the CDT you've bonded.

Protocol Benefits:

When the protocol’s debt level is high, it incentivises short bond issuance to reduce the overall debt burden.

Short Bonds allow the protocol to buy back debt at a cheaper price than it is issued. Protocol issues CDT at a value of $1, every short bond will be buying back CDT for STRAT at a value of <$1.