Bond (Deposit)

The "bond" in bond coupon.

Users can deposit accepted assets into Coupon Finance to mint coupons that get sold into the market for a profit. The proceeds from these sales are seen as upfront interest paid on the deposited assets. Since interest is paid at once, upfront, it provides a fixed-rate deposit. Consequently, the depositor assumes a short position on interest rates.

A Bond Position NFT (Non-Fungible Token) is minted for every deposit made. This NFT is used to keep track of expiry and accounting. The principal of the bond can be collected once every epoch expires.

Users who wish to withdraw before the expiry of their bonds must burn corresponding coupons for each epoch that has not yet reached its expiration. By burning coupons on withdrawal, it ensures that the system maintains its equilibrium between the deposits made and coupons in circulation.

APY from Coupon Sales

The APY from coupon sales is the following.

$$\text{Let }p=\text{average proceeds of coupon sales per unit of the underlying asset}\\ \text{Let }d=\text{duration until the last coupon expires}\\ \text{APY}=((1/1-p)^{1\text{ year}/d}-1)\times100\%$$

Let's see how we derived this equation through an example.

100 ETH was deposited for two epochs, with the first and second epochs ending in four and ten months, respectively. This will mint 200 coupons, 100 coupons for each epoch. If there are enough bids for coupons at the first and second epochs at 0.041 and 0.059, the proceeds of selling all the coupons would be 4.1 + 5.9 = 10 ETH.

At first glance, this looks like depositing 100 ETH for ten months nets 10 ETH in interest. However, the 10 ETH from selling coupons can also be deposited, creating more proceeds from selling coupons that can also be deposited, creating a geometric series. The sum of this geometric series would yield 11.111... ETH. Since this was the interest earned for ten months, adjusting for a year would result in an APY of roughly 13.48%.

An interesting observation from the example is that while the coupons for the second epoch cost less than the first epoch per month, the APY of depositing for just the first epoch (13.38%) would have been smaller than the APY of depositing for two epochs (13.48%). Even though coupons cost less at epochs further away, the proceeds will compound more, possibly netting better yields.

Depositing in Practice

The cyclic process of selling coupons and depositing the proceeds to sell more coupons is pre-calculated and executed through a flash deposit. This means that more coupons than the user deposits are minted and sold into the market, and the proceeds are added to the deposit to make up for the coupons minted in excess of the user's initial deposit. Users will see that the amount deposited is larger than their initial deposit, and the larger amount can be collected on expiry.

Unutilized Deposits

Deposits yet to be loaned out will be lent on Aave to generate protocol yield. This yield compensates for the losses incurred when market-making, allowing Coupon Finance to offer competitive rates consistently.