Internal & External Bond Mechanisms
Explaining Internal and External Bonds working principle.
nBond is the backbone of the platform that is helping to maintain NETHER price to its peg ratio according to TWAP (Time Weighted Average Price). Bonding helps both reduce the supply of NETHER out of circulation to regain the peg and also acquires the platform’s own liquidity alongside with native ETH token.
Internal Bonding can be purchased with NETHER, applicable to only contraction periods when TWAP of NETHER is below its peg ratio, distinctively from External Bonding (NETHER-ETH LP).
Every new epoch on the contraction period nBonds will be issued in the amount of %3 of the current NETHER circulating supply, with a max debt amount of %35. This means that if bonds reach %35 of the circulating supply of NETHER, no more bonds will be issued.
On the other side of Nether Protocol's bonding strategies, accepting NETHER-ETH LPs with External Bonding makes it possible for the protocol to control NETHER emission in advance. By doing that, it provides more healthy and prolific revenue generation for the platform and its user, while the token itself is used as a medium of transaction across L2s.
In general, Internal nBonds can be purchased both in exchange for NETHER on Nether Protocol, if any available. The most important reason to purchase Internal Bonds is to contribute the platform to operate for its mission while maintaining the peg. Internal nBonds don’t have an expiration date, one can utilize them as an investment in the protocol to acquire more of the protocol’s ownership token nShare, if purchased bond tokens are staked, and bond premium rewards according to the holding period and exchange ratio monitored by TWAP.
Diversely, LP Bonding is an External Bonding contract that relieves the platform to operate more fluently while giving the opportunity of platform users to acquire nShare on a discounted value in return for their NETHER-ETH LP. External bonding with LP position is always purchasable on the contrary to Internal Bonding, but the reward amount is variable depending on the submission of the contract and the emission rate of nShare.
Incentives for holding Internal nBond purchases:
The idea is to reward Internal Bond purchaser for co-operation with the protocol to achieve its mission. After a user purchased a bond, there will be three different use cases as follows;
sell back your nBonds for NETHER while peg is between 1-1.1 once again with no premium bonuses to prevent manipulation on peg ratio.
sell back your nBonds for NETHER while peg is between 1.1 once again with premium bonuses.
hold them for a long term to acquire more of nShare emission if purchased bonds are staked, allocated for bondholders, compound your premium, and exchange it to NETHER when the maturity of the investment is saturated. The longer the user holds or stakes, the more protocol and the user benefits from it.
Also you can check: https://medium.com/@nether.finance/explanation-of-internal-and-external-bonding-and-nether-protocols-vision-through-bonding-31b983580cc1
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