Bonded minting

Not Applicable to Asset-Backed Model

This mechanism is not being implemented as it addresses problems specific to fund-like/NAV-based tokenization where issuers can continuously mint new tokens.

This platform uses an asset-backed model with:

• Fixed supply per collection (no continuous minting)
• Authenticated physical assets (no NAV gaming or dilution risk)
• One-time token offerings (no post-launch supply expansion)

Bonded minting solves "runaway dilution" problems that don't exist in the asset-backed architecture. The current supply management mechanisms (hold periods, release curves, open interest, and profit-sharing) are sufficient for this model.

This mechanism may be explored in future iterations if the platform expands to fund-like structures.

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Bonded minting is a supply management mechanism where tokens are minted against deposited collateral (typically USDC or other stablecoins), creating a price floor and enabling redemption mechanisms. Think of it as backing tokens with liquid collateral that provides a guaranteed minimum value.

When the issuer mints tokens after acquiring an asset, instead of simply offering them for sale, the issuer (or protocol) deposits collateral equal to a percentage of the acquisition value. This collateral creates a bond that guarantees token holders can redeem their tokens for the collateral if the market price falls below the bonded value. The mechanism transforms tokens from pure asset claims into hybrid instruments with both asset backing and collateral backing.

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Why bonded minting matters

Bonded minting addresses a fundamental challenge in RWA tokenization: price volatility and liquidity risk. While tokens represent claims on real assets, those assets are:

• Illiquid: Can't be instantly sold at fair value
• Difficult to price: Valuations are subjective and time-dependent
• Slow to liquidate: Selling physical assets takes time

Bonded minting provides a liquid backstop that enables:

Price floor guarantee

Without bonding:

• Token price can fall arbitrarily low
• No guaranteed minimum value
• Holders face unlimited downside risk

With bonding:

• Token price has a floor equal to collateral value
• Holders can redeem for collateral if price falls
• Downside risk is bounded

Improved liquidity

Without bonding:

• Liquidity depends entirely on market makers
• Thin markets can have wide spreads
• Selling large positions causes significant slippage

With bonding:

• Redemption mechanism provides exit liquidity
• Arbitrageurs keep market price above bond value
• Effective liquidity increases even in thin markets

Confidence and adoption

Without bonding:

• Holders rely entirely on asset value
• Risk of market price diverging from fundamentals
• Uncertainty about exit options

With bonding:

• Holders have guaranteed minimum value
• Reduced uncertainty about downside
• Easier to attract conservative investors

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Formal structure

Let:

• $p^{\text{acq}}$: acquisition price per token
• $\beta \in [0, 1]$: bonding ratio (e.g., 0.5 = 50% bonded)
• $C = \beta \cdot p^{\text{acq}} \cdot m$: total collateral deposited
• $m$: number of tokens minted
• $p_{\text{bond}} = \beta \cdot p^{\text{acq}}$: bond value per token

Collateral requirement: For each token minted, the issuer (or protocol) must deposit:

$$c = \beta \cdot p^{\text{acq}}$$

in collateral (e.g., USDC).

Redemption mechanism: Any token holder can redeem their tokens for collateral at the bond value:

$$\text{Redemption value} = n \cdot p_{\text{bond}} = n \cdot \beta \cdot p^{\text{acq}}$$

where $n$ is the number of tokens redeemed.

Arbitrage condition: If market price $p_t < p_{\text{bond}}$, arbitrageurs can:

1. Buy tokens at market price $p_t$
2. Redeem for collateral at $p_{\text{bond}}$
3. Profit: $(p_{\text{bond}} - p_t) \cdot n$

This arbitrage keeps market price at or above $p_{\text{bond}}$.

Collateral pool: The protocol maintains a collateral pool:

$$\text{Pool balance} = C - \sum_{i} n_i \cdot p_{\text{bond}}$$

where $\sum_i n_i$ is the total number of tokens redeemed.

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Worked example

Setup

• Acquisition price: $p^{\text{acq}} = 4{,}200$ USDC per token
• Newly minted tokens: $m = 1{,}000$
• Bonding ratio: $\beta = 0.5$ (50% bonded)
• Bond value per token: $p_{\text{bond}} = 0.5 \times 4{,}200 = 2{,}100$ USDC
• Total collateral required: $C = 2{,}100 \times 1{,}000 = 2{,}100{,}000$ USDC

Scenario 1: Market price above bond value

Market price: $p_t = 5{,}000$ USDC per token

Holder decision:

• Sell on market: Receive $5,000 per token
• Redeem for collateral: Receive $2,100 per token
• Optimal: Sell on market (better price)

Result: No redemptions occur, collateral pool remains full.

Scenario 2: Market price below bond value

Market price: $p_t = 1{,}800$ USDC per token (below bond value)

Arbitrage opportunity:

1. Buy 100 tokens at market price: $100 \times 1{,}800 = 180{,}000$ USDC
2. Redeem for collateral: $100 \times 2{,}100 = 210{,}000$ USDC
3. Profit: $210{,}000 - 180{,}000 = 30{,}000$ USDC

Market impact:

• Arbitrageurs buy tokens at market price, increasing demand
• Market price rises toward bond value
• Redemptions reduce circulating supply
• Equilibrium: $p_t \geq p_{\text{bond}}$

Collateral pool:

• Initial balance: $2,100,000
• After 100 token redemption: $2{,}100{,}000 - 210{,}000 = 1{,}890{,}000$ USDC
• Remaining tokens: 900
• Pool can support: $1{,}890{,}000 / 2{,}100 = 900$ tokens (exactly right)

Scenario 3: Mass redemption event

Market shock: Market price drops to $1,500 per token

Redemption wave:

• 500 tokens redeemed at bond value
• Collateral paid out: $500 \times 2{,}100 = 1{,}050{,}000$ USDC
• Remaining collateral: $2{,}100{,}000 - 1{,}050{,}000 = 1{,}050{,}000$ USDC
• Remaining tokens: 500
• Pool still fully backed: $1{,}050{,}000 / 500 = 2{,}100$ USDC per token

Market recovery:

• Circulating supply reduced from 1,000 to 500 tokens
• Reduced supply increases scarcity
• Market price may recover toward acquisition value
• Remaining holders benefit from supply reduction

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Outcome

Advantages

Price floor:

• Guaranteed minimum value for token holders
• Bounded downside risk
• Increased confidence for conservative investors

Improved liquidity:

• Redemption mechanism provides exit liquidity
• Arbitrage keeps market price above bond value
• Effective liquidity even in thin markets

Supply management:

• Redemptions reduce circulating supply during downturns
• Supply reduction can help price recovery
• Automatic supply adjustment based on market conditions

Issuer benefits:

• Attracts risk-averse investors
• Demonstrates commitment to token value
• Creates natural price support

Disadvantages

Capital requirements:

• Issuer must deposit significant collateral
• Collateral is locked and earns no yield (or reduced yield)
• Opportunity cost of capital

Redemption risk:

• Mass redemptions can drain collateral pool
• If pool is exhausted, mechanism fails
• Requires careful sizing of bonding ratio

Complexity:

• More complex than unbonded minting
• Requires collateral management infrastructure
• Potential for smart contract risk

Dilution of asset exposure:

• Tokens become hybrid (asset + collateral)
• Holders have less pure asset exposure
• May not be desirable for all asset classes

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Why it works

Bonded minting creates a two-layer value structure:

1. Asset layer: Tokens represent claims on real assets (upside potential)
2. Collateral layer: Tokens can be redeemed for collateral (downside protection)

This structure provides asymmetric risk:

• Upside: Full exposure to asset appreciation
• Downside: Protected by collateral floor

The redemption mechanism creates automatic stabilization:

• When price falls below bond value, redemptions reduce supply
• Supply reduction increases scarcity, supporting price recovery
• Arbitrageurs enforce the price floor through redemption arbitrage

Trade-offs vs. other mechanisms

vs. Unbonded minting:

• Bonded: Price floor, but requires collateral
• Unbonded: No collateral needed, but no price floor

vs. Mark-to-Truth auctions:

• Bonded: Continuous price floor through redemptions
• Mark-to-Truth: Periodic price convergence through auctions

vs. Release curve:

• Bonded: Supply adjusts via redemptions (demand-driven)
• Release curve: Supply adjusts via schedule (time-driven)

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Configuration

Bonded minting parameters are configurable per collection:

• Bonding ratio ($\beta$): Percentage of acquisition price backed by collateral (e.g., 50%)
• Collateral type: USDC, DAI, or other stablecoins
• Redemption fee: Small fee to prevent spam redemptions (e.g., 0.5%)
• Redemption delay: Time lock before redemption executes (e.g., 24 hours)
• Collateral yield: Whether collateral earns yield while locked

These parameters balance:

• Protection strength: Higher bonding ratio = stronger floor, but more capital required
• Capital efficiency: Lower bonding ratio = less capital locked, but weaker floor
• Redemption friction: Fees and delays prevent spam but reduce liquidity

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Advanced considerations

Dynamic bonding ratio

Instead of fixed bonding ratio, adjust based on market conditions:

$$\beta(t) = \beta_{\min} + (\beta_{\max} - \beta_{\min}) \cdot f(\text{volatility}, \text{liquidity})$$

Higher volatility or lower liquidity → increase bonding ratio for more protection.

Partial redemptions

Allow redemption of only the collateral portion, keeping asset exposure:

• Redeem collateral: Receive $\beta \cdot p^{\text{acq}}$ in USDC
• Keep asset token: Retain claim on $(1 - \beta) \cdot p^{\text{acq}}$ asset value

This enables risk management without fully exiting the position.

Collateral yield distribution

If collateral earns yield while locked:

• Distribute yield to token holders (increases total return)
• Use yield to increase bonding ratio over time (strengthens floor)
• Burn tokens with yield (reduces supply, increases scarcity)

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Related reading

• Price dynamics and risks for detailed Case B analysis
• Dutch auction mechanism for alternative price discovery
• Release curve mechanism for gradual supply management
• Mark-to-Truth auctions for price convergence mechanisms