Time-Bound Tokens

Background

Although time-bound token use cases are most commonly discussed in the context of staking for rewards, it is worth understanding why time-bound tokens are in fact a useful construct for both the staker and the protocol, and not just the simple introduction of illiquidity for the sake of ponzi-like economics seen in many DeFi projects previously.

Suppose you run a DEX—the way you earn revenue is through fees from people (or aggregators) trading through your token pools. Where do these tokens come from? They're supplied by users in exchange for a share of the revenue. However, in most DEXs, users are able to supply and withdraw tokens (or, LP shares) on demand. Fundamentally, this is an issue, as it puts your DEX revenue stream at the risk of many users pulling their liquidity from the platform for a myriad of reasons. As a nascent decentralized protocol, this uncertainty may have knock-on effects. For example, maybe it makes it harder to hire a new UX designer because you aren't as certain about revenue in the next few months, or maybe it makes it more difficult to design a certain protocol feature, because it relies on some certainty of liquidity.

So, instead you introduce the concept of time-bound liquidity! Now, users will provide DEX liquidity but instead of being able to withdraw on demand, they will be time-locked for some period of time, say, 1 month. In exchange, the users will get extra rewards on top of their usual fee split, and everyone is happy.

In summary:

DEX: Now has an assurance that some amount of its liquidity will be available for collecting fees, and potentially for use in new product features.

User: Exchanges the ability to exit their position at any time (by receiving a time-bound token) while still maintaining a level of liquidity, and earning extra rewards.

Everyone is happy. In fact, it's worth noting a final point: not only do time-bound tokens give some assurance about TVL and assets on a platform, but they also fundamentally increase the design space available to a project! New features that may not have been possible before are now possible through the power of time-bound tokens.

Example

Let's use a real-world example: Frax.

Frax is a widely known DeFi protocol with a $1 billion market cap stablecoin. For a stablecoin to be useful, it must be liquid. Another way to say liquid is that if I hold FRAX, a stablecoin ostensibly worth $1, I must be easily able to trade it for something else worth $1, say USDC. Similarly, if I hold $1 USDC, I should easily be able to swap it for $1 FRAX.

The Frax protocol makes this possible by incentivizing users to become "liquidity providers" (LP) for their stablecoin. Users who LP receive back a receipt—an LP token, which they can "stake" for additional rewards. If a user "stakes" their LP token for a year, for example, Frax knows that they won't remove that liquidity for a year. This is tremendously valuable for the protocol, so it is willing to reward this by providing extra rewards to that user.

More examples with further elaboration to come soon.