Bond Voucher
The Bond Voucher is a zero-coupon bond with an embedded call option that any project can use to finance its project or operations. DAOs can use the Bond Voucher as a convertible bond or remove the European-styled call option embedded in the convertible bond and, instead, use it as a pure form of debt.
Bond Voucher: the Concept
The Bond Voucher can:
  • Receive and lock an amount of token collateral (that is sufficient to exercise the embedded call option).
  • At maturity, charge the issuer stablecoin for principal repayment and accrued interest
  • Send stablecoin payment to the investor’s wallet.
  • Pay back the investors in native tokens if the call option is exercised.
The Bond Voucher is a zero-coupon bond with an embedded call option, The zero-coupon bond within the Bond Voucher is secured by the issuer’s credit and native tokens, and the embedded call option is fully secured by native tokens. The Bond Voucher allows debtors to leverage credit for under-collateralized loans and allows the investors to enjoy steady income and potential free upside.
When used as a convertible bond, the Bond Voucher allows the investor to convert their Bond Voucher into a fixed amount of native tokens when the underlying’s market price reaches a specified strike price (which will grant the investor upside if the project is rising in value). The Bond Voucher will usually trade at a discount and, when used as a pure debt or as a convertible bond with un exercised call option, the investor will receive full face value profit at maturity when they burn the Bond Voucher.

Bond Voucher Template

Like the majority of convertible bonds, the Bond Voucher has a face value, maturity date and, in some situations, a strike price, specifically:
Bond Voucher #6800 (sample)
Face value is the amount the Bond Voucher will be worth at maturity, denominated in stablecoin.
Maturity date is the date on which the Bond Voucher will mature and on which the embedded call option of the Voucher will be exercised.
Strike price is a specified unit price of the underlying asset at which the call option will be exercised and at which the Bond Voucher will convert into an amount of its underlying asset whent the Voucher matures.

Why Bond Vouchers?

Leverage DAO’s Credit
Bond Voucher is built up with a credit rating system for DAOs, which could help them access to this under-collateral loan by their own credit.
Sustainable Liquidity
By issuing Bond Vouchers, DAOs could obtain stable, liquid assets without any liquidation risk until the settlement, no matter how volatile the market acts on their token price.
Low Costs
By providing a lucrative, guaranteed interest to investors, Bond Vouchers dramatically lower the financing costs for DAOs from unfixed, costly yield farming or token sales to a fixed amount.

Debt Repayments

As a crucial part of a debt instrument, the repayment of a bond voucher is guarranteed by three policy modules:
Collateral. Over-collateralizing isn’t mandatory, although the issuer must collateralize sufficient native tokens to back up the embedded call option in the event that it is exercised. Given there’s no cap on how high the collateral could go, it’s generally a good idea to collateralize as many native tokens as possible to keep the investors reassured, formally as: Min. Collateral Amount=Face Value / Strike Price.
Third-party fund manager. The proceeds of the Bond Voucher sales will be sent to a neutral, third-party protocol that manages the use of funds. When the Voucher reaches maturity, the funds will be automatically withdrawn from the protocol to repay the investors. We will begin implementing this feature using the multi-signature wallet in the early stage and then, later on, involve larger and decentralized asset management protocols (such as Enzyme) for this exact purpose.
On-chain I.O.U. The DAO issuing the Voucher will sign an EthSign-powered agreement acknowledging the DAO’s liability for the debt, including details such as the date of the agreement, the amount of debt, the date for repayment, means of repayment (where Solv Smart Contract’s address will be specified), and the e-signature of the DAO.
Repaying the Bond
Another a crucial part of this debt instrument is the fail safe mechanism for debt default, which works as a multi-stage repayment process to minimize the potential risk:
  1. 1.
    The investors are paid tokens converted from the Bond Voucher, assuming the call option is exercised. (Skip to this step if the option is not exercised.)
  2. 2.
    The multi-signature wallet co-authorized by the DAO, the third-party fund manager, and Solv issues funds to the investors.
  3. 3.
    The DAO sends treasury funds to the Solv smart contract to pay up the remaining balance.
  4. 4.
    Liquidation of collateral.
  5. 5.
    The DAO receives the notice of default, urging it to catch up with the payment immediately. The notice includes a negotiation grace period during which the DAO can privately work with the investors to bring the account up to date.
  6. 6.
    The DAO is in default, which is reported and recorded permanently into an on-chain credit history of the DAO.
This repayment process works strictly in chronological order. The failure to complete one event will immediately trigger the one next to it. For events 1-4, the existence of a remaining balance is considered a failure to fulfill that event.

Off-chain Price Discovery

The Bond Voucher’s interrelatedness to a zero-coupon bond means that the discount equates to interest for the investor. Borrowers and lenders of the Bond Voucher can utilize an off-chain approach for price discovery, and transmit orders or conduct Dutch auctions on-chain.

Bond Oracle

Solv plans to bring in some form of hybrid price oracle solutions (such as Uniswap and SushiSwap’s TWAP and Chainlink) to provide the most secure and reliable price feed, provided that exercising the call option (or not) hinges entirely on getting the underlying’s market price right at maturity.

Bond Voucher ratings

Bond Voucher ratings are crucial to debt financing because they provide market participants with transparent insights on the credit quality of Bond Vouchers. While Solv won’t participate in the rating process, a neutral third-party protocol will be used to provide Bond Voucher ratings and risk analysis based on the issuing DAO’s balance sheet, financial reports, on-chain governance, and endorsements. (This plan will come in shape in Q3, 2022.)

Additional Features

  • Whitelisting. This enables issuing Bond Vouchers to a list of allowed and identified individuals or institutions.
  • Unsold Vouchers. DAOs that have unsold outstanding Vouchers can choose to burn those Vouchers and redeem the collateral early and on a pro-rata basis.
  • Spot trading. Investors of Bond Vouchers can cash in Bond Vouchers early on the Solv Marketplace.

Further Applications

Other possibilities surrounding the use of the Bond Voucher include but are not limited to:
  • Voucher-Centric Vaults. DeFi vaults are essentially pools of funds with an assigned strategy and a goal of maximizing returns of its assets. There will be (currently two) DeFi vaults or investment DAOs to invest their pools of funds in Voucher products moving forward.
  • Borrowing. Insofar as the DAO borrower is creditworthy, the Bond Voucher will have full intrinsic value denominated in its underlying asset. Therefore, the holder of the Bond Voucher can use it as collateral to obtain loans through NFT lending protocols.
  • DAO Credit. DAOs that issue bonds and pay their obligations consistently will benefit from some form of an on-chain data-backed credit system that is fundamental to evaluating the creditworthiness of every DAO borrower.
  • Yield Curve. Over time, the market for Bond Vouchers will scale to the point of there being a yield curve constructed to plot yields of different bonds that have equal credit quality but differing maturity dates. This will give market participants a good idea of future yield changes and economic activity.

Pioneering a Credit Bond Market in DeFi

As a convertible bond, Bond Voucher allows DAOs obtain sustainable liquid assets by leveraging a mix of credit and collateral. By providing a fixed-income to investors with a call option as the incentive, it empower DAOs to get external fundings in a cheap and sustainable way. Borrowers and lenders of DeFi can now tap into $120-trillion-dollar debt financing market.

Getting Started

Solv Protocol provides a one-stop platform for creating, managing, and trading Bond Vouchers for DAOs or project teams:
  1. 1.
    Please contact Solv (Discord) for any ideas on your own Bond Vouchers.
  2. 2.
    Then submit your token address, admin address to Solv team, and Solv will whitelist your token.
  3. 3.
    Once your token is whitelisted, you could mint and sell your own Bond Vouchers. Please contact Solv for a detailed tutorial on issuance.