With the introduction of DIP-10, DSD has entered a new era by fundamentally changing the debt cycle mechanics holding on to its mission to become the first uncollateralized reserve asset for DeFi.
This article is more of a “practical guide” on how to participate in the protocol. For a more in-depth read on the mechanics, please check out this article.
What has changed for me as a user?
The main difference in V2 is that the coupon system has been replaced by CDSD (“Contraction DSD”), which can be obtained by burning DSD, reducing the supply.
During expansion cycles, the dynamics remained mostly the same. Once in expansion, you can either bond your DSD in the DAO to generate yield. Or, you can provide liquidity which also credits you with LP rewards. Which strategy generates a higher APY depends on different factors. For less sophisticated users, DAO bonding is recommended.
The bigger changes happened during contractions. Once DSD enters a debt cycle, you are able to burn your DSD 1:1 for CDSD (“Contraction DSD”), which reduces the circulating DSD supply, supporting the price. Additionally to the CDSD you receive an “earnable” amount, which can be farmed by bonding CDSD in the DAO. There is also an incentivized CDSD LP Pool, working the same way as the DSD LP Pool during expansions.
After the debt cycles have ended, and the TWAP >1$ (expansion), CDSD becomes redeemable for DSD, receiving 50% of expansions.
Now, let’s deep dive into how expansion and contraction cycles look like, and how you can participate in both:
Expansion means that the supply of DSD will grow, issuing new DSD. The supply expansion will distribute DSD to DAO bonders and bonded LPs. expansion per epoch is capped at 2%. As there are 12 epochs happening per day, the max supply expansion per day is 27%.
To receive expansion rewards, it’s mandatory to be bonded in the DAO, and/or to have your LP tokens bonded.
Contraction means that the supply of DSD will shrink by people burning DSD for CDSD. CDSD is an interest-bearing token that lets you generate yield during debt cycles by either bonding CDSD in the CDAO or by providing liquidity to the CDSD/USDC pair. Additionally, you can also get (comparably less) rewards by bonding DSD in the DAO.
Bonding DSD/CDSD/DSD-USDC LP tokens/CDSD-USDC LP tokens all generate yield, but how do I know which action gets me the highest return?
This really depends on the circumstances and whether we are in expansion, or in contraction.
How can I bond my CDSD?
To bond your CDSD you simply have to navigate to Bond-CDSD in the DSD App. Here you can choose between BURN DSD FOR CDSD, CDSD Bonding, and REDEEM CDSD FOR DSD.
BURN DSD FOR CDSD
Having CDSD bonded in the DAO enables you to generate yield during contraction cycles. In the bar, just enter the amount of DSD you want to burn for CDSD and choose whether you want to just burn, or burn + bond directly in one go.
For burning DSD, you receive the same amount of CDSD and aditionally100% of the amount is also added to your “earnable” balance, which you can farm by bonding CDSD.
In case you have not bonded your CDSD yet, you can do this here. Furthermore, this panel also allows you to unbond your CDSD at any time.
REDEEM CDSD FOR DSD
Once the TWAP of DSD >1$, you will be able to redeem your CDSD to DSD pro-rata. Hence, you can just multiply your share of all bonded CDSD and multiply this with the total redeemable amount for the current epoch to see how much CDSD you will be able to redeem.
How can I bond my CDSD-USDC LP tokens?
Bonding CDSD-USDC LP tokens works the same as bonding the DSD-USDC LP token.
First of all, navigate to CDSD-LP in the DSD app. Then you must stage your LP tokens, and bond them right after. Similar to DSD, you can add further liquidity from this section as well as claiming your LP tokens. Yet, unlike DSD, there is no lockup for CDSD LP tokens.