Mithril Bond Liquidity
A simple solution to a big problem
Mithril Bonds (MIBs) are one part of the Mithril Cash algorithmic stablecoin system. Mithril Bonds can only be created if Mithril Cash token (MIC) trades below $1, and a single MIC is guaranteed to generate more than one MIB. Upon creation of MIBs, any MICs that were used are burned in the process. A MIB can be redeemed on a 1 for 1 basis once MIC trades above a dollar for a substantial timeframe.
Economics will tell us that price is where supply and demand intersect. Reducing supply while demand stays similar translates to an increase in price. Increasing supply while demand stays similar means a decrease in price. The opposite is true for demand. This puts MIC and MIB in a troublesome spot.
MIBs were designed to be illiquid, and only redeemable when MIC trades above 1.00 for a sustained amount of time. Because of this, a convoluted situation arises when MIC is under a dollar trying to regain peg. Because MIBs have been created, circulating supply of MIC is down, but the fully diluted supply of MIC is up. Note that the decrease in circulating supply is marginally smaller than the increase in fully diluted supply. Psychologically, the larger of these two events seems to weigh heaviest. Market players are not comfortable buying MIC up to the peg of $1.00 because this opens the doorway for bonds to be redeemed. Fearing the massive increase of MIC supply generated by redemption of MIBs, market players are not comfortable pushing MIC anywhere close to a dollar. That’s where our Liquidity Pool comes in.
Creating liquidity for MIBs will relieve a swathe of sell pressure on MIC. Arbitrage traders have already bought and sold MIB to equal its cost of creation. Assuming arbitrage traders continue to maintain MIB price to equal cost of creation, MIB will follow MIC as it gets closer to a dollar. This makes bond holders free to sell bonds directly, which will avert bond sell pressure off the MIC market.
This is not a circular approach because previously bonds have not been tradable. If you like my ideas or I have helped you in the past, please consider throwing a donation my way. Nothing I’ve written in this article is financial advice.