Market Dynamics
There are several feedback mechanisms within the system. These are self-reinforcing behaviors; action 1 increases the rate of action 2 which increases the rate of action 1. Circular mechanics like this are the drivers of exponential expansion and boom and bust cycles. Loose policy states enable these dynamics while tight policy states suppress them.
Stakers care primarily about their SISHI balance. While price is important in valuing their SISHI and determining the rate at which it grows, it is not the main goal. A smart staker cares only about the short and long-term growth prospects of the network. That growth translates into wealth via price and balance growth.
Bonders care primarily about SISHI price. When they bond SISHI purchasing a bond, these users lock in a fixed reward in SISHI. Therefore, network profitability is only helpful in calculating opportunity cost or gain; bonders have their SISHI gains locked in.
The ideal scenario for a bonder is for the price to go up; in this case, the bonders benefit from their discount on SISHI and the increase in price.
Bonders are still happy if SISHI price remains flat; their profit is the discount from the bond. Like stakers, bonders profit from inactivity at or around their buy-in via an increasing balance.
Bonders only lose when SISHI price goes down beyond the discount on the bond. At this point, the Bonders will choose between the SISHI or the LP Token, depending on which one is worth more. Bonders always get to choose the better of the two assets, effectively combining the best pieces of both assets' risk to reward profiles.
The default state of the network is at fair value. After some long period of inactivity, SISHI price will always return to this level.
Contractions are conceivably only triggered by short-term liquidity crises. Since SISHI holders have a guarantee that a fair price will come back above its value eventually, the only sellers below should be those who need a short-term exit and are willing to take the extra loss.
Expansions can be triggered by an increase in staking or bonding.
An increase in staking will generally be preceded by purchases from the market. That increases the price, which allows the protocol to sell at a higher price and increases yield for stakers. That should serve to bring in more stakers and continue the cycle.
Meanwhile, the rising price increases the bond discount and creates the capacity for new bonds. These are preceded by new liquidity, which improves the protocol's ability to carry out sales and increases available exit liquidity.
This positive price-liquidity feedback loop should serve to create sustainable expansionary periods. However, they work both ways. Falling demand decreases staking rewards and mint capacity, causing demand to fall further. This is an unavoidable fact of systems like this; even the best (i.e. Bitcoin) is no stranger to significant declines after periods of expansion.
But we can work to mitigate busts. This is where the protocol's reserves step in and catch the market when velocity turns too far to the downside. It does so through forwarding guidance (the fact that the protocol will buy lowers risk the lower we go, which can mean we don't have to buy) and by buying perpetually below fair value. The treasury ensures that, although bear markets and contractions can and will occur, the protocol can never die.
Last modified 10mo ago