PSM vs Bonds
The PSM represents a significant evolution from the bond mechanisms used in early algorithmic synthetics like Tomb Finance.
How Traditional Bonds Worked
The Bond Mechanism (Tomb Model)
Example Bond Cycle
TOMB trading at 0.85 FTM (15% below peg)
User spends 8.5 FTM to buy 10 TOMB worth of bonds
10 TOMB burned (removed from circulation)
Week later, TOMB recovers to 1.10 FTM
User redeems bonds for 11 TOMB (10 base + premium)
Net profit: 11 TOMB - 8.5 FTM paid = profit if TOMB stays above peg
Problems with Bond Mechanisms
1. Asymmetric Supply Dynamics
The Fatal Flaw:
Expansion: Adds tokens permanently to circulation
Bonds: Remove tokens temporarily, return them + premium
Net result: Every bond cycle increases total supply
Long-term: Unsustainable supply growth
Example over time:
Expansion adds 100,000 tokens
Bonds remove 50,000 tokens
Bonds redeemed for 55,000 tokens (with premium)
Net: +105,000 tokens in circulation
Repeat = death spiral
2. Delayed Settlement
The Waiting Game:
Buy bonds → Wait days/weeks → Hope for recovery → Maybe redeem
Capital locked during entire period
No ability to exit early
Illiquid position
Opportunity cost was massive—capital stuck in bonds while better opportunities passed by.
3. Redemption Risk
Multiple Failure Points:
Peg might never recover (bonds expire worthless)
Peg might recover briefly but drop again
Redemption window might be missed
Premium might not compensate for opportunity cost
Other bonds competing for redemption
Many users lost money on bonds despite the system "working."
4. Complex User Experience
Too Many Steps:
Monitor peg constantly
Decide when to buy bonds
Calculate optimal purchase price
Watch for redemption windows
Compete with others to redeem
Manage multiple bond positions
Sophisticated DeFi users struggled—mass adoption impossible.
5. Gaming Opportunities
Exploitation Vectors:
Whales could manipulate peg to trigger bonds
Bot frontrunning on redemptions
Coordination to buy bonds then collectively pump
Protocol resources extracted rather than strengthened
The mechanism incentivized gaming rather than genuine peg support.
How PSM is Different
Continuous Operation
No Windows, No Waiting:
Bonds: Only function when below peg
PSM: Works every time users claim, regardless of peg status
PSM provides consistent revenue, not sporadic bond purchases.
Instant Settlement
Immediate Value Transfer:
Bonds: Buy → Wait → Hope → Redeem
PSM: Claim → Fee paid → Done
Users get their rewards immediately (minus fee). No lockup, no redemption risk.
No Return of Capital
Permanent Value Capture:
Bonds: Treasury buys tokens, eventually returns them + premium
PSM: Treasury receives fee, keeps it forever
PSM genuinely strengthens treasury rather than just cycling capital.
Bilateral Operation
Works Above and Below Peg:
Bonds: Only below peg
PSM: Every claim at any peg level
Continuous revenue generation, not just during crises.
Predictable Revenue
Protocol Can Budget:
Bonds: Unpredictable—depends on peg breaking
PSM: Proportional to farming activity
Protocol can model revenue based on TVL and claiming patterns.
Better User Experience
Simpler Flow:
Bonds: Monitor → Buy → Wait → Redeem → Track premium
PSM: Farm → Claim → Done (automatic fee)
Users don't need to actively manage anything.
No Gaming Incentive
Aligned Interests:
Bonds: Users profit when peg breaks then recovers (perverse)
PSM: Users profit when protocol succeeds (aligned)
PSM doesn't incentivize users to hope for peg breaks.
Side-by-Side Comparison
Active Period
Below peg only
Always
Settlement Time
Days to weeks
Instant
Capital Return
Yes (with premium)
No (fee kept)
User Experience
Complex
Simple
Revenue Predictability
Low
High
Gaming Risk
High
Low
Supply Impact
Temporary removal
Permanent revenue
Peg Support
Strong when active
Continuous
Opportunity Cost
High (locked capital)
Low (instant claim)
Long-term Sustainability
Poor
Good
Why PSM Wins
For Users
✅ No lockup periods
✅ Instant liquidity
✅ Simpler mechanics
✅ No redemption timing stress
✅ Can claim anytime
❌ Pay fee on every claim
Net: Better UX despite fee
For Protocol
✅ Consistent revenue
✅ Permanent value capture
✅ Works in all market conditions
✅ Harder to game
✅ Better long-term sustainability
❌ Less aggressive below-peg defense
Net: Much more sustainable model
For Peg
✅ Continuous buy pressure (claims every day)
✅ Reduced sell pressure (30% fewer tokens entering market)
✅ Strong treasury enables defense
❌ Less immediate below-peg response than bonds
Net: Better average peg maintenance
Can Bonds and PSM Coexist?
Some protocols might implement both.
Complementary Roles
PSM:
Primary mechanism
Continuous operation
Handles normal conditions
Bonds (optional):
Emergency mechanism
Activated during severe depeg (<0.85)
Provides extra firepower when needed
SPAI Approach
SPAI Finance focuses on PSM:
Simpler system (one mechanism, not two)
Better UX (users don't need to understand bonds)
More sustainable (no bond premium obligations)
AI-optimized (dynamic fees replace bond mechanics)
Bonds might be added if market conditions prove PSM insufficient, but starting with PSM-only is the cleaner design.
Historical Context
Why Tomb Used Bonds
In 2021–2022:
PSM concept wasn't developed yet
Following Basis Cash model (which used bonds)
"Seigniorage shares" was the established pattern
Innovation was pegging to FTM, not the mechanics
Tomb was innovative for its time, but bond mechanisms were inherited from even older protocols.
Why PSM is Modern
By 2024–2025:
Years of data on bond failures
Snake Finance pioneered PSM approach
Community understanding of sustainable vs unsustainable
AI management enables dynamic parameters
SPAI builds on lessons learned across dozens of failed algorithmic synthetics.
The Bottom Line
Bonds were necessary in 2021. PSM is superior in 2025.
The 30% PSM fee might feel high compared to 0% in some protocols, but consider:
Bonds: 0% ongoing fee but massive opportunity cost + redemption risk
No mechanism: 0% fee but protocol dies, yielding 0% forever
PSM: 30% fee but protocol sustainable, continuous yields
30% × sustained yields > 100% × zero yields from dead protocol