One could certainly implement a protocol which burns the interest, but what would the benefit be for long-term bondholders then / what is the difference between having interest and then burning it vs just not having interest at all?
I think interest could be structured in a way which makes it clear that it’s not income (and from a theoretical perspective it’s not, it’s just redistribution of network ownership). For example, it could be structured as an option to take a loan from the protocol in the native token, where the amount of the loan that can be taken increased over time.
That’s the case if these loans are granted by the protocol itself, yes. I guess I was implicitly imaging that other parties would be granting the loans (but potentially accepting these bonds as collateral). The protocol itself granting loans is an interesting angle to investigate as well (in which case a native liquidation mechanism might indeed be necessary).
Another interesting avenue to investigate could be a mechanism whereby bondholders lend to the protocol, perhaps for a fixed term, in exchange for a call option on the token (which the protocol can guarantee), whereby at the expiration of the term, the bondholder could elect either to withdraw the originally lent capital (with no interest), or to exercise the option and convert the lent capital position into a bond of the token (at the pre-agreed price). I think that this is interesting because it’s a way for users to benefit from the network doing well without actually needing to sell their existing asset(s), with a capped downside (modulo a bit of potential risk from whatever is done with the lent funds). For example, lent USDC could be converted to actual tokenized USG bonds, where the network itself earns the interest (which doesn’t change the trust assumptions very much typically), but lenders receive the potential upside of a call option (and if they exercise it, the lent asset is converted into network reserves, potentially contributing to the floor price of a metastability mechanism).