Ribbon Finance x SushiSwap: Increase Treasury Stablecoin Reserves

TL;DR

Deploy a small percentage of the treasury’s 14,471,208 SUSHI (~$17M) into a cash-settled SUSHI covered call position to bolster treasury stablecoin reserves.

Summary

Written by chudnov on behalf of Ribbon Finance

The treasury is ~85% SUSHI (including operation funds), has no revenue stream that diversifies its treasury into ETH/BTC and/or stablecoins, and the revenue that it does have has been trending downwards for several months and is denominated in SUSHI.

Sushi DAO needs to find a reliable means of increasing working capital to grow the team, incentivize core devs with bonuses, fund grants, fund new initiatives, take care of everyday expenditures, and more generally – grow the business.

Issue

Sushi earns protocol revenue by:

  1. Taking 0.05% of each AMM swap. 90% of this revenue is directed to xSUSHI holders, 10% goes to the treasury.
  2. Taking 10% from Kashi lending and liquidations. 90% of this revenue is directed to xSUSHI holders, 10% go to the treasury.

Both of these sources of revenue are trending downwards:

  1. AMM volumes went from ~$150M a year ago to ~$30M today. 100% of AMM revenue comes from SUSHI emissions, denominated in SUSHI, which will taper off in a couple years.
  2. Kashi TVL is <$1M and due to the low utilisation rate the protocol revenue coming from supply / borrow APR is negligible.

Solution

A few solutions that the community is already aware of:

  1. Sell SUSHI. Nobody wants this.
  2. Stake SUSHI in the sushi bar. This dilutes existing stakers and does not solve the issue of selling SUSHI since rewards are denominated in SUSHI.
  3. LP in the Tokemak Sushi LP pool. This also dilutes existing Sushi LP’s. And although the farming rewards are denominated in TOKE, it is currently only generating a 2% APR on deposits.
  4. Divert 10% of revenue from xSUSHI staking to the treasury denominated in a reserve asset, as suggested in the Kanpai proposal. This was never implemented.

There is another solution which is largely unexplored that does not put direct sell pressure on SUSHI, does not dilute existing xSUSHI / t-SUSHI holders, and generates relatively generous returns in USDC albeit with risks: selling cash-settled SUSHI covered calls.

The treasury would deposit SUSHI into a Ribbon Finance treasury vault and sell 25% out-of-the-money monthly calls, in an auction, to our network of market makers. The tenor and strike is customizable as the vault is deployed specifically for the Sushi DAO in order to cater to its needs.

Risks

If the option expires out-of-the-money, the DAO simply collects the premiums, denominated in USDC, directly into the treasury multisig. However, there is a risk that the option expires in-the-money (SUSHI spot price is higher than the 1.25x strike price), in which case the option buyer can claim some of the SUSHI collateral equivalent to the value of the options. As a result, the position will be down when denominating in SUSHI, but up when denominating in USDC. You can read more about options and the payoff diagram here.

Expected Returns

Market makers are quoting ~$20.5K in premiums for a SUSHI 25% out-of-the-money monthly option on $1M notional. Assuming market conditions are the same throughout the year and the options never get exercised, the DAO would earn $20.5K * 12 months = $248K annually on a $1M position. Again, it is possible that the options are in-the-money in which case the strategy may have a lower return and possibly underperform buy-and-hold. I want to refrain from using “APY” for this very reason, since it is a trade and not a loan, but in those terms it would be roughly 24.8% “APY” ($248K / $1M).

Historical performance

Past performance is no guarantee of future results, but here is a report of how the SUSHI covered call strategy would have performed between November 2021 - June 2022 based on some historical Implied Volatility assumptions.

Beyond backtests – our execution works. Perpetual Protocol has been running a PERP covered call strategy with us since February (5 monthly options sold) and has earned a total of ~200K USDC. We consistently fill the entire size between market makers, collect premiums from the market makers, and redistribute the USDC directly to the treasury. Similarly, Balancer successfully sold their first covered call to market makers last week.

Conclusion

The Sushi DAO is an ideal candidate to sell covered calls because the native token SUSHI comprises ~85% of the treasury/operation wallets.

Worst case scenario the options expire in-the-money, in which case although the covered call position will have lost some underlying SUSHI, the treasury will have largely appreciated in value since the treasury still holds a significant amount of SUSHI.

Best case scenario the options expire out-of-the-money and the treasury will have collected USDC.

This is a great way for the DAO to hedge against overall AMM volumes / future protocol revenue by earning cash if the SUSHI price goes down, stays flat, or moderately goes up.

Execution

This strategy involves no overhead on behalf of the DAO beyond due diligence of the risks involved and a one-time deposit transaction into the Ribbon vault from the treasury gnosis multisig. Nothing else needs to be done.

Everything around the trade such as SUSHI collateralization, selling the options in an auction, collecting USDC premiums, settlement, and distribution of premiums to the treasury address, is abstracted away by Ribbon’s smart contracts. The strategy is automatically rolled over every month.

Poll

It is up to the community to decide how much SUSHI is reasonable to allocate to this strategy, if at all. Note that every month the depositor (the Sushi DAO) has the flexibility to downsize the position, add to the position, or exit the strategy entirely.

Here are a few options to vote on:

  • 0 SUSHI (Do not do this)
  • ~3.5% of Treasury (500k SUSHI)
  • ~7% of Treasury (1M SUSHI)
  • ~10% of Treasury (1.5M SUSHI)
  • ~14% of Treasury (2M SUSHI)

0 voters

1 Like

As I said during the Forum I call: “I am for methods that increased income revenue”, and I personally see this as a valid option.

but I would personally like an addition to the proposal to include a trail period. The chosen stratetgy would then be excuted for the chosen time, and if the results are as expected would it just kept on running. If it is not the case the choice could be easier withdrawn without a complete governance track.

I am curious what @jhoward and @Neiltbe think of this possible choice of revenue

I think utilizing 3.5% of the Sushi in the Treasury in this ribbon strat be a good way to utilize some of that reserve, and think ribbon probably the better bang for the buck from a risk + profit perspective that we can do to earn a little extra income on our idle Sushi as well. I do caution it against going with the one of the higher options to start, and rather see it be the lower amount.

I would like to see more votes on this before it goes to snapshot though.

And also @chudnov correct me if I’m wrong, but this would also mean there’s more sushi liquidity avail for option traders on Opyn as well? Which I think would be a positive thing.

I’m all for increasing and diversifying income streams. I’m unfamiliar with Ribbon Finance and would love for core team to review the smart contracts in order to evaluate risk of the potential investment.

If the “audit” qualifies the contracts and safe, I’d even like to see us go to 10% of treasury. A few hundred thousand in income each year just by allocating capital, would seem like a good way to make use of capital.

Am I reading it right that we basically have the option of removing the funds once a month? If it is automatically rolled over every month, I’m supposing we can actually choose to undelegate each month?

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I am all for a clause here that allows Sushi to exit the strategy without involving governance.

Equating “expected results” with “same returns as the backtest” may be misleading. The only metric here is premiums earned in USDC from market makers. However this is entirely dependent on the volatility of $SUSHI at the time the options are sold, which may be higher or lower than the historical volatility.

So if the premiums end up being lower than on the backtest it doesn’t necessarily mean you’re getting an unfair price. It means that the volatility on $SUSHI is much lower so the chance that the option is profitable for the market maker is much lower.

Conversely, if the premiums end up being really high it doesn’t necessarily mean you’re getting a really good price. It means that the volatility on $SUSHI is much higher so the chance that the option is profitable for the market maker is much higher.

What I can say is Perpetual Protocol has been running this strategy since February and Balancer started running it this month. Each auction has 3-4 market makers bidding which ensures competitive pricing.

I hope this makes sense. If you think you have a good metric for gauging success I would love to hear it.

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We run an internal auction with our network of market makers to a) ensure the entire size is filled and b) ensure competitive pricing for the option seller (SUSHI DAO). We cannot guarantee either of those two things in an opyn order book.

Audits are here:

V2 audits:

Treasury audit (extension of V2):

It will automatically get rolled over unless the DAO tells us not to, in which case we won’t sell the options that month. No particular on-chain action needs to be taken by the DAO. The DAO can choose to stay in the vault (in which case the $SUSHI will just sit idle) and continue some time afterwards or it can exit entirely.

1 Like

I really like the idea of diversifying revenue streams particularly when Sushi can start small & the risk:reward is worth it.

I would feel better if this was part of a larger initiative in financial engineering. At the end of the day making 250k w/ a 1m investment is solid but isn’t moving the needle for Sushi. I also don’t think Sushi’s equipped to take advantage of this experiment and snowball it into a sophisticated financial engineering operation that’s making meaningful revenues for Sushi with appropriate risk management.
Sushi isn’t an investment firm it’s a product development organization.

This specific trade probably checks the boxes but I don’t see a clear way to take this experience and evolve it into something meaningful for Sushi.

Hey @Neiltbe, a couple thoughts for beyond this trade alone:

  1. scale it up in the future. Market makers have capacity here. With a $4M investment all of a sudden you are making $1M - same assumptions hold with a large size. Currently this is 25% of the treasury which is quite a lot - but if SUSHI protocol grows (along with $SUSHI) then $4M allocation might not be so large in the future!

  2. create a genesis pool and lend $SUSHI on dAMM Finance who we are quite close with. Think “uncollateralized Compound fork for market makers to borrow”. Allow KYC/AML’d / high credit rating market makers to borrow $SUSHI unsecured for 5-12% APY. This is another place you can deploy your SUSHI - different from options since its lower APY but “guaranteed” assuming borrowers don’t default.

Is 1 & 2 riskier than doing nothing? Yes. Could these strategies work at scale and make solid returns for Sushi on idle assets? Yes.

These are a couple of ideas, I have one more idea we are working on internally at Ribbon that can increase yields on $SUSHI that is still early to reveal. But rest assured there is room for growth beyond this proposal!

I tend to agree. I don’t see an immediate way to turn this into some full-blown sophisticated financial engineering operation that spins out into its own revenue stream / product for Sushi. But some interesting ideas might come out of these low-overhead experiments. Who knows.

Appreciate the feedback. Happy to see this has already been addressed.

I think it make sense and Sushi should make sure to have a gauge to receive RBN afterwards if deployed.

@0xMaki We thought internally about what would happen if treasury vaults get a gauge. We don’t think it is net positive for veRBN.

It might be good for rbn lockers (better bribes) in the short term at the expense of retail vault staking APY’s. Smaller retail staking APY → slow deposit growth / increase withdrawals → less protocol revenue → less rbn locking incentive.

Unlike on curve where every “gauge is created equal”, these are custom vaults so they are tailored to the specific treasury. This means higher gauge emissions for this vault does not necessarily mean more deposits since the treasury is the only depositor.