TL;DR:
- Proposal to partner with Sushi, UMA (and possibly Yearn) to build a debt based treasury management protocol on top of Sushi’s ecosystem.
- Ideally leveraging MISO, Sushi’s AMM and possibly BentoBox.
- Sushi gets a way to raise funds from locked treasury assets that they can buy back if needed.
- Sushi then has a way to make revenue off of other protocols that need a more diverse treasury.
Summary:
Over the past few months, I’ve been tinkering around with trying to solve the treasury diversification problem through the issuance of convertible-debt-bonds collateralized by treasury tokens.
I had debated though if there would be much interest in the purchasing of these styles of tokens.
It seems with the Sushi attempts at fundraising, there is not only high interest in locked token bonds, but, also a need for a controlled market of these which allow for the sale of these assets in a regulated fashion.
Ultimately, I think the Sushi raise represents a great opportunity for this to be developed as a joint venture between myself, Sushi and UMA Protocol (who have done great works in developing novel treasury tokens.
So with a bit of a pivot from the initial concept, let me present “Smaug”
Core Problems:
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As Lex_Node pointed out in the strategic raise thread, it is likely (from the Telegram legal case) that the direct sale of any existing, liquid, treasury tokens could indirectly taint the security status of the rest of the tokens.
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Treasuries sit on massive piles of their own token, but lack methods to diversify or liquify. The moments when they need cash the most are the times in which it is usually the worst to sell them.
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VCs usually want discounts for lockups, open markets want dilution over lockups, and treasuries just want money that doesn’t hurt their tokenomics.
Solution:
Smaug is a protocol and market for selling treasury backed, convertible debt bonds.
SBond:
DAOs use tokens in their treasury as collateral to issue an SBond.
SBonds contain:
- X amount of the DAOs token
- A declared strategy in how that token is used (perhaps via Yearn vaults?)
- A maturity date
- The minimum amount of USD requested for the bond.
- An annual interest rate
- The option of if the bond pays ‘only interest’ or ‘interest and appreciation’
- A voting strategy if the bond has pass through voting rights.
- An unlock range (optional)
Each ERC20 token issued from the bond contract represents $1000 USD of initial debt.
Process of an SBond:
For example, Sushi could choose to set aside 5M units of Sushi for collateral.
The 5M units of Sushi are placed into the SBond contract as collateral.
They decide they want to raise a minimum of $25M of collateral, and are willing to have an interest of 10% year + token appreciation.
The SBonds could then be auctioned off above the floor price.
This leaves Sushi with $25M of USD to run their operations.
Overtime Sushi has two options:
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Pay back the debt to each bond position to buy back the underlying collateral.
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Let the SBond expire in which case it converts into its share of the underlying $SUSHI tokens.
Unlike a traditional financial instrument this model:
- Creates a maximum exposure for the treasury (their underlying token collateral)
- Leaves an avenue to buy back all or a portion of the collateral if they exceed expected growth.
- Gives funds a way to partake in allocations but forcing a lock mechanic, so there is less concern around tokens being dumped.
- Gives funds a better way to ensure benefit from growth and not getting positions bought out from under them on a standard convertible debt denoted in tokens.
- Ensures that the bidding is more open to get a market rate rather than a negotiated deal. If the treasuries deal doesn’t sell they can reprice and reissue.
Smaug Market:
The Smaug Market would be an after market where issuers (DAOs) and allowed buyers (regulatory dependent) can buy and trade existing market SBonds through AMM pools (provided by Sushiswap)
Since each SBond is always issued at the equivalence of $1000 of USD debt it means that each unit from issuers are comparable.
While 1 Sushi SBond might have better earning terms than 1 YFI SBond, both were worth $1000 of USD debt at the start of term.
This allows flexibility within the markets where the pricing is focused on preference and payment terms, and not units.
It also allows for creative opportunities of funds or even DAOs creating automated index pools of specific assets so they can buy broad exposure to the market.
Such a market also gives the DAOs a distinct opportunity to use their profits to buy back their own SBonds at any dipping price point to reduce their collateral exposure.
This essentially creates a liquid market both for issuing SBonds and maintaining a diverse treasury.
Eventually this market can serve as a way for wealthy DAOs to be buying investment exposure to new DAOs without 1:1 negotiations.
How would this benefit Sushi:
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The underlying system for these auctions could run on Sushi’s MISO. It is also a natural upsell for the MISO listing partners sushi has right now, and the farming partners that sushi incentivizes.
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The underlying AMM would be built off of Sushiswap.
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We may be able to build this as a BentoBox app (depending on the current flexibility of that system - needs review)
Both of these meaning that Sushi’s protocol would slowly be earning long term treasury assets of all other DAO protocols.
How would this benefit UMA:
- UMA’s oracle system would be used as the core of price tracking for these products.
- It may also be possible to build these bonds entirely as a specific type of UMA Synthetic asset.
How would it benefit the Yearn Ecosystem:
- Issuers have the ability to add strategies to tokens allowing them to gain underlying yield.
- With Sushi being a core part of the Yearn Ecosystem, and Yearn being leaders in securely managing vault strategies, it would make sense for these strategies to be private Yearn vaults.
How would this benefit Sushi as an SBond issuer:
- Instead of raising funds on the open market, Sushi would ensure the funds are locked on terms they choose.
- Sushi’s maximum exposure would be the collateral tokens they choose.
- Sushi would have an opportunity to buy back the collateral if Sushi grew faster than expected.
- Unlike private VC deals, the auction process would ensure that Sushi gets the best price for these assets.
- The assets are non-dilutive.
How would this benefit Sushi users:
- Sushi gets no dilution today.
- Sushi MISO and AMM products get new volume and revenue streams.
- Possibly built on BentoBox so that we drive more liquidity volume into Bento.
FAQ
Why Smaug?
Smaug is the name of the great fire drake that lived in Lonely Mountain in The Hobbit. He guards a mountain of ancient treasury, and cares very much about that treasury not being in circulation.
Do SBonds have to have an unlock curve?
No an issuer would choose to have the tokens either unlock all at the date of maturity or to vest in a linear fashion between two date timestamps.
Does a DAO have to pay the interest rate by the maturity date?
No. The SBond basically tracks debt as an internal metric that accrues overtime.
Meaning that every block it gets slightly more expensive for the DAO to buy back their collateral from the SBond.
If by the maturity date, the DAO has not paid back their total debt, then users can begin to claim the proportional share of remaining collateral, in which case they are surrendering their claim to any of the USD debt.
Who gets the yield?
That is an open question. If a bond has a strategy, should that yield flow through to the seller, the buyer, or go against the sellers debt position.
Currently, I think going against the debt position is the best option as this allows the DAO to automate a manner in which the debt pays back overtime.
Can DAOs pay back from revenue?
Yes, DAOs could set up a revenue wallet that makes calls to the SBond position to automatically pay back their debt from incoming revenues.
Can DAOs buy their own SBonds?
Yes, its possible that DAOs may find that buying an SBond on the secondary market is cheaper than paying back the equivalent amount of debt.
DAOs would be able to buy back and cancel this SBond token, lowering the proportional outstanding debt.
This measure is actual crucial as it acts as a backstop to the market price of SBonds and their underlying debt drifting too far a part in the later time stage of the bonds lifecycle.
Would Smaug be a part of Sushi?
No, I am proposing it as a sperate partner protocol similar to Yearn, Pickle or Keep3r.
However, it would use Sushi’s existing tooling like MISO and the AMM, meaning Sushi would generate revenue from all Smaug related actions which is the more lucrative part of the stack anyway.
There may also be opportunities to build it out as a BentoBox DApp, which is something that still needs more review. But, the end goal is having BentoBox as a flexible smart wallet so it should be doable.
more faq to be updated as they evolve
Probably a little too forward in my initial approach - thank Adam for the feedback - but we are definitely very keen to help in anyway we can.