Hey guys, Sean from the UMA team here. I think @jonisjon, @Josh and others have done a great job already summarizing the advantages of using a Range Token or Success Token for treasury diversification. Because of that, I’ll keep this post pretty practical and do my best to try to summarize and answer some of the questions that have popped up.
What is an UMIP? What is involved in creating a Range/Success Token?
An UMIP is an UMA Improvement Proposal and is used to, among other things, propose new price identifiers and collateral types that the UMA Optimistic Oracle can support. Think of this as the design doc for your FOX/USD price oracle - the goal is to clearly communicate to UMA DVM voters and price proposers/verifiers how to calculate the FOX/USD price.
Really all that is needed is to decide on a design. Like “inalittlewhile” said, usually, before using new types of collateral or pricing implementations, there needs to be some governance action in the form of an UMIP. In this case, ShapeShift doesn’t need to worry about the UMIP process. Clayton alerted us about ShapeShift’s potential interest, and we’re planning on proposing the pricing implementation and collateral support for UMA governance review ASAP.
Once these UMIPs are voted in, launching and using a RT or ST should take a defi savvy dev no more than 20 minutes. Would be more than happy to help out with this deployment process or even just deploy the contract once governance is complete!
Do Range/Success Tokens need to be sold OTC?
Not necessarily. These are just erc-20 tokens, and can be sold in whatever way seems most appropriate to ShapeShift. Previously all other RT/ST sales have been OTC, and there are a few nuances around how they behave in traditional AMM’s since they have capped floor and ceiling prices, but alternative methods of distribution are definitely possible and really should just be whatever fits ShapeShift’s goals best.
Breakdown on the function/difference between Range Tokens and Success Tokens
Neither the success token or range token are immediate sales of the FOX token. In both cases, to mint RT/STs you need to collateralize your debt position with FOX, but there is no immediate sale of FOX.
For a Range Token holder, it looks like a credit product between the range, being short a put option below the range, and holding a call option above the range. So with a range of $0.2 and $5, a Range Token holder would typically buy at a discount (say $0.95), get $1 worth of FOX when the contract expires if FOX/USD is between $5 and $0.2, and be exposed to the FOX price above and below $5 and $0.2 respectively.
Not precise pricing (just a RT numerical example for illustrative purposes):
- FOX RT with a range of $0.2 and $5, expiring 1 year from today. Each RT is backed by 5 FOX tokens.
- Each FOX RT is sold for whatever discount is agreed upon. Say a 15% discount, or $0.95. This is not the same as directly selling tokens at a discount.
- A year from now settlement, FOX/USD is at the bottom of the range at $0.2. Each RT is worth 5 FOX tokens ($1).
- FOX/USD settlement at the top of the range at $5, each RT is worth 0.2 FOX tokens ($1).
- FOX/USD settlement in the range at $2. Each RT is worth 0.5 FOX tokens ($1).
- FOX/USD above the range at $6. Each RT is worth the floor amount of 0.2 FOX tokens or $1.2. This is the imbedded call option, and looks like the ShapeShift DAO selling FOX at $5. ShapeShift has maintained upside exposure until the end of the range.
- FOX/USD below the range at $0.10. Each RT is worth the capped amount of 5 FOX tokens or $0.5. This is the imbedded put behavior, and gives the ShapeShift DAO downside protection since it looks like ShapeShift selling FOX at $0.2.
A Success Token looks slightly different. STs consist of exposure to 1 token of collateral + an imbedded call option. Typically STs are sold for the current price of FOX without a discount, since ST buyers are compensated for their cost of capital with a free call option.
Again, not precise pricing but:
- FOX ST with a $5 strike expiring 1 year from today. Each ST is backed by 2 FOX tokens.
- Each ST is sold for current FOX price, say $0.75.
- A year from now at settlement, FOX/USD is below $5 (or the call option is OTM). ST holders get 1 FOX token in return for their ST.
- Alternatively, a year from now at settlement, FOX/USD is $6. ST holders get 1 FOX token + ((Settlement Price - Strike Price) / Settlement Price) or (6 - 5)/6 = 0.167 FOX tokens. Total ST redemption value of 1.167 FOX. FOX token price has increased, so it’s a win/win for the DAO and the ST investor.
In both situations, of course ShapeShift would potentially have the option of buying back the RT/ST debt instead of allowing RT/ST holders to claim the FOX collateral. Both structures are non-liquidatable, and would allow for stablecoin borrowing now against FOX tokens.
I know that was long, so let me know if anything wasn’t clear! Bottom-line, I think diversification makes sense, there are various structures we can explore and either of these structures can be live in prod as soon as this weekend.