Mint and Sell Range Tokens for Treasury Diversification

Using the proposal template that can be found here:

1. Summary -
Proposal for the DAO to mint and sell a set of “range tokens” in collaboration with UMA to diversify treasury and raise some stablecoin for operational reasons.

2. Abstract -
This discussion is just to start the conversation, and start to hammer out some details of what our Range Token may look like. With more details, we can better understand if this is a good idea for the ShapeShift DAO.

Range Token Info: Treasury Diversification With Range Tokens | by Kevin Chan | UMA Project | Jun, 2021 | Medium

3. Motivation -
There is a lot of research that DAO’s should have a diversified treasury. At the moment, all we hold is FOX. For practical operational purposes, it is very likely that before the end of the year we will want to contract with some core engineers to keep the product running and fix bugs, at a minimum. To offer contracts in stablecoin to core teams is a best practice for many DAOs. Having the option at a minimum I think is essential to the success of the DAO.

4. Specification -
This discussion is meant to hammer out exact specifications.

5. Benefits -
More coins than FOX in the treasury. Diversification. More resilient treasury to handle multiple possible future market conditions. Specifically, stable coins are a hedge against a down crypto market. We have lots of FOX, let’s not keep all our eggs in one basket.

6. Drawbacks -
Would need to sell the minted Range Tokens via OTC and through connections. No precedence for selling through distributed protocols.

Would love to hear other drawbacks.

7. Vote -
An eventual “For” vote (after hammering out specs) would be a vote to use FOX to mint Range Tokens and engage in some method to sell the Range Tokens for stablecoins.
An “Against” vote would vote to not take any action in this regard. To leave everything as is.

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So I really like this idea for a number of reasons.

(1) this allows the DAO to effectively leverage (take on debt) against its treasury now, with the hope of paying back that debt at a higher FOX price than today in order to ensure it has the necessary stable coin funds for various operational expenses it may want to pay out (when not paying directly in FOX or even paying a combo of the two).

(2) The DAO retains the upside on the FOX up to the max of the range.

(3) there is no liquidation risk on the loan.

I think this is a smart and innovative way to diversify DAO treasury without selling the FOX to the market now when the DAO should be bullish it’s own token.

Some questions for everyone to consider:

(1) for this to move forward, what range should the DAO sell at (e.g between 0.50 cents and $5) and how much USDC (or other stable coin) should it raise? Prob something like 10 mil to start would make sense but curious on others’ thoughts for range/amount to leverage.

(2) @Josh you say the range tokens need to be sold OTC, can you elaborate more on that? In theory why couldn’t the range token be sold to anyone who wants to buy? Maybe even setup on a bonding curve or something like that?

Would be great to get someone from UMA into this thread to discuss what the process of minting a range token looks like and help us walk through any questions around this/explain more how it works.

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Per #1, that is certainly a primary decision. What is the range.

Per #2, a fella named Clayton at UMA and I were chatting in Discord about this, and he will hopefully be piping in here.

How to determine what the price range would be is something I’m seeking information about. Clayton said this in a DM:

i think the lower range would be “How cheaply do we want to sell these for and no cheaper?” and the higher range would be “How much upside chance do we want to give people for taking that lower side risk”?

I thought there is a set price that you sell them all for, but I might be misunderstanding that. I think @jonisjon your suggestion of a range curve could be good. Although admittedly I don’t know the exact mechanics of that. Good thing to study.

I think raising 10M stable coins sounds great. I’d even be good with 5M, likely no less than that.

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Cool somewhere in the 5-10 mil range sounds reasonable and like a good start for this (can always issue additional range tokens as needed treasury wise).

My initial gut for the range is we choose a multiplier and apply it equally on both ends. E.g if we issue the range token for 5 million $ when the market price of FOX is 1$ then we choose a multiplier like 5x, then we say the buyer has the right to redeem at a market price at a given time somewhere between the range of $.20 - 5$ (This way their upside/downside risk within the range would be equal - either way they are paid back $5 million + any interest with a equivalent amount of $FOX at repayment time within that range.

That is another question I have with these range tokens, what would be fair/standard for when repayment of the loan is due? Also wonder if other DAOs (like the Iron Bank) might be interested in buying these range tokens from the ShapeShift DAO.

Look forward to hearing more from Clayton and the UMA team on process and further details on this!

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Awesome to see ShapeShift discussing the potential of Treasury diversification via the UMA Range Token. I’m sure Clayton will stop in with more clarification. The process of writing up the UMIP isn’t tough and ShapeShift will find plenty of help from the UMA community in that respect.

Great start, I think, here in the ShapeShift forum. This will help to gauge interest from the community and hash through the desired range and allocation of FOX. As an UMA ambassador, I’m happy to assist with the process in anyway I can.

Geoff - aka inalittlewhile.

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One more thing to consider for VC sales. From the Sushi community call, VCs may be much more interested in the UMA success token. The VCs in attendance didn’t want downside protection but all the upside potential.

Read more from Hart on Medium:

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Thanks for joining in the discussion @inalittlewhile! Look forward to hearing more from Clayton when he can hop in on what this process looks like. What is a UMIP - some sort of proposal format we should be aware of, can you provide any links to that?

I wasn’t aware of the success token idea, that is cool and maybe something we should consider if there is VC/fund type appetite to buy some tokens in that way, the downside I think is it would require selling some FOX now and the DAO may prefer to keep that upside for its own treasury via a range token, both are interesting options worth exploring!

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Thanks for the quick reply Josh. Had to track down the link. You’ll find a ton of useful info on the UMIPs (UMA Improvement Proposals) process over on UMA Discourse.

We have a community call tonight where I’ll be inviting the SuperUman team to join the convo over here.

Geoff

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I don’t think you sell any FOX now to mint and sell Success Tokens. Like the Range tokens, there is an expiry date, and Success Tokens would convert to FOX at that time. But you also get additional FOX based on the call option set when minted. Whereas with the Range token, you don’t ever get more than 1 FOX for each Range Token held at expiration. I think that’s one of the differences anyway. Still learning this all myself.

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So reading the post that @inalittlewhile posted above that didn’t seem like the case to me but maybe I didn’t understand.

The way I read that post is the success token sells X amount of FOX at market price (delivered at time of sale) + the call option to purchase more at a capped price of the option. Maybe I didn’t fully understand the first part and the success token is collateralized too? But from my reading that seems different from how the range token is collateralized. @inalittlewhile or anyone from UMA when you get a chance can you give us more of a breakdown on the process/difference of these two options?

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Good questions. My understanding is that with the UMA Range Token, you won’t sell your native asset. Instead, you use the native asset to borrow stablecoins with the preset value range.

If the contract expires within the range, it offers a yield. I saw 25% mentioned on the Sushi call, though this may depend on the set range. If the Range Token expires above range, there is some exposure to the upside but it’s capped. Assuming it expires below the range, there is exposure to the downside. The yield % will drop accordingly but the assets are still protected from liquidation.

With the UMA success token, you essentially wrap two tokens. One, the native asset. The other is the Option that only provides value to the buyer if the native asset expires above the strike value.

In full disclosure, these are both new ideas from our UMA masterminds. I’m learning too.

Geoff.

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Awesome, thanks for that further detail @inalittlewhile - look forward to learning more and collaborating with the UMA team/community as I think this is a great way to explore treasury management for the DAO.

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My pleasure. It goes without saying how elated I am to hodl my own $FOX via the airdrop. Looking forward to further discussions. :rocket:

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Hey @Josh and @jonisjon

I think the main things to decide right now are 1. if your community wants to do a raise 2. if they’d prefer to borrow against the tokens or sell them. I suspect that at this stage they are feeling pretty bullish, and would prefer to avoid selling them too cheaply.

So long as the community is interested in doing such a raise, then we can get more definite on the actual design. I’m bringing in Kevin from our team to have a look too.

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Thanks @clayton - I think there is interest in some general treasury diversification for operational reasons, I am just one community member but IMO the DAO would probably prefer to borrow against its treasury right now rather than sell them for the reasons you mention.

I think that is probably what we should explore at this juncture, but anyone else can weigh in here with thoughts on that.

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Thanks @clayton. I am a strong proponent of treasury diversification at this time - particularly into a stablecoin.

I also favor borrowing at the moment. I would strongly oppose selling FOX on any DEX or CEX. I would entertain the notion of selling OTC or through personal network connections.

Look forward to more input / guidance from the UMA team on what this could look like.

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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.

Range Tokens

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.

Success Tokens

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.

Summary

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.

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Wow @sean - what an incredible post explaining all the UMA options in detail!

So appreciate you and the team jumping in to help here, laying out all of our options, moving forward on the UMIP do we don’t even have to worry about that part, and even offering to do some of the development, I am blown away!

If I wasn’t convinced decentralized communities working together was clearly the future before now this post alone would have sold me, thank you!

After reading through your post I am now leaning towards perhaps a success token actually being the way to go, away from my original inclination. Still could prob be convinced of either though, really curious to see the communities’ thoughts after your explanation.

One question that isn’t clear to me @sean - how is the timeline set for the call/strike in either option? Do we simply just choose a timeline I assume? Like 1 year, 2 years, or whatever arbitrary date we deem appropriate?

Again thanks so much for the time and help, looking forward to this and future collaborations!

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Do we simply just choose a timeline I assume? Like 1 year, 2 years, or whatever arbitrary date we deem appropriate?

Yep! The timeline can be any arbitrary date. The imbedded options would just have the same expiry time as the rest of the structure.

If there was a desire to break the this up across different dates or even structures, that would be easy to do as well!

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Great, thanks so much for the info and support @sean - I would like to hear some feedback from a few other members of the community and then see this move forward in the governance process.

One thing we need to figure out is how the DAO wants to sell these - @willy do you think a bonding curve or the like would be possible/make sense for this or should we just find individual parties interested in buying either the range or success tokens (depending which way we decide on)?