AIP-389: Innovative Treasury Strategy: Generating Revenue through Covered Call Lending

Active Proposals AIP Drafts
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PROPOSAL NAME

Innovative Treasury Strategy: Generating Revenue through Covered Call Lending

PROPOSAL CATEGORY

Ecosystem Fund Allocation

TEAM DESCRIPTION

MYSO is a decentralized lending protocol that allows users to borrow and lend with any ERC20 token. The protocol currently holds a TVL of ~$1.7m and is live on Ethereum, Arbitrum, Mantle, Evmos, and Neon EVM.

The protocol originated from the ETH Global Hackathon in 2021, where it was awarded as one of the winners. MYSO is also backed by several reputable crypto OGs, such as HashKey, Wintermute, and Nexo. MYSO has received several grants and has partnered with many top projects and DAOs in the space, including Mantle, Lybra, Pendle, and others.

MYSO’s core team comes from a varied background of finance and engineering and has several years of professional experience in crypto. We have a deep understanding of both DeFi and TradFi (in particular financial derivatives), which allows us to synthesize concepts from both worlds.

  • Aetienne, Founder & Developer

  • Jamie, Lead Full Stack Developer

  • Mykola, Senior Full Stack Developer

  • Denis Golub, Growth and Research

  • Matan, Designer

  • dominic, Operations and Partnerships & Author of this proposal

ABSTRACT

During the recent election season, it became clear that sustaining a robust treasury is essential for the long-term prosperity and resilience of ApeCoin’s community. A noticeable trend in AIPs is their focus on spending rather than income generation, which over time, results in a depletion of the treasury.

To address this, we propose utilizing idle treasury-owned $APE to engage in covered call lending using MYSO Finance. This would allow ApeCoin DAO to generate significant stablecoin revenue, diversify part of its treasury and earn cash upfront. In contrast to simply selling tokens, there’s no market impact. All loan execution happens through MYSO smart contracts and is trustless and fully transparent with full on-chain traceability.

BENEFIT TO APECOIN ECOSYSTEM

  • Idle $APE tokens can be used to generate immediate upfront USDC revenue
  • Immediate revenue and liquidity for operational and developmental activities
  • Diversification of the treasury into stables
  • Tokens don’t need to be sold, thus there’s no immediate market impact
  • Covered call parameters (e.g., duration, upside cap, size etc.) can all be fully customized
  • Unlike conventional covered calls or market maker loan arrangements, there is no counterparty risk

KEY TERMS

  • Covered Call: A covered call is an investment strategy where the investor sells call options on assets they already own to generate income from the option premiums.
  • Strike Price: The strike price is the set price at which the option can be excercised

PLATFORMS & TECHNOLOGIES

MYSO v2 smart contracts (three comprehensive audits: Trail of Bits, Omniscia and Statemind) deployed on Ethereum.

STEPS TO IMPLEMENT & TIMELINE

We propose using $APE to engage in covered call lending, allowing the treasury to generate USDC income. In contrast to conventional lending, the USDC is earned upfront, eliminating the need to wait until the loan matures. All loan execution happens through MYSO smart contracts and is trustless and fully transparent with full on-chain traceability.

The covered call lending parameters, such as loan duration and upside cap, can be customized according to individual treasury preferences to optimally serve the ApeCoin community. Unlike traditional CeFi-style covered calls which are oftentimes presented by market makers, this proposal allows ApeCoin to get access to a similar financial payoff but without any counterparty risk. This is because the borrower is required to post USDC collateral upfront, ensuring that ApeCoin never faces a situation where the upside cap price is not paid or the loaned $APE tokens are not returned.

The upfront USDC income from lending ApeCoin can be immediately utilized for community needs. And unlike a simple token sale, covered call lending enables the treasury to diversify its holdings into stable assets without any immediate market impact.

Example Scenario

The diagram below shows indicative upfront premiums (as of 16. January 2024) that the ApeCoin treasury could earn across various loan duration (Days to Expiry) and upside cap (Relative Strike Level) combinations.

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For instance, ApeCoin treasury lends $500k worth of $APE for 90 days at a 105% upside cap. In turn, ApeCoin treasury gets approx. $42k USDC upfront.

If the $APE price remains below 105% after 90 days, the originally loaned $APE is returned. If it exceeds 105%, ApeCoin treasury receives $525k USDC (and still keeps the initial $42k USDC upfront).

Start Date: March 1

Execution Phases:

  • Through MYSO’s OTC network, the terms for the covered call can be discussed and matched with institutional borrowers beforehand, so that ApeCoin can be certain that the borrower will take the loan offer within a few hours (process to be facilitated via MYSO platform)
  • Creation of a multisig with signers from the foundation, governance group, special council and MYSO. The respective members having the ability to opt in to participation.
  • Once the loan terms have been agreed on, a lender vault needs to be created and funded w/ $APE token
  • Creation of a loan offer according to the agreed terms, where multisig owners will be signing off the deals
  • In case the borrower doesn’t execute the loan for any reason, ApeCoin can withdraw the funds at any time.

Reporting and Transparency:

  • Weekly updates on performance and progress will be transparently reported.

OVERALL COST

MYSO would recommend using $500k worth of $APE to start writing covered calls.

Regarding the overall costs, there are two main scenarios to consider at the expiry of the covered call. However, it’s important to highlight that $APE will receive the upfront premium in any case, no matter what happens at expiry of the option:

  • If the price of $APE is below the defined strike price, ApeCoin will receive the $APE back, essentially incurring no costs
  • If the $APE price is above the strike price, the $APE will be sold at the defined strike price and the ApeCoin DAO will receive USDC. This scenario also does not incur direct costs as $APE is sold at the strike price (without any slippage etc.)
3 Likes
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Interesting idea Dominic!
Thank you for sharing this. How do you think we can use the revenue from such lending within the DAO, if approved ofc.

1 Like
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The idea of generating revenue through covered call lending from the ApeCoin treasury is an interesting and innovative approach. Here are some thoughts on the proposal:

Pros:

  1. Revenue Generation: The strategy provides a potential avenue for the ApeCoin community to generate revenue without directly impacting the market. This could contribute to the sustainability and growth of the ApeCoin ecosystem.
  2. Limited Downside: The covered call lending strategy offers a limited downside for the ApeCoin treasury since the worst-case scenario is the return of the originally loaned $APE. The treasury retains the upfront USDC payment regardless of market movements.
  3. Diversification of Revenue Streams: Implementing diverse revenue-generating strategies, such as covered call lending, can help the ApeCoin ecosystem become more resilient to market fluctuations and economic uncertainties.
  4. Community Engagement: Presenting the idea to the community and seeking their thoughts through an AIP Draft demonstrates a commitment to community engagement and decentralized decision-making, aligning with the principles of the ApeCoin DAO.

Considerations:

  1. Market Conditions: The success of covered call lending depends on market conditions. It’s essential to assess the current market environment and potential risks associated with the strategy, especially during periods of high volatility.
  2. Risk Management: While the proposed strategy has limited downside, it’s crucial to have a robust risk management plan in place. Define clear criteria for selecting lending opportunities and set appropriate risk limits to protect the ApeCoin treasury.
  3. Community Feedback: As suggested, seeking community input through an AIP Draft is a positive step. Ensure that the proposal includes detailed information on the mechanics of the covered call lending, potential risks, and how generated revenue will be utilized for the benefit of the community.
  4. Legal and Regulatory Compliance: Before implementing such a strategy, it’s important to consider legal and regulatory aspects. Ensure compliance with relevant regulations and seek legal advice to mitigate potential risks.
  5. Transparency: Transparency is key in community governance. Clearly communicate the terms of the covered call lending, the expected returns, and the process for decision-making. This transparency will build trust within the community.

Overall, the proposal presents an innovative way to leverage the ApeCoin treasury for revenue generation. By addressing potential considerations and incorporating community feedback, the AIP Draft can be refined into a well-rounded proposal that aligns with the community’s goals and values.

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Thank you for your valuable feedback, @Evil much appreciated. As I review the diverse range of AIPs, ideas, and various proposals coming our way, there seem to be numerous strategies for how the DAO can effectively utilize the USDC. With this in mind, establishing an income stream is undeniably essential for any DAO’s sustainability and success. But definitely more than happy to hear your thoughts on that as well!

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dear @alighier92 many thanks for this insightful feedback, greatly appreciated! Let me address your considerations:

  1. Market Conditions: The success of covered call lending depends on market conditions. It’s essential to assess the current market environment and potential risks associated with the strategy, especially during periods of high volatility.

Indeed, a crucial factor to consider is the volatility of the underlying asset (e.g. $APE). It’s worth noting that with increased volatility comes the potential for the treasury to earn a higher upfront premium. Needless to say that volatility fluctuates over time (and therefore the upfront premium). However, at present, the volatility appears to be quite favorable.

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  1. Risk Management: While the proposed strategy has limited downside, it’s crucial to have a robust risk management plan in place. Define clear criteria for selecting lending opportunities and set appropriate risk limits to protect the ApeCoin treasury.

Fully agree, all the parameters can be cusomized according to individual treasury preferences to optimally serve the community. In addition, there are solutions on the market where ApeCoin wouldn’t face any counterparty risk. This is because the borrower is required to post USDC collateral upfront, ensuring that ApeCoin never faces a situation where the upside cap price is not paid or the loaned $APE tokens are not returned.

  1. Community Feedback: As suggested, seeking community input through an AIP Draft is a positive step. Ensure that the proposal includes detailed information on the mechanics of the covered call lending, potential risks, and how generated revenue will be utilized for the benefit of the community.

Definitely, this is meant to be an idea - happy to provide all details in a follow-up AIP Draft.

  1. Legal and Regulatory Compliance: Before implementing such a strategy, it’s important to consider legal and regulatory aspects. Ensure compliance with relevant regulations and seek legal advice to mitigate potential risks.

ApeCoin would be matched with an institutional borrowers beforehand, so that when the loan offer is created the ApeCoin treasury can be certain that the borrower will take the loan offer within a few hours. Moreover, the whole lending process is fully transparent with full on-chain traceability.

  1. Transparency: Transparency is key in community governance. Clearly communicate the terms of the covered call lending, the expected returns, and the process for decision-making. This transparency will build trust within the community.

Fully agree, that’s what this process is all about

Please let me know if there are any other questions, happy to dive into those!

1 Like
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Hi @dominic,

The community feedback period for your proposal would be ending in less than 24 hours.

  • If you’re content with the feedback received, your next steps are to finalize your proposal using the AIP Draft Template.

  • A moderator will reach out to the author to finalize the AIP Draft. Upon receipt of the final Draft, we will review and provide instructions on the next steps.

  • Are you ready to proceed to the next phase or do you wish to extend community discussion for another 7 days?

We look forward to hearing from you.

-@Facilitators

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This topic was automatically closed after 7 days. New replies are no longer allowed.

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Hi @dominic,

Thank you for your ideas [and the ApeCoin DAO community for the insightful discussions].

A moderator has reached out to the author to finalize the AIP Draft using the appropriate template.

  • Once the AIP Draft is confirmed by the author and meets all DAO-approved guidelines, it will receive an AIP ID number and move forward for Draft Analysis Review.
  • @dominic please see your messages for the next steps.

Follow this Topic as further updates will be posted here in the comments. In accordance with DAO-approved guidelines, if the author does not respond within 30 days, the proposal will be automatically transferred to the Withdrawn category, and the author can re-submit the idea.

-@Facilitators

11

Hi ApeCoin DAO Community,

@dominic has completed editing their AIP Idea to be their AIP Draft.

This proposal has been assigned the AIP ID Number 389.

Follow this Topic as further updates will be posted here in the comments.

Kind Regards,

-@Facilitators

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Hi ApeCoin DAO Community,

Our team has reviewed and discussed @dominic’s AIP Draft and have sent a list of initial questions. We await answers.

  • Edits have been made to this Topic, by the author or by the author’s request.

  • You can click the Pencil icon at the top of the post to see these edits.

Follow this Topic as further updates will be posted here in the comments.

Kind Regards,

-@Facilitators

1 Like
13

Hi ApeCoin DAO Community,

@dominic has responded to our questions and they are in our review once again.

Follow this Topic as further updates will be posted here in the comments.

Kind Regards,

-@Facilitators

14

Hi ApeCoin DAO Community,

We have no further questions for @dominic. This AIP is now under Administrative Review.

Follow this Topic as further updates will be posted here in the comments.

Kind Regards,

-@Facilitators

1 Like