TL;DR:
- Buy up to 600k BADGER using a maximum of 4.5 cbBTC to compensate for BADGER expenditure from TCD #106.
- Implementation of this TCD is contingent on approval and successful implementation of TCD #106.
Background:
Implementation of this TCD is contingent on approval and successful implementation of TCD #106.
Badger Treasury has a history of buying BADGER to hedge the loans to market makers (see: TCD #35, TCD #91).
I’ll quote the rationale from TCD #91 below:
Market Making deals, while enhancing the token’s liquidity environment on CEXs, also imply conditional selling losses if BADGER trades noticeably above the call options prices.
By conditional selling loss, I mean that whenever the option to repay the loan in USDT is exercised by the market maker, it signifies that the token’s open market value is higher - and the difference between the two constitutes the loss.
In the scenario where options get exercised, hedging allows to:
- Keep the market making program online (otherwise we’d need to find extra 300k BADGER to renew it).
- Turn the deal from being a conditional loss to a conditional gain by switching its cost basis to Stablecoins.
In the past, the Treasury has already successfully hedged the GSR deal (TCD #32) with a Badger buy (TCD #35).
As the cost of hedging depends on the current BADGER price, it might get expensive for the Treasury, which is why there were no hedging proposals other than TCD 35.
At the current price, though, hedging is much more affordable and doesn’t compromise the runway.
This rationale applies to the current conditions.
Due to BADGER’s depressed price, I believe the risk/reward of this hedging is better today than before.
The other side of that coin is that the conditional loss from not hedging is also likely to be higher.
Metrics of Success
How long will the investment thesis take to play out?
In the optimistic scenario, it would take 12 months for the options to get exercised, at which point the Treasury would see up to ATM +X% profit (X% as specified in the MM deal) on its Stablecoin investment while retaining full BADGER exposure to continue the market making program.
In the pessimistic scenario, indefinitely. The funds will be swapped to BADGER and are expected to remain in the Treasury until spent. And spending BADGER outside the market making deals currently isn’t a part of the Treasury management strategy.
Will the treasury recoup funds or does the investment represent an outlay?
The Treasury anticipates a positive return on this investment.
What are the risks associated with each investment?
Protocol risk (0 - 10)
0 - This is an investment in the Native token and therefore has no extra protocol risk outside of BadgerDAO.
Liquidity risk (0 - 10)
4 - Given BADGER’s on-chain liquidity, the slippage is expected to be less than 10%.
Market risk (0 - 10)
6 - BADGER is a volatile token.
However, the market risk is partially mitigated in this proposal by limiting the amount of BTC to be spent.
Credit risk (0 - 10)
0 - There is little to no counterparty risk in this decision.
Execution risk (0-10)
2 - This decision gives discretion of execution to the Treasury Multisig. This requires some management and extra attention from signers. However, the transactions themselves are not complicated and have been executed by the Multisig before.
Vote.
- Yes, buy up to 600k BADGER with up to 4.5 cbBTC
- No, there’s a better way.
Implementation Note
The TCD was executed after #TCD 106 was approved and before its implementation got postponed.