TL;DR:
Buy up to 300k BADGER using a maximum of $350k Stablecoins to compensate for BADGER expenditure from TCD #49.
Background.
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.
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 104% profit on its Stablecoin investment while retaining full BADGER exposure.
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 5%.
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 Stablecoins to be spent.
Credit risk (0 - 10)
0 - There is little to no counterparty risk in this decision; the counterparty risk is instead transferred to the protocol risk.
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.
Implementation.
The Stablecoins used for this transaction are to be borrowed from the Compound position:
- Withdraw 200 stETH from eBTC protocol (bringing CR to the target range at ~187%) and deposit to Compound;
- Deposit ~0.87 WBTC available in the Treasury wallet to Compound;
- Borrow $350k USDT from Compound;
- Swap up to $350k USDT, targeting a 300k BADGER buy.
Using this borrowing strategy, the collateral ratio of the Compound position will stay close to its current level. The liquidation price increases by 2.5% to $62.5k for BTC and $1,442 for ETH (assuming both assets move in unison), with the BTC/ETH ratio in Compound position shifting from 70/30 to 65/35.
Vote.
- Yes, buy up to 300k BADGER with up to $350k USDT borrowed from Compound.
- No, there’s a better way.
