Unclaimed FORTH Proposal - Use as collateral for issuing DAO-bond

Yo guys,

There’s been several discussions about what to do with the unclaimed FORTH that will be transferred to the DAO. This proposal is to highlight one strategy that will not only benefit FORTH holders in the short-term and long-term, but also some of the AMPL-utilities that have just launched like ButtonTranche, while also providing the potential to turn FORTH into a yield-earning token.

ABSTRACT:

Some of the suggestions proposed so far include burning it, airdropping it, adding it to geysers, selling it for POL (protocol owned liquidity). All of these proposals except the geyser proposal require doing something barbarian with the tokens (burning/airdrop/selling) which would never be done by a publicly traded company with it’s token price at all time lows. NONE of these proposals provide a concrete path for how they integrate into the several great roadmap ideas added to the community Miro Board and what governance activities would arise as a result.

The proposal here is to use the FORTH as collateral to take out a loan by using the utilities that are already building on top of AMPL (ButtonTranche contracts and HourGlass contracts). This will give the FORTH DAO access to stable-coins like USDx that it can use to fund the roadmap endeavors, while providing a clearer vision of subsequent governance activities, and also allowing the DAO to retain significant ownership of the collateral if demand for the token increases as a result.

INTRO:

I hope most readers are familiar with ButtonTranche contracts, but I’ve been told the following GIF summarizes it pretty well. The A-tranches can be sold for USDT, because they maintain relatively stable value.

TrancheGifFrameRate25

What’s awesome is that the PRL team has also developed the rebasing wrapper, which will allow us to take the unclaimed FORTH and make FORTH-A/Z tranches that track the FORTH price. Now for the FORTH A-tranche, it will only lose value if the FORTH price drops 80% from the start of the bond. I.e. if we did this today, FORTH-price would need to drop to $1.37 in order for FORTH A-Tranche to lose value.

FORTH-PRICE-GIF

However, the problem is that no investor looking for safe investments like A-tranche would be interested in a FORTH-A tranche over an AMPL-A-Tranche. AMPL’s supply fluctuates in a throttled, oscillating manner compared to the FORTH token, whose price has just been slowly dumping.

We can work around this by adding additional upside the FORTH-A-tranche to attract a different type of investor (one who wants more upside). We can do this by the following:

  • Use the HourGlass contracts to create FORTH-A-PRIME (which act as FORTH-corporate bonds) and FORTH-Z-PRIME
  • Place a limit range order with the FORTH-A-PRIME for USDx on UniSwapV3 for % interest we want
  • Make the bond-term-length sufficiently long enough to where we think FORTH DAO will have been developed (i.e. at least 1 year, most corporate bonds are 2 - 3 years in length)

The following sections will explain why this is beneficial not just for the DAO, but also FORTH-A-PRIME bond holders.

SUMMARY OF HOURGLASS CONTRACTS:

For those that aren’t familiar with the HourGlass contracts, you can read the medium article, but below is a short summary. HourGlass contracts package the A-Tranche and Z-tranche in a way similar to SIPs (structured investment products). This gives investors much more upside, with limited risk. These grew popularity in TradFi specifically because they allowed corporations (i.e. organizations) to take out low-interest rate loans.

By using the HourGlass contracts, we can define the payoff (i.e. the amount of FORTH-Z given to the FORTH-A-PRIME) as some KPI (Key performance indicator) that we think is relevant to the DAO with a reasonable loan term (Governance activity #1).

For simplicity sake, I will use the FORTH token price as that KPI in the example below with a 1-year loan term, with 20/80 tranche ratios. The FORTH token price is ultimately a reflection of the demand to be involved in the FORTH DAO, which can be a good KPI if the DAO is doing useful things.

If FORTH price has increased by the end of the bond term, then the payoff for the A-PRIME is reduced, however each FORTH-Z-Tranche will be worth more, which means there could be a handsome pay-off for lending USDT. The benefit for the DAO is that it still retains a large percentage ownership of the initial collateral deposited.

If FORTH price has dropped by the end of the bond term, people who chose to lend their USDT for FORTH-A-PRIME are protected against an 80% price drop by maturity. Meanwhile, the DAO does not need to repay the loan since it’s already accounted for in it’s pay-off.

FORTH-PRIMES

In the meantime, the DAO can use the USDx lent by FORTH-A-PRIME holders towards the endeavors that they feel are most valuable for bringing more people into eco-system (Governance Activity #2). The wonderful thing here is that the DAO maintains upside exposure to the majority of the FORTH we are using as collateral.

OTHER BENEFITS:

This proposal also has some other benefits that are implied also. The full list of benefits are summarized:

  • Immediately introduces several other governance activities including deciding the loan terms, and allocation of the USDx loan
  • Similar to the AMPL-Tranches, the FORTH-Tranches are Zero-Coupon bonds, there’s no need to register these as securities anywhere
  • Highlights the use-cases for BW & HG utilities
  • Bringing more awareness to the AMPL-ecosystem
  • Still affords the DAO the opportunity to use the Loan to fund some of the other suggested ideas (i.e. geysers, POL)
  • Immediately opens up utility for FORTH holders to use their tokens as collateral for their own endeavors on HourGlass and possibly MoonCake. We could even choose to turn on a fee-switch that emits to the DAO wallet with a % cut of the tranches from any free-market actors who choose to borrow with FORTH as collateral, turning FORTH into a yield-earning token.

The disadvantages of this proposal that I could think of include the following:

*EDIT: So upon inspection, it appears as there’s no existing ChainLink oracle for FORTH price, which would be an additional step to set up

  • Will likely take longer than just airdropping/burning/selling
  • Unknown amount of excitement for FORTH-A-PRIME bonds. This can be addressed with snapshots/surveys to align on the best paramters.
  • Depending on which of the RoadMap activities from the MIRO board we plan to tackle, it may or may not fully cover the cost. If more USDx is required, the payoff parameters can be changed before issuance, but it may/may not be attractive for investors
  • Demand for the token may not translate directly into token price for reasons beyond the DAO’s control. To address this we could use a different KPI but may take longer to develop

BURNING / AIRDROPPING / SELLING TOKENS:

Any proposal that would require the DAO to burn, airdrop or sell tokens is barbarian for several reasons. If you magically gave any publicly traded company a huge percentage of it’s shares, you’d never see it burn the shares, or immediately do a share offering (unless the token price is high; FORTH is literally at all time lows, so it’d be the worst business decision of all time to sell the FORTH if we actually believe in the protocol) or give each shareholder x% more shares. Similarly, we should begin thinking of this DAO as a business and what would be the best way to achieve our goals with the assets we have. We have the tools necessary to borrow, and they’re OUR tools, so using them will only highlight their utility. If we are successful with the USDT we borrow, we could possibly even have a Governance Snapshot leading up to maturity for optionally repaying the loan if we think that’d be valuable (Governance Activity #3).

WORKED OUT EXAMPLES WITH MATH:

Current FORTH price: $6.87
Unclaimed Governance Tokens: 3.9M
Value: $26.8M
% Ownership of FORTH supply: 26%

Governance decided values

Tranche-Ratios: 20/80
Limit order interest rate: 5%

HourGlass Deposit Ratio: 20/80
Payoff Function Risk/Skew Factor: 20

Resultant: Threshold price for FORTH-A, FORTH-A-PRIME : $1.37
Resultant: Loan Amount: $5.25M (should be enough to buy forth and do token swaps / fund the development of a shorting vault / simple marketing initiatives like a mini-hackathon)

SCENARIO 1: FORTH PRICE OF $10 in 1 year:
DAO Initial ownership % of network = 26%
DAO ownership% after maturity = 22.4%
DAO wallet value after maturity = $32M

Lender ROI: 65%

SCENARIO 2: FORTH PRICE OF $4 in 1 year:
DAO Initial ownership % of network = 26%
DAO ownership% after maturity = 17.07%
DAO wallet value after maturity = $10M

Lender ROI: 22.89%

SCENARIO 3: FORTH PRICE OF $1.30 in 1 year:
DAO Initial ownership % of network = 26%
DAO ownership% after maturity = 0%
DAO wallet value after maturity = $0

Lender ROI: -3.45%

You can calculate results for your own scenarios by adjusting inputs on a copy of the spreadsheet I created here.

10 Likes

I think this is a really interesting idea and one to consider seriously. It allows the DAO to start using the assets productively without any near-term impacts on the ecosystem.

For completeness it should be noted that, upon tranche maturity, the buyers will be holding position in raw FORTH tokens. At that point they’ll be free to liquidate on the market or participate in governance actions themselves. However, if the DAO treasury ever holds other assets those could be used in place of FORTH if desired.

The specific details of the bonds’ structure (like maturity time) do depend on the needs/wants of the buyers on the other side of the transaction. So it could be useful to explore the landscape of potential buyers early.

3 Likes

Very interesting proposal. I think I like it.

I love this idea and I think the generic idea of issuing bonds to prevent dumping of shares for funding growth is really important. A couple questions that came up while I was reading. I’m still not 100% on HG so please pardon me if there are some stupid questions as a result of misunderstanding.

Do we need to use all the forth as collateral for bonds continuously? Why can’t it be more ad hoc and issue more bonds as there is more demand for them / activities that need USDx funding? For example if there is demand for USDx for DAO activities that need doing could the interest rate be tuned to adapt to urgency of DAO activities?

Another slightly crazy idea is does it have to be single limit order or could we create something like a bonding curve for the interest rate? So for example if the target is to use 50% of the Forth for bonds for funding DAO activities in the first quarter there could be a funding period where price discovery of the bond happens and as more commitments come in the interest rate lowers until it meets an equilibrium.

To get some ideas we could look at what porter finance is doing since they are working on providing bond tooling for DAOs Issuing debt could save your DAO. Using debt financing to survive a… | by Jordan Meyer | Jan, 2022 | Porter

2 Likes

Why can’t it be more ad hoc and issue more bonds as there is more demand for them / activities that need USDx funding? For example if there is demand for USDx for DAO activities that need doing could the interest rate be tuned to adapt to urgency of DAO activities?

Yup that’s absolutely possible and something as a DAO we should come to agreement on (i.e. how much to use as collateral, how much to borrow). I think it makes most sense to decide which projects/activities are important and then work backwards to see how much funding they need, and then how much collateral that would require us to borrow against.

Another slightly crazy idea is does it have to be single limit order or could we create something like a bonding curve for the interest rate? So for example if the target is to use 50% of the Forth for bonds for funding DAO activities in the first quarter there could be a funding period where price discovery of the bond happens and as more commitments come in the interest rate lowers until it meets an equilibrium.

Not crazy at all, that’s exactly the sort of stuff we’re intending that the DAO use it’s governance process for deciding if using the HG contracts. UniSwap V3 has concentrated liquidity so the tokens could be tranched & primed and different qty’s can be auctioned off at different interest rates, at different times etc. The spreadsheet I made was just designed to give a high level view of what’s possible using the maximum amount.

Love it, any proposal that unlocks liquidity without having to sell FORTH tokens at the current criminal undervaluation has my support :slight_smile:

1 Like

sorry i can’t understant mean, it’s luna - rebase ust? but i think that’s funny​:relaxed::laughing::heart_eyes:

1 Like