Propose $10M Bond Issuance for Lido

Solv Bond Voucher for Lido

Background

This proposal provides a financing solution for Lido based on the recent proposal, “Prepare For Bear Market” from the internal team through the issuance of the Bond Voucher powered by Solv Protocol. We believe this solution can address the challenges experienced by Lido around treasury diversification in the following ways:

  1. Low-cost financing to cover expenses and ops
  2. Solv’s robust relationships with top investors to help close the sale fast
  3. Additional $SOLV tokens as LP rewards

What is Solv and the Bond Voucher

Solv Protocol is the first and largest financial NFT marketplace backed by top-tier institutions including Blockchain Capital, Binance Labs, Sfermion, Spartan, IOSG. Its flagship product, Bond Voucher, is Solv’s featured product, which is the first low-cost, one-stop, non-liquidatable solution for DeFi projects to raise funds. Since its February launch, Bond Voucher has successfully raised $1M for Unslashed Finance, $3MM for Perpetual Protocol and $2MM for Strips Finance and $11MM for iZUMi Finance.

How it works: a DAO issues Bond Vouchers (collateralized by its native token) for stablecoins. When the Voucher matures, the DAO then pays back the principal and interest and gets back the collateral.

The Bond Voucher has an embedded European-style call option (convertibility), where on the maturity date, if the underlying asset (usually the native token) rises above a predefined strike price, the holders of the Vouchers can exercise the embedded call option by burning the Bond Voucher for the underlying.

Proposal

We are seeking to use Bond Voucher to help Lido raise funds for the next 2 years without the need of selling a huge amount of assets. Our team will be in charge of most executive works, including Bond Voucher design, smart contract development, LP incentives, bond-buyers pitching, etc.

Proposal Details

In the light of @kadmil’s recent proposal, Lido is preparing funds for the next 2 year as the market signals a 4-year bear. However, a 2- year term loan might not be available to the majority of lending protocols. While our team can solve the problem by deploying the Bond Voucher in the form of revolving term loans - referred to as “borrowing to return”, which makes a good option for businesses that have ongoing operation expenses but inconsistent cash flow.

We have customized two bond issuance options to help Lido obtain liquid funds at low costs for 2 year expenses and ops.

Revolving Loan - Plan A: Over-collateralization with $LDO

We would separate the revolving loans into 4~8 terms, with no margin cost, and 17% of the treasury-hold $LDO, approximately $30M LDO, would be used as collateral.

Highlights

Amount to issue: $10M

Months in Arrears: 24 Months

Duration of Single Loan: 3~6 Months

Zero Coupon APR: 5% ~ 10% (TBD)

Convertibility: 3x~5x Current Price of $LDO

Collateral*: $30M in LDO (3x collateral, redeemable after Lido, the bond issuer, repays principal and interests)

Revolving Loan - Plan B: Over-Collateralization with $stETH

At this plan, we can accept $stETH as a collateral asset and recommend merging the existing holdings, 9,000 ETH, into stETH.

This way you could earn extra 4% interest from Ethereum 2.0 plus nearly 2% interest from Curve. To put differently, if the APR of the Bond Voucher is 8%, the actual cost of borrowing would be just 2%.

*The general plan about the revolving loan remains the same.

Highlights

Amount to issue: $10M

Months in Arrears: 24 Months

Duration of Single Loan: 3 ~ 6 Months

Zero coupon APY:4% ~ 10% (TBD)

Convertibility: 3x~5x Current Price of $LDO

Collateral*: $20M in stETH (2x collateral, redeemable after Lido, the bond issuer, repays principal and interests)

Other than the aforementioned, Solv is open to other financing options of Lido DAO, such as under-collateralization loans (e.g. using your expected revenue as collateral). We highly suggest issuing a certain amount of bonds to hedge the upside risk of $ETH.

Reference for Bond Voucher Offering

Resources

Official Website:Solv Protocol, the pioneer of Financial NFTs

Official Doc:Solv Protocol - Solv Documentation

Discord:Solv Protocol

2 Likes

Writing here as a Lido community member.

Thanks for the proposal, its always positive to have more options to evaluate and choose from.

I have some questions and some comments. Starting with the questions in this reply, and leaving the comments for the next one.


  1. For the parameters you’ve given as a range, in particular the bond interest (5-10%) and the embedded call strike price (3-5x current price), what is going to determine what value inside the range would end up in a final deal?
  • Is it a direct proportionality relation between the two where the Lido DAO could choose, inside the given range, to have both higher or both lower depending on what the DAO values most? (i.e. paying less interest on the loan but giving up more upside via a lower strike price in the call, or the inverse)?

  • Market conditions from here to when a deal would be finalized?

  • Negotiation?


  1. I’d like to better understand how the loan, being overcollaterallized but non-liquidatable, works. So to confirm, if the value of the collateral given by Lido (be it LDO or stETH) drops below the value of the 10M stablecoins lent out, neither Solv nor the bond owners can liquidate or appropriate the collateral. Is that right?
  • In a scenario where, at the bond expiry date, the collateral is worth less than the needed repayment amount, the DAO could rationally opt to default (losing the given collateral would be less expensive than repaying at that point)?

  • It would make a lot of sense if that’s how it works actually. It’s a mechanism I haven’t seen before. Under this assumption, bond purchasers are also de facto selling a put to the Lido DAO (in addition to buying the embedded call already mentioned).

    • The put effectively has a strike price of 1/3 (in the case of plan A: LDO) or of 1/2 (in the case of plan B: stETH) of their respective current market prices (these fractions are obviously the inverse of the collateral ratios, since these “puts” would be in money the moment the loan became undercollateralized (i.e. collateral ratio <1) and “pay” linearly from there down).
  • The question is just: is this how Solv’s Bond Vouchers work?

Ref:


  1. If the Lido DAO were to vote in favor of issuing this Solv Bond Voucher, can you give some estimates of how much time it would take from there until the stables are in the treasury?

My understanding is that you’d still have to find buyers and execute a few other things:

In your experience doing this for other DAOs, what’s an average time to completion Lido could expect?

3 Likes

Hi Carvas, thanks for your interest.

1.Re:

The range we proposed above is based on past deal experience, which is essentially similar to the pricing practices that have been proven in the traditional bond market. Factually speaking, there is no direct correlation between call strike price and the bond interest rate. All elements in the deal are variables and will need to be adjusted along with market fluctuations. The APR is subject to business alignment between both parties and latest applicable market conditions. Adequate communications and negotiations as needed between Lido community and investors are critical to the success & sustainability of this deal.

The strike price of embedded call option (Euro-style) is determined by Lido community’s demand. The strike price can be set among lower range if Lido community intend to sell the tokens. Reversely, the embedded call strike price can possibly be set up among higher range (5x or above is recommended in this case) if the community is looking to hold the tokens for long.

2.Re:

If the value of the Lido’s collateral dropped below the value of 10M stablecoins being lent out, Lido will be asked to raise its collateral to make up the gap between current collateral value and 70% of the original collateral value. If Lido fails to close the gap in collateral value as described above, this deal will be deemed as default and Solv’s risk team will proceed to initiate the default procedure in order to fairly protect Lido and investors’ benefits.

Similar to traditional finance, it is an option for a DAO or company to go default (keep the stablecoin and give up collateral). However, making the repayment on time will always be considered as the optimal choice that can best sustains the project in the long term.

,

Besides, , I believe I better introduce how the process worked prior to bond issuance.

Our research team, serving like an investment-banking-like intermediary, will run in-depth assessment on the bond issuers’ (borrowers) business model, anticipated cashflow, creditworthiness, and so forth to make sure if the collateral price dropped below the estimated line, the bond issuers’ (borrowers) would not jeopardize its reputation and still be capable of & willing to pay back the bond buyers (investors) with the best efforts.

Once the borrowers’ qualification is confirmed to meet our risk management standard, signing an on-chain smart contract to secure investors’ principal is likely to be recquired.

All in all, default risk of bond voucher will inevitably exist However, as we believe and have seen the solidity ofLido project, Lido will be capable of and willing to repay, instead of damaging the reputation even the value of collateral plummets down to$10 mm or below under the impact of market downtrend

3.Re:
The standard processof bond issuance takes 7~11 days on average, including road shows (bond investors pitching), marketing, bond voucher design, etc.

Roughly speaking, it normally takes 2 days or less for bond voucher design, marketing and operations, and 7 days for road shows. Bond vouchers will be available and ready to be delivered within two hours after the road shows are completed,. We can target to deliver the bond in 9 days plus 2 hours in the most ideal scenario.

Also have a few comments aimed at increasing clarity in a potential deal.

1. Embedded LDO calls in the Bond

As discussed, the convertability of the bond amount into LDO at 3x~5x current price is de facto the same as Lido giving an out of the money LDO call option to the bond purchasers as part of the deal.

In my view, this is a much bigger part of the deal than it may seem at first. I did a quick model on how what value these calls may have, presented bellow:

Assumptions:

  1. We used standard Black-Scholes to try to value the options. The BSM has limitations and there are critics on its accuracy especially in pricing longer term options (which is the case).
    However, it’s the most widely used model and should give at least a base estimate.

  2. For LDO spot price, we used the LDO 30-day TWAP instead of today’s price. At the time this was computed, the TWAP was $1.152.
    Daily price is to volatile for these estimates to be useful for more than a week and a TWAP will almost always be fairer for both sides.

  3. Implied volatility is, obviously, the hardest input for the Black-Scholes model. Since there are no liquid option markets for LDO from which to extract IV from option prices, we used the historical volatility as the estimate for implied volatility.
    Since this isn’t perfect, we looked at average LDO HVs from tradingview and used a wide range around them (from 100 to 200) for different estimates.

  4. As for other assumptions, we used a 3% annual risk-free rate to discount the options. This value could be higher or lower but either way it wouldn’t affect the outputs much so it shouldn’t be a big focus here.

Pricing estimates

  1. Under these assumptions, the following tables contain what the present value of the LDO calls would be, a function of the chosen strike price (to be determined in the potential deal terms) and implied volatility (multiple possibilities used as explained above):

The goal of this analysis is to provide more detail to the Lido (and Solv) community regarding what this structure entails :slight_smile:

3 Likes

Re:

That is a great assumption, Carvas. However, you might amplify the role of strike price, namely the call option, but overlook our purpose of issuing bond for Lido, which is conducive to the future working capital. In reality, few and far between are the protocols that explore issuing bond vouchers at low strike price, which is 3x or less. In the sense that a bond voucher is a pure debt instrument to borrow money.

For the settlement of interest rate of the bond voucher, you can take aim at previous response:

“The APR is subject to business alignment between both parties and latest applicable market conditions. Adequate communications and negotiations as needed between Lido community and investors are critical to the success & sustainability of this deal. ”

*Please note that private negotiation of interest rate is highly encouraged.

In addition, we would like to reiterate that aside from offering bond instruments, advisory service as an independent third party, risk management including credit default swap and other types-like insurance will be applied to protect our investors and the protocols (bond issuers).

Second comment, on a different front:

2. Comparison to other borrowing options

The following points are not to endorse these options for Lido. They’re more to evaluate whether the proposed loan terms are fair, by comparing them to similar competing alternatives.

An immediate point of comparison to Solv’s overcollateralized loan proposal would be taking out the equivalent loan on a decentralized lending platform.

2.1. First example - Aave

The counterfactual of taking an overcollateralized loan of stablecoins against stETH on Aave can give some insights on fair cost of capital for a potential bond.

For both DAI and USDC, interest rates on Aave have been consistently under 4% (which is considerably below the 5-10% proposed):

.

2.2. Second example - Maker

The situation is similar in Maker. Borrowing DAI against stETH with the same collateral ratio as requested in Solv’s proposal would also cost Lido much less than the 5-10%.

2.3. Considerations

a) Rates on stablecoin borrowing against cryptoassets is highly correlated with demand for leverage and for yield farming (main use cases). These are in turn both correlated with bull markets in crypto.

As such, its fair to point out that this current variable rate could increase into or past the interest range proposed in Solv’s proposal.

However, because of the aforementioned correlation, if that happened, Lido would probably be in a position to get working capital in other ways (treasury diversification by selling LDO holdings ou stETH revenues – which would themselves be worth more), so the loan wouldn’t be as needed/would be closable.

b) On a bond, Lido would get the $10m up front but would only need it/deploy it over several months, all while paying the full interest on all of it.

On the other hand, in a counterfactual scenario such as the two mentioned here, borrowing of the stablecoins would only happen ~linearly as needed, so the effective interest paid at the end of the period would be half (think: in a first month paying 4% of, say, $1m and at the end 4% of $10m, averaging 4% on $5m).


Again, only presenting these comparisons to gauge whether the proposed deal terms are the best we could get.

2 Likes

Having a credit line is not a bad idea, but I agree we need to find out what could be alternative terms and how we derisk it from liquidations. Maker is a pretty good option for both if we’re borrowing against stETH - it allows us to borrow in chunks and has a good oracle/liquidations model. It doesn’t accept LDO though, at least yet.

There’s one more side to this - as far as I know, we have muslim stakeholders and contributors that wouldn’t be fine with Lido issuing a regular bond.

3 Likes

Before embarking on a debt raising, we would like to open up new possibilities beyond pure debt offering, which we believe is more in the interest of the Lido Community.

Under the downward corrections, there is generally one main decision to be taken into consideration when choosing a financing option, which is diversification. A glimpse of Lido’s treasury balance, stable coins Lido possesses merely match the requirement for future working capital. Nevertheless, our other featured products, Convertible Voucher, can address the ongoing advancement that Lido has committed to, allowing for higher level of diversification and granularity when implementing $10 millions fundraising strategies without the need to pay back in the future.

Once again, we would like to reiterate that Solv is capable of closing the sale fast with the aid of solid relationships with top-tier investors (voucher buyers). We helped a $3 million fundraising for Perpetual Protocol.
https://twitter.com/SolvProtocol/status/1498193156428288002

Introduction of Convertible Voucher

Simply put, the convertible voucher is a structural product, containing a certain amount of collateral tokens. Its unique payment mechanism takes into account the volatility that currently characterized Defi while retaining a strong tolerance of risk. It was featured with parameters including maturity date, settlement price, bond price range, face value, APR, etc. For instance, if the token price falls out of the bond range, the voucher gives buyers access to more or less collateral tokens. Shared below are some of the most promising edges of the product,

  • Convertible voucher allows to place stETH at future price, which appears to be a better choice
  • The spot price of ETH will not be affected, in a way to sustain confidence in Ethereum’s community
  • Convertible voucher eases the downside exposure of ETH so as to enable a widespread adoption
  • Buyers have the complete freedom to split, trade, or transfer the vouchers in a form of NFT on Solv’s platform before the maturity date

*Use Case of Convertible Voucher (Payout Breakdown for the Convertible Voucher | by Solv Protocol Team | Solv Protocol | Medium)

Proposal Details
We propose to issue a $10 million convertible voucher for Lido by our one-stop solution. The voucher is convertible when the settlement price is below $400 or above $1600 (if the settlement price falls within the range, Lido only needs to pay the equal amount of collateral, which is $10 million). In accordance with our discussions with potential investors during the past two days, most of them prefer to accept stETH as collateral assets. Meanwhile, we recommend merging existing ETH into stETH via Curve. 25,000 stETH, give or take, is acquired to deposit upfront as collateral.

Highlights

Amount to issue: $10M
Duration: 6 Months
Zero Coupon APR: 0%
Bond Range: $400 ~ $1600
Settlement Price: 15 Days TWAP
Collateral: 25,000 in stETH
Maturity to Expiry Date: 7/1/2022 ~ 1/1/2023 (TBD)

Example of Convertible Voucher

Settlement Price within the Range of $400 ~ $1600

1.Provided Tyler purchases the convertible voucher issued from Lido for $1,000 USDC. At the expiry date, if the price of ETH is $1200, then 0.8333 stETH (face value ($1000) / settlement price ($1200)) is claimable. Furthermore, the ETH 2.0 gives 4% APR to stETH holders, meaning that Tyler is awarded additional 0.033 ETH. The outright revenue (principal plus interest) is 0.85 ETH, which is $1020 USDC.

*Lido is able to retrieve 16666 stETH (face value ($10M) /settlement price ($1200) - 25,000 stETH), if all is claimed.

Settlement Price below $400

2.Provided Tyler purchases the convertible voucher issued from Lido for $1,000 USDC. At the expiry date, if the price of ETH is $300, then 2.5 stETH (face value ($1000) / lower bound price ($400)) is claimable. Furthermore, the ETH 2.0 gives 4% APR to stETH holders, meaning that Tyler is awarded additional 0.05 ETH. The outright revenue (principal plus interest) is 2.55 ETH, which is $765 USDC.

*Lido is able to retrieve 0 stETH (face value ($10M) / lower bound price ($400) - 25,000 stETH), if all is claimed.

Settlement Price above $1600

3.Provided Tyler purchases the convertible voucher issued from Lido for $1,000 USDC. At the expiry date, if the price of ETH is $2500, then 0.625 stETH (face value ($1000) / upper bound price ($1600)) is claimable. Furthermore, the ETH 2.0 gives 4% APR to st ETH holders, meaning that Tyler is awarded additional 0.0125 ETH. The outright revenue (principal plus interest) is 0.6375 ETH, which is $1594 USDC.

*Lido is able to retrieve 18750 stETH (face value ($10M) /upper bound price ($1600) - 25,000 stETH), if all is claimed.