Generate USDC revenue through ACX covered call lending on MYSO

Author(s): MYSO Status: Proposed Related Discussions: (optional)

Summary:

We propose utilizing idle treasury-owned ACX to engage in covered call lending using MYSO Finance: this would allow Across to generate significant stablecoin revenue, diversify part of its treasury and earn cash upfront without having to wait until loan expiry. In contrast to simply selling tokens, there’s no immediate market impact. All loan execution happens through MYSO smart contracts and is trustless and fully transparent with full on-chain traceability.

About MYSO: MYSO is a decentralized peer-to-peer lending protocol that specializes in custom loans that allow users to borrow and lend with any ERC20 token. In addition, the protocol can support a wide range of different on-chain structured product strategies like synthetic token buybacks and covered calls. MYSO has facilitated ~$1.7 million in covered call notional volume in the past several months and has run a few strategies with DAOs/treasuries in the past including ones with the Telos treasury and Evmos community treasury.

The protocol originated from the ETH Global Hackathon in 2021, where it was awarded as one of the winners. The protocol is also backed by several reputable crypto OGs, such as HashKey, Wintermute, and Nexo.

Site - https://myso.finance DApp - https://app.myso.finance

Motivation:

Treasury diversification and revenue generation, especially in stables, should be a key goal of any DAO looking to have funding for runway and additional product development. Across has previously engaged in some treasury diversification efforts as well as deployment of ACX to various on-chain yield-generating/liquidity growth strategies. However the DAO still has a considerable sum of ACX tokens idle in the treasury which can be used more productively to fulfill the goals mentioned above.

To support this endeavor, we propose using ACX 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 Across community. Unlike traditional CeFi-style covered calls which are oftentimes presented by market makers, this proposal allows Across 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 Across never faces a situation where the upside cap price is not paid or the loaned ACX tokens are not returned. The upfront USDC income from lending ACX 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.

Features Utilize Idle Tokens: Idle ACX tokens can be used to generate upfront USDC revenue Full Customizability: Covered call parameters (e.g., duration, upside cap, size etc.) can all be fully customized to optimally cater for Across’s treasury preferences No Market Impact: Tokens don’t need to be sold, thus there’s no immediate market impact Covered Call Yield: Yield is generated through a covered call structure, where cash is paid upfront for lending ACX and implicitly writing a call option on the loaned tokens (see Call option - Wikipedia) Transparency: Loan execution happens transparently on-chain using 3x audited MYSO smart contracts, without counterparty default risk

Benefits

Immediate revenue and liquidity for operational and developmental activities Diversification of the treasury into stables (e.g., multiple covered calls can be executed consecutively over a longer time period) Unlike conventional covered calls or market maker loan arrangements, there is no counterparty risk

Example Scenario When Across lends through a covered call, it essentially lends treasury tokens and writes a call option. The borrower, on the other hand, buys the call option and has the right - but not the obligation - to return ACX tokens. To initiate the loan, the borrower first needs to pledge USDC collateral to (1) pay for the upfront premium to the Across treasury and (2) provide collateral for cases where the borrower doesn’t repay.

For example, let’s say that Across lends $100k worth of ACX from the treasury. The DAO is free to set the terms they’d like to lend at, but let’s say that a strike the loan tenor will be 60 days and have an upside cap, or strike, of 110%. In return, given recent volatility, the Across treasury would get ~$10.90k USDC upfront (~65.4% APY).

At the loan’s inception, the Across treasury would receive this $10.90k USDC immediately and keep it no matter what.

Then, at expiry, there are two possible outcomes: (i) ACX price doesn’t increase by more than 10% after 60 days, in which case it’s rational for the borrower to return the borrowed ACX tokens and retrieve the $110k USDC collateral (ii) If the ACX price increases by more than 10% after 60 days, it’s rational for the borrower not to return ACX tokens, resulting in an unlock of the pledged $110k USDC, which becomes claimable by the Across treasury.

[chart available in forum discussion]

How secure is it to do covered calls via MYSO? MYSO has undergone three independent rigorous audits with leading security experts from Statemind, Omniscia, and Trail of Bits. All audit reports are publicly available and can be seen here:

Statemind: [public-audits/Myso Finance/2023-08-15_Myso_v2.pdf at main · statemindio/public-audits · GitHub] Omniscia: [Omniscia Myso Finance Audit] Trail of Bits: [publications/reviews/2023-04-mysoloans-securityreview.pdf at master · trailofbits/publications · GitHub]

Moreover, as mentioned earlier in the proposal, one of the benefits of using MYSO for covered calls is the absence of counterparty risk. MYSO provides access to covered calls in a trustless manner, eliminating the need to trust the borrower.

The diagram below shows indicative upfront premiums that the Across treasury could earn across various loan duration (Days to Expiry) and upside cap (Relative Strike Level) combinations. Generally, the longer the loan duration and the lower the upside cap the higher the upfront premium Across can earn. Across can customize the covered call terms to their liking and choose from a number of different duration/upside cap combinations. Additional indicative prices can be provided upon request.

The premium for the example scenario above (110% upside cap, 60 day duration) is indicated in red (10.90% upfront)

Specification & Implementation:

We propose that the Across DAO fund a bespoke vault on MYSO with 400,000 ACX tokens (~$116,000 USD at current spot price of ~$0.29) to utilize for a covered call strategy. We then propose to establish the Risk Labs Foundation multisig as an on-chain quoting delegate for the bespoke vault, which would let Risk Labs handle quote creation and execution on behalf of Across DAO.

We also propose utilizing either a 110% or 120% upside cap (strike) and running the strategy at either a 30 or 60 day tenor - the tenor for each transaction would depend on the upfront premium, and we’d push towards securing a tenor/strike combination for which the premium would result in highest annualized yield.

Once the proposal is approved by the Across DAO, no other active management will be needed by the DAO given that a Risk Labs Foundation wallet address is established as an on-chain quoting delegate for creating a covered call quote.

Technical Specification The MYSO team will create a vault [address will be determined at creation] from the MYSO Vault Factory token contract at [0x1874a08F7975b25944FEb989BbAaA464f61aB3bc] and will transferOwnership to the Across DAO treasury wallet [0xB524735356985D2f267FA010D681f061DfF03715]. The MYSO team will also set the Risk Labs Foundation multisig [0x8180D59b7175d4064bDFA8138A58e9baBFFdA44a] as on-chain quoting delegate.

Then, the aforementioned Across DAO treasury wallet will call acceptOwnership at the newly created vault address.

Then, the aforementioned Across DAO treasury wallet will call transfer on ACX at contract address [0x44108f0223A3C3028F5Fe7AEC7f9bb2E66beF82F] with to address being newly created vault address [address will be determined at creation] and amount being 400000_000000000000000000 ($116,000 USD at current spot price of ~$0.29)

Once the bespoke Across DAO vault is created on MYSO and funded with 400,000 ACX, the Risk Labs Foundation multisig (as an on-chain quoting delegate) will create a covered call quote on behalf of the Across DAO calling addOnChainQuote function.

Conclusion:

This proposal has outlined how Across can generate USDC cash revenues by using idle ACX treasury for covered call lending. This approach not only diversifies the treasury but also avoids market impacts that could arise from outright selling ACX. The flexibility in structuring loan terms allows Across to tailor the initiative according to its unique risk-reward preferences, ensuring alignment with its broader financial and operational objectives.

We look forward to hearing your comments and feedback and would love to answer any and all questions regarding covered calls and how execution would work!

Voting:

For - in support of generating USDC revenue through ACX covered call lending on MYSO - should a 'For' vote pass, Across will move forward with Myso's proposal.

Against - not in support of generating USDC revenue through ACX covered call lending on MYSO - should an 'Against' vote pass, Across will not move forward.