RFP-27: Strategic Plan for Addressing January 2nd Exploit - Recapitalization & Debt Resolution Options

Abstract

RFP-27 seeks consensus from Radiant DAO stakeholders regarding the strategy and timeline for recapitalizing the Arbitrum lending market and repaying the excess debt in the WETH market, following the January 2nd exploit.

Motivation

Context

Radiant Capital was subject to a flash loan exploit on January 2nd at 06:53:29 PM +UTC, shortly after launching the native USDC market on Arbitrum. This incident resulted in the accumulation of bad debt totaling 1,902.5927 wETH in the WETH market. In response, the Radiant DAO Council invoked the emergency administrative controls, pausing all markets on Arbitrum to mitigate any further damage.

To ensure the protocol's safety and guarantee unrestricted access to deposits for all users, it is imperative to recapitalize the protocol and fully reimburse the bad debt. This proposal presents various approaches to achieve this, balancing the need for financial flexibility to accelerate DAO development with the imperative of restoring complete confidence in the Arbitrum lending market.

Current Treasury Balances and Assets (at current prices):

DAO Treasury:		$4,018,265
ARB OpEx:			$759,987 
BNB OpEx:			$377,823
ETH OpEx:			$81,921
Total:				$5,237,996

Option 1 – Repay Bad Debt With Liquid DAO Funds & OpEx

Radiant DAO Treasury currently holds approximately $5,236,996 in non-RDNT assets, excluding ARB tokens allocated via previous RFPs. Of this, $4,018,265 in stablecoins are deposited into Radiant to stabilize the utilization rates in USDC.e and USDT markets on Arbitrum and Ethereum deployments. Without any redemptions of rTokens, $1,219,731 remains liquid, with about $1M readily available.

The breakdown of the remaining $4,018,265 worth of stablecoins that are deposited into Radiant is as follows:

USDC.e (Arbitrum)	$1,404,186 
USDT (Arbitrum)		$2,008,262
USDT (Mainnet)		$605,817
Total:				$4,018,265

USDC.e on Arbitrum is 92.29% utilized with $1.03m in available liquidity.

USDT on Arbitrum is 88.01% utilized with $943.17K in available liquidity.

USDT on Mainnet is 83.9% utilized with $874.44K in available liquidity.

If the DAO were to liquidate each position and bring all three markets to 100% utilization, that would free up $2,578,987.

However, it is the opinion of advisors and community members that a lending protocol should avoid scenarios where multiple stablecoin markets are 100% utilized, as this is highly detrimental to the protocol’s financial health. To mitigate this, Option 1 proposes to use $1M from the DAO’s treasury combined with $1M in OpEx funds for the immediate purchase of approximately 50% of the 1,900 ETH loss.

Should utilization rates fall below 80% again, the DAO will continue to withdraw additional stablecoins and convert them into ETH, further reducing the bad debt.

Currently, Radiant generates roughly $500,000 USD per month in protocol fees, equivalent to approximately 200 ETH at current prices. This option proposes that Radiant allocates 80% of its monthly OpEx towards covering the remaining bad debt. This repayment is estimated to take about two months at the current ETH price and protocol fee generation rate, and includes provisions for the potential withdrawal of more stablecoins in the future.

Option 2 – Same as Option 1 With DAO Reimbursement Through RDNT Token Sales Over One Year

This option mirrors Option 1's actions but includes reimbursing the DAO Treasury with ETH obtained from selling RDNT tokens over a 1-year period.

Given the exploit value of 1,902 ETH (valued at $4,300,000 at the time of writing), this would involve the DAO selling approximately $360K of RDNT tokens per month over a 12-month period. For context, the RDNT token did approximately ~$1.3bn in total volume over the last 30 days, of which $360K would represent a mere 0.02% of total trading volume on a monthly basis.

Option 2 aims to ensure the Radiant DAO’s continued growth and ability to expand its core contributors, aligning with its vision of becoming the leading cross-chain money market in DeFi.

Most vendors, employees, contractors and partners require payment in stablecoins. The benefit of Option 2 is that it maintains a healthy stablecoin reserve for the DAO, facilitating continued expansion.

Option 3 - Abstain & Return to Drawing Board

Option 3 is for DAO community members who disagree with the proposed solutions and prefer to explore alternative strategies. A subsequent proposal would be brought forth within 48 hours after discussion on both Discourse and Discord.

Key Terms

• Bad debt: Refers to a situation where a loan cannot be repaid because the value of the collateral securing the loan has fallen below the amount owed.

• dLP: Dynamic Liquidity Providers within the Radiant ecosystem.

• Flash loan: An uncollateralized loan in decentralized finance (DeFi) that must be issued and repaid within the same transaction block on a blockchain.

• OpEx: Short for Operating Expenses, this term refers to the ongoing costs associated with running a business on a day-to-day basis.

Specifications

Debt Repayment Amounts: This section details the exact amounts of WETH to be repurchased monthly for debt repayment.

Treasury Allocation: A breakdown of the treasury assets to be utilized for the purpose of debt repayment.

Steps to Implement

Options 1 & 2:

• Liquidate necessary treasury assets to purchase WETH.

• Execute block WETH trades on Ethereum to minimize slippage and MEV.

• Distribute Repayment Funds to 0x789145aB5C5FAF652094A4B0BC6B639E150330d1 (Repayment MultiSig).

• Allocate 80% of monthly OPEX towards remaining bad debt repayment.

• Implement team salary adjustments accordingly.

• Execute RepayBehalf function for excess debt on user 0x826d5f4d8084980366f975e10db6c4cf1f9dde6d until 1,902.5927 WETH is repaid.

For Option 2, schedule monthly RDNT token sales through an OTC counterpart and manage ETH reimbursements.

Option 3:

• Gather community feedback for new proposals.

• Develop and present alternative strategies based on member input.

Overall Cost/Impact

1,902.59 ETH, or USD equivalent.

Timeline

For Option 1 - Immediate Repayment With Liquid DAO Funds & OPEX

• Jan 10, 2024: Commence the first debt repayment phase by liquidating $2,000,000 in stablecoins to purchase 880 ETH, covering 46% of the bad debt.

• Feb 2024 to Apr 2024: Over the next 3 months, allocate 80% of monthly OPEX (~200 ETH per month) towards the remaining bad debt.

• Accelerated Excess Debt Repayment Potential: Should additional liquidity enter the USDC.e and USDT markets on Radiant, increased withdrawals of stablecoins will be possible, enabling a swifter repayment of the outstanding debt.

For Option 2 - DAO Reimbursement Through RDNT Token Sales

• Jan 10, 2024: Begin the first phase of debt repayment similarly to Option 1.

• Feb 2024 to Jan 2025: Implement RDNT token sales to reimburse the DAO treasury. Approximately $360K of RDNT tokens will be sold each month over a 12-month period.

• Monthly Review: Continuously monitor and adjust the token sale strategy to ensure minimal market impact and optimal replenishment of DAO funds.

For Option 3 - Abstain & Return to Drawing Board

• Immediate Action: If Option 3 is chosen, promptly initiate a community feedback phase to explore new solutions.

• Proposal Development: Aim to present alternative strategies within 48 hours, based on community input and discussions.

General Notes

• Market Conditions: The timeline is subject to change based on market conditions, liquidity, and unforeseen issues related to the execution of the repayment plan.

• Monitoring: Continuous monitoring and adjustment of the plan will be essential to ensure effective debt repayment while maintaining the operational stability of the DAO.

Voting

Option 1: Use existing DAO assets for a swift debt repayment process.

Option 2: Same as Option 1, but also in support of replenishing the DAO's treasury through a structured sale of RDNT tokens.

Option 3: Abstain and revisit within 48 hours upon conclusion of RFP-27 vote process.