Idea: Generate USDC revenue through $SPA covered call lending

Intro
After reviewing your Roadmap for 2024, it’s clear that your protocol is deeply committed to fostering a sustainable, accessible, and empowering financial future for everyone. With this mission in mind, I am excited to propose an innovative approach to achieving sustainable yield for the protocol through the use of on-chain covered call strategies. This method will enable the protocol to realize its vision by enhancing financial sustainability and accessibility.

Idea
The idea is to leverage a portion of Sperax DAO treasury for covered call lending. This approach involves lending out a smaller part of currently idle $SPA tokens. By doing so, Sperax DAO can generate significant upfront revenue in USDC. The earned USDC 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 an immediate market impact.

Benefits

• Idle $SPA tokens can be used to generate upfront USDC revenue
• Immediate revenue and liquidity for operational and developmental activities
• Diversification of the treasury into stables
• Tokens don’t need to be sold, thus there’s no immediate market impact

Example Scenario
The diagram below shows indicative upfront premiums (as of 08. February 2024) that Sperax DAO could earn across various loan duration (Days to Expiry) and upside cap (Relative Strike Level) combinations.

For instance, Sperax DAO lends $100k worth of $SPA for 90 days at a 110% upside cap. In turn, Sperax DAO gets approx. $20k USDC upfront.

If the $SPA price remains below 110% after 90 days, the originally loaned $SPA is returned. If it exceeds 110%, Sperax DAO receives $110k USDC (and still keeps the initial $20k USDC upfront).

Conclusion
This proposal outlines how the Sperax DAO can generate USDC cash revenue by using idle $SPA treasury for covered call lending. This approach not only diversifies the treasury but also avoids market impacts that could arise from outright selling $SPA tokens. I’d love to hear the community’s thoughts on this idea and more than happy to outline a detailed draft.

Is it possible to do this on-chain? Because the SPA treasury cannot move funds off-chain.

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hi @sparkConsulting thanks for your feedback, much appreciated. absolutely, that’s the beauty about this setup: everything is fully customizable and settled on-chain w/o counterparty risk.

Hi @dominic, Could you please share the mechanism design and the contracts that will be used for this. To remove counterparty risk can you please provide examples of collateral that will be posted with the DAO for borrowing SPA tokens. Or if any other method is used to remove counterparty risk.

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hi @sparkConsulting thanks for the follow-up questions and more than happy to elaborate!

MYSO Finance is a decentralized lending protocol specializing in bespoke DeFi loans and fully customizable covered calls for nearly any token. Through MYSO Finance’s smart contracts, audited three times by Trail of Bits, Statemind, and Omniscia (can only share two links in my answer :)), covered calls can be settled in a trust-minimized way and transparently on-chain.

MYSO has onboarded several institutional borrowers who are available to quote and provide stablecoin liquidity for these covered call strategies. When a covered call gets matched, the inst. borrower needs to send the corresponding upfront premium as well as post collateral for the potential conversion amount in stablecoins. This means that the party lending tokens (e.g. Sperax DAO) through a covered call strategy is protected from default/counterparty risk.

I hope that answers your question. Feel free to reach out if you have any more questions - more than happy to dive into anything else you’d like to know.

@dominic Thanks for sharing your audit reports. What kind of collaterals do your borrowers post, is it stablecoins? What do your borrowers usually do with the borrowed token amount?
Please provide the technical details and what the DAO needs to do to execute this, if the DAO were to be interested. DAO currently holds SPA tokens in a multi-sig address, details of which are provided in docs.sperax.io. I hope you can understand that the DAO cannot use any UI interface to execute such transactions.

dear @sparkConsulting , thanks for following up on this.

MYSO has onboarded several professional market makers, who take the other side of the trade (and yes, they provide stablecoins (e.g. $USDC)) and employ various strategies to make money.

One reason why market makers are willing to provide upfront cash for borrowing tokens is because these tokens enable them to seize arbitrage opportunities, such as price differences between different exchanges or between spot and perpetual contract prices. Additionally, market makers utilize a strategy called “gamma scalping” to take advantage of price fluctuations in the value of the call option. This strategy enables them to profit from the volatility of the underlying token without committing to a specific directional view.

And wrt to execution, there are two ways to go about it:

i) MYSO has incorporated Wallet Connect, allowing a multi-sig signer to use the UI to carry out the required actions (happy to provide a step-by-step guide). Subsequently, the other multi-sig signers will need to approve these actions via e.g. Gnosis Safe.
ii) as an alternative, we can supply you with code snippets or a JSON file for direct integration into e.g. Gnosis Safe

I hope this response has addressed your question. If you have any further questions, please don’t hesitate to ask!

Okay, help me understand this. So the DAO provides tokens worth 110k USD in your example and receives 20k USDC right away. I believe your contracts holds the rest of the USDC collateral? If not, is it some kind of a uncollateralized loan that the DAO is giving out to the MMs?

I think for the DAO it would make sense to see a loan request from a market maker and execute a transaction on chain where the collateral (SPA) is deposited and USDC is borrowed in the same transaction. Also could you please provide details of any such transactions which have already happened in your platform with transaction details, like amount of collateral held etc…

hi @sparkConsulting great questions, let me elaborate in more detail:

Okay, help me understand this. So the DAO provides tokens worth 110k USD in your example and receives 20k USDC right away. I believe your contracts holds the rest of the USDC collateral? If not, is it some kind of a uncollateralized loan that the DAO is giving out to the MMs?

In my previous example, Sperax would pledge $100k worth of $SPA for 90 days and a strike price of 110%. In order for the borrower to borrow this $SPA, they are not only pledging the conversion amount (e.g. $110k USDC) but also the upfront premium (e.g. $20k), effectively creating an overcollateralized loan. Having said that, Sperax can claim the $20k instantly and remove from MYSO’s smart contracts.

At expiry, there are two outcomes:

a) If $SPA price doesn’t increase by more than 10%, Sperax receives the originally loaned $SPA tokens back (and the borrower is claiming the previously pledged $USDC).
b) Else, Sperax can claim the $110k (110% of the initial loaned $SPA tokens’ value).

I think for the DAO it would make sense to see a loan request from a market maker and execute a transaction on chain where the collateral (SPA) is deposited and USDC is borrowed in the same transaction

Absolutely, it’s important to mention that the inst. borrower is pledging $USDC and borrowing $SPA. From a process perspective, the lender (e.g. Sperax) will create a lender vault first (every lender has its own lender vault). Following that, Sperax deposits the $SPA tokens into this vault and subsequently specifies the terms of the loan (e.g. the agreed strike price loan tenor, etc.). In order for the borrower to borrow the $SPA, they have to pledge the $USDC (conversion amount + premium), ensuring the entire transaction occurs atomically and without any counterparty risk.

Also could you please provide details of any such transactions which have already happened in your platform with transaction details, like amount of collateral held etc…

We’ve helped several whales do covered calls for part of their token holdings:

Additionally, we’ve collaborated with treasuries to generate stablecoin revenue on their tokens. For example, we helped the Evmos treasury lend $100,000 of $EVMOS for 30 days with a 110% strike.

I hope that answers your questions. If not, please let me know!

As I can only share two links per post, here are the missing ones: