RGP 17 created a proposal for issuing RBN bonds to raise working capital for the protocol. RGP-18 proposal aims to extend the discussion around the options any protocol can explore when looking to raise working capital. It should be noted that this proposal is intended as an educational discussion for the community to consider options for RGP-17.
When a project is looking to raise working capital, it can either sell its token in the open market or borrow against its token to raise the capital needed. I want to propose two alternatives strategies Ribbon can explore to achieve a capital raise using RBN: Range Tokens and Success Tokens
RGP-17 allows Ribbon to receive stablecoins today and promises to pay back the stablecoins later plus a return. The RBN token backs this loan as collateral set at five times the borrowed amount. Paying back stablecoin debt in stablecoins works well if the protocol earns revenues in stables or reserves to pay the loan back. This setup also works well if the buyer of the bond wants their yield in stables and not the project token.
A key point here is that treasuries are typically made up of a project’s token, and most projects want to spend their token rather than stables. The aim is to keep a liquid reserve of stables to pay expenses or support protocol operations. Reserving the stables for future debt repayments can be restrictive or require further treasury actions to raise more stables.
This is where the alternatives can be helpful. Instead of repaying the debt in stables, the debt is repaid using the project’s tokens.
The Range Token is similar to a convertible debt instrument, where the debt is paid back using the native token at the token’s market price at settlement. This has the benefit that if the token price rallies before payment, the project has to unlock less of its tokens to pay back the total outstanding amount (debt plus interest). In a market downturn, Range tokens cannot be liquidated, meaning that a project can rest easy in bear turns that they don’t have to manage positions at risk of liquidation.
To illustrate how the range token would work, let’s use an example with RBN token trading at $0.5. A range token is made up of a yield dollar with a put and a call option on either side. The put option is used as a floor price for the instrument and the call option is an added bonus to holder of the range token to compensate in the upside case.
If for example we set a floor using a put at $0.25 strike and use $1 as the call strike, the holder of the range token earns the following potential payouts.
- If $RBN settles between the $0.25 and $1, the holder of the Range Token would earn the yield dollar APY
- If the $RBN token drops below the $0.25 range, the investor would be short the out option and would be buying the $RBN tokens at $0.25 - even if the price was lower
- If the price settles above $1, the investor earns the APY of the yield dollar plus the upside of the call option.
While this numerical example is only illustrative, you can read about a Range Token being used in action with UMA’s Range Token retro.
The Success Token offers a different payout structure which aligns closely with how venture capital funding works. Instead of VCs trading off a token discount for a vesting schedule, which has typically seen resistance from communities, the VC buys the token at current market prices with a vesting lockup. The Success Token has an embedded bonus payout in a call option to compensate the investor for the vesting schedule if the token price rallies. Since the VC had to pay market prices for the token and only receives the bonus reward if the project does well, the VC has the incentive to help the project grow.
For example, if $Ribbon sells $RBN at the assumed $0.5 today to investors, and not baking in a discount, and the price rallies past the same $1 call strike we set in the Range token example, the investor has a payout higher than just holding the token. This structure allows projects to sell their tokens today, without the need to include a discount to privileged buyers.
Various projects have used the Success token to raise capital, notably ShapeShift.
In summary, Ribbon has various options to raise stables. If Ribbon wants to pay back the stables it raises at the loan’s maturity, the Porter Finance approach in RGP-17 makes a ton of sense. However, if Ribbon wants to pay its loan back in RBN tokens and keep the stables, the Range or Success Token approach may be better.