Intro
Congratulations on the upcoming v2 relaunch! I am excited to propose an innovative idea to achieving sustainable yield for the protocol through the use of on-chain covered call strategies. This method can play a pivotal role in supporting the successful launch of your v2!
Idea
The idea is to leverage a portion of Onyx treasury for covered call lending. This approach involves lending out a smaller part of currently idle $XCN tokens. By doing so, Onyx can generate significant upfront revenue in USDC (see below). The earned USDC can be immediately utilized for community needs (e.g. seeding initial lending markets etc.). 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 $XCN 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 12. February 2024) that the Onyx treasury (or any other large token holder) could earn across various loan duration (Days to Expiry) and upside cap (Relative Strike Level) combinations.
For instance, lending $100k of $XCN for 90 days with a 110% strike could yield around $21’000 USDC upfront (equal to approx. 85% APY). After 90 days, two outcomes are possible:
a) If $XCN price doesn’t increase by more than 10%, Onyx treasury receives the originally loaned $XCN tokens back
b) Else, Onyx receives $110,000 USDC (110% of the initial loaned $XCN tokens’ value).
The stablecoin premium is paid upfront, immediately, and irrespective of the outcome, providing a strategic benefit over merely holding $XCN tokens. Additionally, it is crucial to note that Onyx can freely select both the duration and strike level.
Conclusion
This proposal outlines how the Onyx treasury can generate USDC cash revenue by using idle $XCN treasury for covered call lending. This approach not only diversifies the treasury but also avoids market impacts that could arise from outright selling $XCN tokens. I’d love to hear the community’s thoughts on this idea and more than happy to outline a detailed draft.