Covered Calls are one of the most popular yield strategies in tradfi — they allow people to generate income on their assets by selling upside volatility. The income generated could be pretty significant — for example, selling a 1-month at-the-money call option on ETH currently generates ~10% in a month in exchange for potential upside.
We think this makes it a perfect product for DAO treasuries for multiple reasons:
- DAOs who are sitting on hundreds of millions of dollars of their own native token often have no way to generate yield on them. For example, yield on SUSHI lending on Compound is 0.05% APY. Covered calls unlocks significantly higher income generation on those assets.
- Instead of selling tokens on the open market to diversify the treasury, DAOs could sell covered calls on their native asset and collect the premiums in stables.
- DAOs are well suited to sell upside volatility in their own native token in exchange for cash today. In the case that the token is flat or down, the DAO would have collected premiums for free. In the case that the token goes up significantly, the DAO would have given up some of that upside — which is totally reasonable risk-reward for a DAO that already owns significant amounts of the native token.
As noted in Hasu’s “A New Mental Model for Defi Treasuries”, many DAO treasuries consist primarily of their own native token, which should not/cannot be considered as a real treasury. Ribbon Treasury allows DAOs to generate income on their native tokens and build a healthy diversified portfolio of assets.
Ribbon Treasury takes what we have learnt with the Ribbon Vaults and productizes it into a service for DAOs. It is Ribbon’s version of what Olympus Pro is to OlympusDAO.
Ribbon Treasury is a private Ribbon vault built specifically for DAOs to run covered calls on their native tokens. These private vaults are segregated from the main Ribbon vaults, and runs a custom strategy for each DAO. Each vault has a few unique parameters:
- Strike Selection Methodology
DAOs can choose how aggressive they want to be with regards to the strike selection methodology. A more aggressive strategy would lead to higher yields, but will give up more potential upside. This will differ for each DAO depending on their goals of growing/diversifying their treasuries.
DAOs can choose how often they want to run the strategy. The current Ribbon Vaults run a weekly strategy that automatically re-rolls, but DAOs can choose longer tenors, such as biweekly or monthly tenors. This means that the vaults could sell 2-week or 1-month call options, and automatically re-roll. The longer the tenor, the higher the expected yields will be.
- Premium Currency
DAOs can also choose what currency they want to receive the premiums in. For example, a DAO could elect to receive premiums in USDC or ETH, depending on their treasury diversification goals.
For these vaults to generate yield, there needs to be someone who takes the opposite side and buys the call options from the vault. The main value proposition of working with Ribbon Treasury is that Ribbon will help to coordinate market makers to trade with the vault. We already currently work with the biggest crypto options market makers in the world (e.g QCP, Alameda, GSR, Wintermute, etc.) for Ribbon’s retail product, and we can onboard them for each private vault too.
The call options that are periodically sold by these vaults are auctioned to the public via a Gnosis Auction (as per how Ribbon V2 works). Ribbon will work with market-makers to participate in these auctions, but the auctions are fundamentally open to anyone with an Ethereum address.
This effectively bootstraps a market for altcoin options. For the first time, retail participants will be able to purchase call options on their favorite altcoins to increase their upside exposure if they are feeling bullish.
How this benefits Ribbon
Working with DAO treasuries benefits Ribbon for multiple reasons:
- Sticky TVL
Ribbon Treasury is much more of a B2B enterprise product than a retail facing product. Because of that, we expect TVL to be significantly more sticky than our current vaults. This sticky TVL contributes to long-term recurring revenue to the protocol.
- DeFi 2.0
The narrative around DeFi 2.0 is extremely dominant at the moment. There is strong demand for products that help to create sustainable liquidity for other protocols. We think Ribbon Treasury plays perfectly into this narrative, and could potentially become one of the quintessential “DeFi 2.0” protocols.
To kickstart Ribbon Treasury, we are looking for pilot partners who are keen on allocating some of their native tokens into a covered call strategy. We will be working very closely with the team to design a strategy and product that best suits their treasury needs. Because this is still early/experimental, we have some additional requirements for pilot partners:
- There must exist perps for the token on a CEX so that market makers can hedge easily
- DAO should be willing to deploy between $1-$5 million of their native token into Ribbon Treasury
If interested, please fill in this very short form so we can contact you!