Proposal for Across to generate USDC revenue through ACX covered call lending on MYSO

Proposals
1

Author(s): contentropy from MYSO
Status: Proposal

Summary:
We propose utilizing idle treasury-owned ACX to engage in covered call lending using MYSO Finance: this would allow Across to generate significant stablecoin revenue, diversify part of its treasury and earn cash upfront without having to wait until loan expiry. In contrast to simply selling tokens, there’s no immediate market impact. All loan execution happens through MYSO smart contracts and is trustless and fully transparent with full on-chain traceability.

About MYSO:
MYSO is a decentralized peer-to-peer lending protocol that specializes in custom loans that allow users to borrow and lend with any ERC20 token. In addition, the protocol can support a wide range of different on-chain structured product strategies like synthetic token buybacks and covered calls. MYSO has facilitated ~$1.7 million in covered call notional volume in the past several months and has run a few strategies with DAOs/treasuries in the past including ones with the with Telos treasury and Evmos community treasury.

The protocol originated from the ETH Global Hackathon in 2021, where it was awarded as one of the winners. The protocol is also backed by several reputable crypto OGs, such as HashKey, Wintermute, and Nexo.

Site - https://myso.finance/
DApp - https://app.myso.finance/

Motivation:
Treasury diversification and revenue generation, especially in stables, should be a key goal of any DAO looking to have funding for runway and additional product development. Across has previously engaged in some treasury diversification efforts as well as deployment of ACX to various on-chain yield-generating/liquidity growth strategies. However the DAO still has a considerable sum of ACX tokens idle in the treasury which can be used more productively to fulfill the goals mentioned above.

To support this endeavor, we propose using ACX to engage in covered call lending, allowing the treasury to generate USDC income. In contrast to conventional lending, the USDC is earned upfront, eliminating the need to wait until the loan matures. All loan execution happens through MYSO smart contracts and is trustless and fully transparent with full on-chain traceability.

The covered call lending parameters, such as loan duration and upside cap, can be customized according to individual treasury preferences to optimally serve the Across community. Unlike traditional CeFi-style covered calls which are oftentimes presented by market makers, this proposal allows Across to get access to a similar financial payoff but without any counterparty risk. This is because the borrower is required to post USDC collateral upfront, ensuring that Across never faces a situation where the upside cap price is not paid or the loaned ACX tokens are not returned. The upfront USDC income from lending ACX 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 any immediate market impact.

Features
Utilize Idle Tokens: Idle ACX tokens can be used to generate upfront USDC revenue
Full Customizability: Covered call parameters (e.g., duration, upside cap, size etc.) can all be fully customized to optimally cater for Across’s treasury preferences
No Market Impact: Tokens don’t need to be sold, thus there’s no immediate market impact
Covered Call Yield: Yield is generated through a covered call structure, where cash is paid upfront for lending ACX and implicitly writing a call option on the loaned tokens (see Call option - Wikipedia)
Transparency: Loan execution happens transparently on-chain using 3x audited MYSO smart contracts, without counterparty default risk

Benefits

  • Immediate revenue and liquidity for operational and developmental activities
  • Diversification of the treasury into stables (e.g., multiple covered calls can be executed consecutively over a longer time period)
  • Unlike conventional covered calls or market maker loan arrangements, there is no counterparty risk

Example Scenario
When Across lends through a covered call, it essentially lends treasury tokens and writes a call option. The borrower, on the other hand, buys the call option and has the right - but not the obligation - to return ACX tokens. To initiate the loan, the borrower first needs to pledge USDC collateral to (1) pay for the upfront premium to the Across treasury and (2) provide collateral for cases where the borrower doesn’t repay.

For example, let’s say that Across lends $100k worth of ACX from the treasury. The DAO is free to set the terms they’d like to lend at, but let’s say that a strike the loan tenor will be 60 days and have an upside cap, or strike, of 110%. In return, given recent volatility, the Across treasury would get ~$10.90k USDC upfront (~65.4% APY).

At the loan’s inception, the Across treasury would receive this $10.90k USDC immediately and keep it no matter what.

Then, at expiry, there are two possible outcomes:
(i) ACX price doesn’t increase by more than 10% after 60 days, in which case it’s rational for the borrower to return the borrowed ACX tokens and retrieve the $110k USDC collateral
(ii) If the ACX price increases by more than 10% after 60 days, it’s rational for the borrower not to return ACX tokens, resulting in an unlock of the pledged $110k USDC, which becomes claimable by the Across treasury.

The diagram below shows indicative upfront premiums that the Across treasury could earn across various loan duration (Days to Expiry) and upside cap (Relative Strike Level) combinations. Generally, the longer the loan duration and the lower the upside cap the higher the upfront premium Across can earn. Across can customize the covered call terms to their liking and choose from a number of different duration/upside cap combinations. Additional indicative prices can be provided upon request.

The premium for the example scenario above (110% upside cap, 60 day duration) is indicated in red (10.90% upfront)

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photo_2024-05-07_16-36-391200×550 73.7 KB

How secure is it to do covered calls via MYSO?
MYSO has undergone three independent rigorous audits with leading security experts from Statemind, Omniscia, and Trail of Bits. All audit reports are publicly available and can be seen here:

Statemind: [public-audits/Myso Finance/2023-08-15_Myso_v2.pdf at main · statemindio/public-audits · GitHub]
Omniscia: [Omniscia Myso Finance Audit]
Trail of Bits: [publications/reviews/2023-04-mysoloans-securityreview.pdf at master · trailofbits/publications · GitHub]

Moreover, as mentioned earlier in the proposal, one of the benefits of using MYSO for covered calls is the absence of counterparty risk. MYSO provides access to covered calls in a trustless manner, eliminating the need to trust the borrower.

Specification
We propose that the Across DAO fund a bespoke vault on MYSO with 400,000 ACX tokens (~$116,000 USD at current spot price of ~$0.29) to utilize for a covered call strategy. We then propose to establish the Risk Labs Foundation multisig as an on-chain quoting delegate for the bespoke vault, which would let Risk Labs handle quote creation and execution on behalf of Across DAO.

We also propose utilizing either a 110% or 120% upside cap (strike) and running the strategy at either a 30 or 60 day tenor - the tenor for each transaction would depend on the upfront premium, and we’d push towards securing a tenor/strike combination for which the premium would result in highest annualized yield.

Once the proposal is approved by the Across DAO, no other active management will be needed by the DAO given that a Risk Labs Foundation wallet address is established as an on-chain quoting delegate for creating a covered call quote.

Technical Specification
The MYSO team will create a vault [address will be determined at creation] from the MYSO Vault Factory token contract at [0x1874a08F7975b25944FEb989BbAaA464f61aB3bc] and will transferOwnership to the Across DAO treasury wallet [0xB524735356985D2f267FA010D681f061DfF03715]. The MYSO team will also set the Risk Labs Foundation multisig [0x8180D59b7175d4064bDFA8138A58e9baBFFdA44a] as on-chain quoting delegate.

Then, the aforementioned Across DAO treasury wallet will call acceptOwnership at the newly created vault address.

Then, the aforementioned Across DAO treasury wallet will call transfer on ACX at contract address [0x44108f0223A3C3028F5Fe7AEC7f9bb2E66beF82F] with to address being newly created vault address [address will be determined at creation] and amount being 400000_000000000000000000 ($116,000 USD at current spot price of ~$0.29)

Once the bespoke Across DAO vault is created on MYSO and funded with 400,000 ACX, the Risk Labs Foundation multisig (as an on-chain quoting delegate) will create a covered call quote on behalf of the Across DAO calling addOnChainQuote function.

Conclusion
This proposal has outlined how Across can generate USDC cash revenues by using idle ACX treasury for covered call lending. This approach not only diversifies the treasury but also avoids market impacts that could arise from outright selling ACX. The flexibility in structuring loan terms allows Across to tailor the initiative according to its unique risk-reward preferences, ensuring alignment with its broader financial and operational objectives.

We look forward to hearing your comments and feedback and would love to answer any and all questions regarding covered calls and how execution would work!

5 Likes
2

Thanks for the proposal. I think it’s a good way to generate income for the DAO treasury assets and the risk taken on is a fit as well. The DAO utilizes idle assets and is only selling ACX on a rally from these levels. A few things for the Across community to consider:

  1. Is the community OK with selling ACX 10 or 20% above these levels? (We all believe ACX is undervalued!) Given the liquidity of ACX is there any concerns? We can get more clarity on this, but I think the borrower of these tokens are market makers and they are using the option value of this call to make markets in ACX. I think it’s possible that we could end up having more volume in the token from this.
  2. Is there any smart contract risk concern? I’m not super technical, but I’m always paranoid with having the main wallet interact with other projects. Are there other alternatives to make this work? Would love any comments here.
    All together the strategy makes sense and actually something Risk Labs/UMA had pitched to other DAOs a few years ago when the focus for UMA was synthetic assets.
1 Like
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Thanks for the proposal @contentropy I like the idea and using idle treasury funds to earn income.

@Kevin_UMA - The way this proposal is written sounds like there has been some initial correspondence with the RL team. Is RL willing to take on the effort of creating the covered call quotes and any effort being the delegate entails?

The other thing I am curious about is the demand for this? @Kevin_UMA - You mentioned likely being market makers. Have we gauged demand and do we know if and how much exists before giving this a shot?

2 Likes
4

Hey there thanks for the feedback :slight_smile:

To answer your second question, MYSO has onboarded a number of different institutional borrowers (MMs, etc.) willing and able to quote on ACX

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5

I like and support this idea, but I believe we should start with a more conservative approach initially, using a 120% or higher strike price for 30 days as a test run. I understand that this means the returns for the DAO might be slightly lower than the proposed amount but am open to other people’s thoughts.

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Thanks for the insight. If your proposed amount based on discussions and commitments or willingness for demand to quote on ACX or is it intended to be conservative as a pilot?

If there is opportunity for greater demand at certain strike prices it would be helpful to know to inform the DAO/ACX holders. I personally would support a higher amount given where the treasury is, but don’t know what conversations have been had or if they have at that degree of specificity.

2 Likes
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Hey @Kevin_UMA thanks for the comment and feedback!

Keen to hear what the community thinks on the upside cap that should be set! The terms are full customizable (duration, strike) so there’s a lot of flexibility with how the strategy could be structured. If the goals of the DAO are to maximize the stablecoin yields, then setting a more aggressive, lower strike would make sense, even ATM could be done. If on the other hand the DAO wants to have some lower yields but also lower the odds of converting the ACX loan amount into stables then that’s also an option

In terms of smart contract risk, keen to see what users think here as well. We structured the proposal to mitigate risks to the main Across DAO wallet to just have one interaction for strategy execution, which is funding the bespoke DAO vault with $ACX. Across DAO wallet would be the vault owner but then the creation of on-chain quotes would be handled from the Risk Labs side.

2 Likes
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So the proposed amount (400,000 ACX) was not defined by some demand-based metric but moreso as a conservative measure for the DAO to first execute on. Of course, based on liquidity/trading volume, there is an upper limit where any counterparty would want to quote at but the amount in the proposal is not at the upper limit

As Kevin mentioned above, there is also the possibility that running a strategy such as this could potentially also serve as a self-reinforcing flywheel that contributes to increased ACX volumes

And to answer your last point, the demand for quoting shouldn’t change at certain strike prices but what would change is the premiums/relative annualized yields

2 Likes
9

Please could you provide us with the targeted returns vs achieved returns for the two DAOs you have used as case studies?

Many thanks,

3 Likes
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Yeah so we did some short writeups about previous strategies run with other DAOs here (note these DAOs have run several new strategies since these were posted).

In terms of targeted vs. achieved returns specifically, the upfront premium is guaranteed and the relative annualized yield will be fixed and known prior to the strategy being executed.

In terms of whether or not the strategy settles in-the-money (ITM), or the underlying token is converted into stables → the settled strategies run with both the Evmos DAO / Telos treasury have settled out-of-the-money (OTM), meaning that the underling EVMOS/TLOS was returned prior to expiry and each DAO got their native tokens back (and kept the premium, ofc).

There is currently a live strategy run by Evmos that has not been settled and also a live strategy run by the Telos treasury that has not been settled.

In addition, you can see other strategies that have been executed along with premiums via the ‘stats’ page on the DApp - MYSO Finance

*Note whether or not a strategy settles where native tokens are returned or conversely they are converted into stables will depend on price action of the underlying.

1 Like
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Hey, since I’m not too familiar with a covered call structure, I’m using an LLM-based forum assistant to help me understand the entire proposal.
https://app.myshell.ai/share/I3eiau
Overall, I agree with this proposal, but I want to confirm, if the ACX price rises significantly above the strike price, is there a risk of the ACX being sold?

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Hi @zeck thanks for the reply :slight_smile:

Yeah so if the price of ACX is above the strike price at expiry, then the rational borrower would just keep the ACX - this means that the stablecoin collateral that the borrower pledged would be unlocked for Across DAO to keep. The borrower is then free to do with the ACX what they wish at that point.

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got it , thanks.
The holder of $acx needs to seriously consider this matter. There are advantages and disadvantages. Overall, I think this proposal can be tried.
@contentropy

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Hello, I oppose this proposal for the reasons I mentioned on Twitter here: x.com
(I’ll copy and paste it in English just below)

The idea isn’t bad, but I don’t understand why we should do it on MYSO. There are much more secure protocols that can offer the same service. This way, we risk jeopardizing the treasury if MYSO gets hacked. I think we should spread the proposed 400,000 ACX from the treasury across several lending protocols.
I believe we are evolving in a young sector that is experiencing a lot of hacks, especially at the moment. Any protocol, even audited, can face a hack. I think distributing the 400,000 ACX across several protocols (including MYSO) to limit the risk would be much more interesting. Diversification above all. But putting everything on MYSO, I think, is a mistake.

Another thing: In the benefits of this practice, it is mentioned that this will allow the DAO to generate income in USDC and thus avoid selling ACX to finance operations, instead using the USDC generated by the loan.

The problem is that the person or people who decide to borrow ACX will have two choices regarding the repayment of ACX at the end of the loan term:

  1. If the price of ACX does not increase or remains stable after the loan expires, it makes sense for the borrower to return the borrowed ACX tokens and recover the USDC they put up as collateral since the borrowed ACX has not increased in value beyond the USDC used as collateral.

  2. If the price of ACX increases to the point where the value of the borrowed ACX exceeds that of the USDC used as collateral, it makes sense for the borrower not to return the ACX tokens, which releases the USDC collateral that the Across treasury can claim. However, the ACX will no longer be in the possession of the DAO. Although it holds an equivalent amount in USDC, the ACX will belong to the borrower, who could choose to sell them, exerting selling pressure on the price.

As you understand, the second choice is problematic and could occur every time a user who borrowed ACX sees that its value exceeds their USDC collateral. In conclusion, borrowers could potentially exert selling pressure on ACX with each significant price increase.

➮ In conclusion, I think we should vote against this proposal due to the risk of a hack on Myso Finance (I could reconsider my choice if the 400,000 ACX are spread across several lending/borrowing protocols, reducing the risk) and because of the potential selling pressure that could be exerted on ACX.

Sorry for my bad english :confused:

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thx for taking the time to review the proposal and sharing your thoughts. however, your opinion seems to fall short in considering the following points:

  1. you said "It's a great idea, but I don't understand why we should do it on MYSO. There are much more secure protocols that can offer the same service." → great to hear that you like the idea. however, your latter statement is false, ie, there are no other protocols in the space where you can do on-chain bespoke covered calls. you probably are thinking of for example lending protocols like Aave, Compound, Silo etc but they can’t do “covered calls” (you can google about this to learn more about this option writing strategy). what they do is regular lending. now one could say that what if they were to activate lending for ACX, however, this would first require a lengthy integration process which might not even be possible for technical reasons and moreover a would require a lengthy governance process which also might not pass. secondly, even if there was lending available on Aave etc you would still need borrowers to borrow and typically without a clear borrowing use case utilization tends to be very low, which ultimately leads to a low deposit yield where the community wouldn’t be earning anything -for example MKR borrower utilization on Aave is like 0.39%, with a deposit yield of <0.01%.

  2. you said "...borrowers could potentially exert selling pressure on ACX..." → this statement is misleading because it suggests the covered call would have a damaging effect on ACX’s price performance. this is not true as selling ACX would if at all only make sense if ACX had significanlty increased in value above the strike price, in which case ACX would’ve rallied quite a bit which obviously would be good. and in that case if the borrower was to sell some tokens he wouldn’t want to sell them at a price lower than the strike, they wouldn’t gain anything from that. Perhaps you could try to learn more about covered calls and how they work, this could help you come to a more founded and fact based opinion. for this, allow me to share a resource with you where we analyzed together with Evmos whether a covered call with Evmos treasury tokens had any negative impact on price and there was no supporting evidence whatsoever: https://medium.com/mysofinance/myso-evmos-treasury-debut-covered-call-strategy-512f6f9b2226

  3. you said "Any protocol, even audited, can face a hack." → yes, but this point is very generic and could be made for any DeFi integration. in fact, this generic statement discourages any form of collaboration with DeFi builders that want to contribute to the Across ecosystem and foster long-term partnerships. and moreover, your point also doesn’t take into account the fact that MYSO has undergone 3x independent security audits. you can find all reports on https://myso.finance. lastly, your point also ignores the fact that MYSO has already done several transactions with numerous treasuries and whales (you can see all of them here https://app.myso.finance/stats/loans), even for larger sizes than the one discussed here in the proposal.

overall, your opinion seems somewhat biased and does not seem to factor in any of the above points. we invite you to revise and reconsider your perspective and avoid jumping to premature conclusions. nonetheless, we thank you for sharing your thoughts and respect every opinion, including biased ones like yours, as they contribute to a healthy debate.

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With Risk Labs being in full control over the timing and parameters of covered call creation, I’m worried about the creation of “insider extractable value”. Does the MYSO team or Risk Labs have ideas about how this risk can be mitigated?

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Hi @defi_occam, thank you for participating in the discussion and for your question. Absolutely, all transactions are fully transparent on-chain, so everyone will be able to see the terms of the covered call. Moreover, with our internal pricing engine, we can help validate the offered quotes received from trading firms, in particular cross-validate the implied volatility used for pricing. As part of this process, we will also provide a report documenting the quotes received, the pricing parameters used, and a fair value assessment.

Lastly, we’d like to highlight that we have already worked with numerous treasuries and whales, including Telos, Evmos, and DIA. We have always served them with the highest ethical standards, aiming to build long-term relationships with treasuries and provide long-term value. For example, with Telos, we have executed several rolling covered calls consecutively over an extended period. We have the same goal with Across, where we aim to be of long-term value to the treasury and community.

Hence, this transaction is not meant to be a one-off but rather the beginning of a long-term collaboration to be useful to the Across community and provide unparalleled access to tailor-made, transparent, and competitive on-chain covered call strategies for ACX.

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Thanks for the reply. Since there’s no dutch auction, what prevents someone from Risk Labs from sniping ACX on the cheap by playing both sides of this trade? I.e. set a low covered call price and anonymously scoop up covered calls the minute they go on the market. Just playing devil’s advocate here. Not impugning anyone’s integrity

2 Likes