Long Bonds

If users bond USD stablecoins they recieve a Convertible Note which is two seperate assets.

  1. CDT (Convertible Debt Token): A fungible debt claim against the protocol.

  2. NFT Option: A standard American call option on STRAT with a 4.2 year expiry.

Bond holders thus hold a “convertible note” composed of the debt token (CDT) and the option (NFT).

If the user wishes to exercise their option to convert into STRAT, they must burn an equivalent amount of CDT.

Bond Pricing and Debt Control

All convertibles notes have the same tenor (4.2 years), so the only differentiating factor is the bond price, which in this case is the STRAT/CDT strike price that a note holder is able convert their CDT to STRAT.

This strike price is priced in a way that reflects the system’s Debt-to-Market-Cap (D/M) ratio. Specifically:

Bond Price=GAVSstrat+BCV×DebtSstrat\text{Bond Price} = \frac{\text{GAV}}{S_{strat}} + BCV \times \frac{\text{Debt}}{S_{strat}}

where:

  • GAV: Gross asset value of protocol (total amount of ETH in treasury)

  • BCV (Bond Control Value): A governance-controlled parameter that determines the sensitivity of bond pricing to demand and the D/M ratio

  • Debt (CDT Supply): Total circulating supply of the debt token (CDT).

  • S_Strat: The total supply of the Strat token.

When the debt level is low relative to the STRAT supply, bond prices become more attractive (more valuable option), incentivising treasury expansion. Conversely, if debt grows large relative to STRAT supply, strike prices become higher (less valuable option), slowing down new debt issuance.

Convertible Note Dynamics

  • Option + Debt Separation: Separating the call option (NFT) from the debt token (CDT) promotes efficient risk management and liquidity. Holders can trade or hedge these components independently.

  • Maturity and Exercise: The convertible notes typically have a 4.2-year maturity. Exercising the option before or at expiry consumes CDT and mints STRAT.

  • Treasury Acquisition of ETH: By issuing convertible notes, the protocol effectively acquires ETH without the risk of forced liquidation. This enables a non-liquidatable leverage on ETH prices over the bond’s term.

  • Insolvency Scenario: If ETH is trading significantly lower over a 4 year period than its weighted average purchase price, the protocol may be unable to fully repay bond holders. In this scenario, bond holders will receive a portion of treasury ETH back at expiry.

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