Protocol Overview
How STRAT, esETH, and CDT fit together to create non-liquidatable leveraged ETH exposure.
ETH Strategy is a treasury accumulation protocol. Bonders purchase USD-denominated convertible notes (paying with ETH), and the protocol acquires that ETH for the treasury. The treasury's growth — relative to the debt issued against it — is what gives STRAT its leveraged ETH exposure. Every mechanism in the protocol exists to grow the treasury, distribute yield to STRAT holders, or manage the debt that funds it all.
This page explains how the pieces fit together. Each component links to its own deep-dive page for the full mechanics.
Token Flow
Three tokens power the protocol. Understanding how they relate is the key to understanding ETH Strategy. For the complete text-based flow map covering every user journey, see Token Routes.
The flow works like this:
Bonding creates CDT + Option NFTs. Bonders purchase convertible notes by sending ETH (the smart contract prices it in USD via an oracle). The buyer receives two composable tokens: CDT (fungible debt — each token represents ~$1 the protocol owes) and an Option NFT encoding their conversion rights (how much STRAT or esETH they can claim, and when).
ETH enters as esETH. Deposited ETH is wrapped into esETH — the protocol's unified denomination layer. All treasury holdings are denominated in esETH.
Conversion burns debt for equity. Before expiry, note holders burn CDT against their NFT to receive STRAT (equity) or esETH (ETH). After expiry, remaining CDT redeems for its USD notional value paid in esETH. Either way, conversion destroys protocol debt.
Staking earns yield. STRAT holders stake to earn esETH rewards — primarily from treasury lending interest. Rewards stream linearly over 7-day periods to prevent frontrunning.
Treasury lending generates revenue. STRAT + CDT holders borrow esETH from the treasury at fixed rates with fixed terms. The interest paid flows to STRAT stakers. No liquidation during the loan term — only after expiry.
Core Components
STRAT — Leveraged ETH Exposure
STRAT is the protocol's equity token. Holding STRAT gives you a claim on the treasury's ETH — and because the treasury is funded by zero-interest debt, that claim is inherently leveraged.
Value driver: ETH per STRAT (EPS) — the ratio of treasury ETH to total STRAT supply. As the treasury grows faster than STRAT supply, EPS rises
Yield: Stake STRAT to earn ETH from treasury lending interest
Utility: Required as collateral (alongside CDT) to borrow from the treasury
STRAT never faces liquidation because its leverage comes from the treasury's capital structure — not from borrowed margin that can be called.
For more on how STRAT accretes value, see STRAT Economics. For the comparison to MicroStrategy's convertible debt model, see MSTR Comparison.
Status: Live. Available on secondary markets. Staking currently via Merkl distribution; on-chain staking in the upcoming release.
esETH — The Denomination Layer
esETH is a non-rebasing ERC-20, pegged 1:1 with ETH, that wraps multiple liquid staking tokens into a single unified representation. It is not a separate product — it is the unit of account for the entire protocol treasury.
Mint esETH by depositing ETH or any supported LST (e.g. wstETH, rETH, weETH, OETH)
Redeem esETH for any supported LST the contract holds
Non-rebasing means your balance stays constant. Yield from the underlying LSTs is harvested periodically and directed to the protocol's yield receiver, not reflected in your token balance
Why non-rebasing? Predictable balances make esETH composable across DeFi — no need to handle edge cases that plague rebasing integrations
esETH solves a specific problem for the protocol: it needs a single, composable token to denominate its entire treasury without rebase-related accounting bugs and without concentrating all staking risk in a single provider. By aggregating multiple LSTs behind a non-rebasing interface, esETH gives the protocol diversified staking exposure while keeping internal accounting clean.
For integrators: esETH behaves like a standard ERC-20 pegged 1:1 with ETH. Balances don't change unexpectedly, and each token is always worth exactly 1 ETH. You can cache balances, use them in mappings, and store them in structs without worrying about rebase drift or exchange rate changes.
Status: esETH is a protocol-internal token. It is not currently available for public minting (will be available for public mint and redeem in a limited capacity as part of the upcoming release).
CDT — Convertible Debt Token
CDT is a fungible ERC-20 representing protocol debt. Each CDT represents approximately $1 of debt the protocol owes to note holders.
Created when users purchase convertible notes (1 CDT per ~$1 of USD notional)
Destroyed when note holders convert (before expiry) or redeem (after expiry)
Total CDT supply = total protocol debt obligations — a transparent, on-chain measure of leverage
CDT is also required as collateral alongside STRAT for treasury lending, creating organic demand beyond conversion.
For the full mechanics, see CDT.
Status: Upcoming release — minted through the convertible note bonding mechanism.
Convertible Notes — The Engine of Treasury Growth
Convertible notes are the protocol's primary mechanism for accumulating ETH. A user purchases a USD-denominated note (paying with ETH, priced via an ETH/USD oracle) and receives two tokens:
CDT — fungible debt representing the dollar value owed
Option NFT — encoding conversion entitlements: how much STRAT and esETH the holder can claim, a ~6.9-day timelock, and a ~4.2-year expiry
The NFT is transferable and supports partial exercise — burn some CDT now, keep the rest for later.
Why zero-interest debt works: The conversion option embedded in each note is valuable. In traditional finance, option sellers receive a cash premium. Here, the value of that option is what the bonder "pays" — in exchange, the protocol gets to borrow at 0% interest. The implied option premium is the protocol's revenue from debt issuance.
Conversion entitlement pricing uses two control factors — PCF (Premium Control Factor) and GCF (GAV Control Factor). These factors scale the STRAT and ETH conversion entitlements based on the protocol's gross asset value and the current premium.
For full details on note structure, pricing, and lifecycle, see Convertible Notes. For conversion mechanics, see Conversion of Notes.
Status: Upcoming release — currently permissioned for ESPN. Permissionless bonding coming soon.
STRAT Staking — Earning Protocol Revenue
Staking STRAT earns yield paid in esETH, primarily from interest paid by treasury lending borrowers.
Deposit STRAT → receive sSTRAT-v2 (non-transferable)
Earn esETH rewards streamed linearly over 7-day periods
Unstake at any time — auto-claims pending rewards, no lock period
7-day streaming prevents frontrunning: you can't deposit right before a reward distribution, collect, and leave. New rewards blend with any undistributed balance and stream linearly, so earlier stakers always retain their accrued yield
For the full mechanics, see STRAT Staking.
Status: Live via Merkl distribution. On-chain StakedStrat contract in the upcoming release.
Treasury Lending — Borrow Against Your Position
STRAT holders can borrow esETH from the treasury using STRAT + CDT as collateral.
Key differences from typical DeFi lending:
Rate
Fixed at origination
Variable, changes per block
Term
Fixed (6-month terms)
Open-ended
Liquidation
Post-expiry only — no liquidation during the term
Price-triggered, can happen any time
Position
ERC-721 NFT (transferable)
Fungible debt position
Collateral
STRAT + proportional CDT
Single asset
Interest revenue flows to STRAT stakers via the StakedStrat reward pool. Delinquent borrowers forfeit a reserved fee that boosts the ETH per STRAT ratio for remaining holders.
For the full mechanics, see Treasury Lending.
Status: Roadmap — Q2 2026.
ESPN — The Volatility Trade, Productized
ESPN (ETH Strategy Perpetual Note) is the protocol's first live product. It's an ERC-4626 vault that earns yield by selling covered call options on ETH through Derive.
ESPN exists independently of the bonding/conversion mechanics — it monetizes ETH volatility for depositors. Revenue from ESPN also contributes to the broader protocol treasury.
For full details, see the ESPN section.
Status: Live.
Protocol Objectives
The protocol operates toward three goals, in order of priority:
Build a substantial on-chain treasury — grow the esETH holdings backing STRAT through convertible note issuance and lending revenue.
Consistently grow ETH per STRAT — the ratio of treasury esETH to total STRAT supply is the core performance metric. It increases when the treasury grows faster than STRAT dilution.
Strategically reduce liabilities when favorable — when market conditions allow, the protocol can retire debt cheaply, improving the treasury-to-debt ratio for remaining holders.
The Two-Sided Market
ETH Strategy serves two types of participants with complementary incentives:
STRAT holders (equity side) want the treasury to grow and EPS to increase. They benefit from:
New bonds (treasury grows with each issuance)
Staking yield (lending interest paid in esETH)
Favorable debt reduction (retiring CDT below face value)
Bond buyers (debt side) want defined-outcome positions with conversion optionality. They benefit from:
Conversion to STRAT if STRAT appreciates above their entitlement price
Conversion to esETH for direct ETH exposure
Post-expiry redemption for USD notional value if they prefer to exit
Transferable, composable positions (CDT is fungible; NFTs are transferable)
These incentives are complementary: bond buyers provide the capital that grows the treasury, while treasury growth is what makes STRAT — and therefore the conversion option — valuable. The protocol's health depends on maintaining this flywheel.
Encumbered vs. Unencumbered Holdings
The protocol treasury is split into two pools:
Encumbered holdings — ETH reserved to back conversion rights. When a bonder receives an NFT with conversion entitlements, the corresponding ETH is set aside. It can only leave the encumbered pool when a note holder exercises their conversion-to-ETH right.
Unencumbered holdings — ETH available for protocol operations: lending, yield distribution, and debt redemption. This is the protocol's "free" capital.
This separation ensures that conversion rights are always backed by real ETH, while still allowing the protocol to put its remaining capital to work.
What's Next
Use the protocol now: ESPN is live — earn yield from ETH options.
See what's coming: Upcoming Release covers permissionless bonding, on-chain staking, and note conversion.
Understand the timeline: Roadmap lays out named phases from Genesis through the full protocol.
Evaluate the economics: STRAT Economics breaks down how revenue accretes to STRAT.
Last updated