Protocol Overview
Overview of the full ETH Strategy Protocol
This outlines the complete ETH Strategy Protocol. For details on specifications at launch, please see Launch Spec.
Overview
ETH Strategy at its core is an autonomous treasury protocol with the goal of accumulating ETH.
The treasury finances purchases of ETH by issuing protocol convertible debt through a bonding mechanism similar to the original MicroStrategy (NASDAQ: MSTR) convertible trade, and via an At The Market (ATM) program, similar to Sharplink (NASDAQ: SBET) and Bitmine Immersive (NASDAQ: BMNR).
The protocol has 2 primary users, the STRAT buyers, which represent equity holders, and the bond buyers, which represent debt holders.
The protocol is designed to maintain optimal leverage for STRAT holders while ensuring effective risk management for convertible debt holders through the free-market actions of economically rational users.
Protocol Objectives
Build a substantial onchain treasury
Consistently grow the ETH per STRAT ratio over time
Strategically reduce protocol liabilities when economically favorable
Mechanics Overview
Bonding
The core of the protocol is an on-chain treasury that expands through bond issuances. Two classes of bonds enable treasury growth:
- Long Bonds (Convertible Debt):
Users deposit USD stablecoins, in exchange for 2 tokens, CDT (Convertible Debt Token) and an NFT Option, These 2 together represent a convertible note.
Protocol receives USD stablecoins and market purchases ETH into treasury.
Users deposit CDT and receive STRAT
Protocol receives CDT, burns it (buying back and destroying protocol debt in return for equity)
The proceeds from Long Bonds increase protocol treasury. The Short Bonds enable the protocol to reduce its total debt burden.
Convertible note conversion depends on whether the Option NFT is before or after expiry.
Before Expiry:
Bonders deposit NFT and CDT, receive STRAT according to the STRAT/CDT price encoded on the Option NFT
Protocol burns NFT and CDT and issues STRAT
After Expiry:
Bonders deposit NFT and CDT, receive USD value of their note
Protocol burns NFT and CDT and pays USD out of treasury
Treasury Expansion and AUM Premium explanation
The protocol treasury continuously grows through the issuance of convertible notes. A key factor behind STRAT's premium over its net asset value (NAV) is the revenue generated from these notes and future notes in the form of an implied premium.
In traditional markets, option sellers receive a premium as income. However, in this protocol, the implied premium arises because the protocol secures 0% interest debt from bonders. Normally, debt carries an interest cost, but the protocol avoids this by embedding a conversion option within the debt receipt issued to bonders. The value of this option, which would typically be received as a premium, is instead offset against the interest cost, effectively allowing the protocol to borrow at zero interest.
This mechanism not only fuels treasury expansion but also reinforces STRAT's market valuation beyond its underlying NAV.
The protocol treasury will allocate a portion of its ETH holdings into a Morpho Pool, where it can only be borrowed using STRAT tokens as collateral. This mechanism serves three key purposes:
STRAT Token Utility: The only way to access ETH from the protocol treasury is by holding STRAT and using it as collateral, enhancing the token's intrinsic value.
Treasury Revenue: As with any lending model, the protocol earns interest on the ETH borrowed by STRAT holders, generating sustainable revenue for the treasury.
Treasury RFV Attack Protection: By integrating this treasury "escape valve," the protocol safeguards itself against governance-based RFV (Risk-Free Value) attacks, a vulnerability observed in other DeFi treasury protocols.
Protocol Tokens
The protocol maintains three tokens:
STRAT (ERC20): Represents leveraged ETH exposure.
CDT (ERC20): Fungible debt token issued by the protocol.
NFT Options (ERC721): American call options on STRAT with varying strike prices, maturities, and activation times.
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