Key comparison and improvements to the MSTR model
STRAT mechanics are designed to replicate the core financial engineering of MSTR, without any centralisation via pure DeFi mechanics.
How the MSTR trade works
MSTR raises capital by issuing convertible notes, effectively borrowing money while attaching a 4-year option on MSTR shares, which carries an implied premium. This premium exists because the debt has little to no interest, essentially exchanging interest payments for the option’s value. The borrowed funds are then used to purchase Bitcoin.
After 4 years, the debt must either be repaid or converted into MSTR shares. If Bitcoin’s price rises, note holders are incentivized to convert their notes into MSTR shares, as the company’s NAV will exceed the debt owed.
When conversions occur, the NAV/MSTR ratio increases, allowing MicroStrategy to avoid selling Bitcoin to repay the debt, reinforcing its long-term Bitcoin accumulation strategy.
Key things to consider for MSTR:
Convertible notes are a widely used fundraising instrument in traditional finance, offering key advantages such as easy institutional access and seamless composability within the financial system. For example, institutional entities can secure loans against their convertible notes from banks, which can reliably assess their value, further integrating this mechanism into established financial rails.
MSTR does not actively utilize its Bitcoin holdings; instead, the coins are effectively black-holed. This is because MSTR’s primary benefit comes from Bitcoin’s volatility, rather than its direct productivity or yield-generating potential.
Sophisticated participants can utilize the call option embedded in the convertible note to generate a steady income stream through gamma farming. This strategy involves shorting MSTR in an amount that, when combined with the option’s value, creates a delta-neutral position. From this point, any price deviation becomes profitable, and rebalancing back to delta neutrality locks in gains, allowing traders to systematically extract value from market fluctuations.
Under TradFi corporate takeover laws, MSTR’s Bitcoin holdings could eventually be subject to an RFV event through a 51% acquisition. In such a scenario, the acquiring entity may choose to dissolve the company, leading to a sudden release of BTC into the market. A potentially (very) bearish event for Bitcoin.
How the STRAT mechanics differ
We structure our convertible note by separating it into two components: a non-fungible NFT that encodes the option data, and a fungible collateralized debt token (CDT). This allows bondholders to monetize their debt in a non-liquidatable manner, either by selling their CDT or borrowing against it. This also is a first principles way of building in DeFi allowing for both of these (long dated options and perpetual debt) to become DeFi lego blocks of their own.
Our ETH is not black-holed, rather, it is available for borrowing by STRAT holders, generating yield for the treasury while reintroducing the ETH back into the broader DeFi ecosystem. The ETH retained in the treasury to cover debt positions is also staked for yield.
Gamma hedging in this environment can be even more profitable than in TradFi, thanks to the availability of perpetuals and shorts with positive funding rates.
Finally, STRAT, by utilizing borrowed ETH and lacking other mechanisms for reclaiming ETH or dissolving the protocol, remains immune to RFV attacks, ensuring long-term protocol security and stability.
Those who want high vol/high beta exposure will simply buy STRAT, those who want downside protection or long term borrow without liquidation risk will bond with convertible notes.