Launch Spec

This page describes the protocol mechanics at launch, with additional features rolled out post launch.

Mechanism Overview

At launch, the ETH Strategy protocol will consist of two primary mechanisms to increase ETH per STRAT (EPS).

1. Convertible Debt (via Gamma Vault)

2. Equity (via ATM program)

Every time the protocol finances purchases of ETH through these two mechanisms, the EPS ratio grows, making STRAT a levered proxy for ETH exposure.

Permissionless bonding will not be available to the public at launch.

Convertible Debt

Convertible debt are long-duration bonds that have a debt obligation of 4.2 years, with a right but not an obligation to convert into STRAT. As bonds are sold, the protocol swaps the proceeds into ETH, immediately increasing the ETH per fully diluted STRAT ratio. At launch, all bonding will be done exclusively through a vault with a preferential strike price above the current market price of ETH, allowing the vault to purchase the bonds and sell covered calls on Derive to bring in option premium as yield to the vault.

This trade fundamentally works because STRAT holders are willing to sell cheap volatility (IV) in the form of convertible debt, in exchange for cheap debt capital to finance purchases of ETH. Since debt is long-dated, there are no short term liquidation risks as there are with traditional margin based leverage.

Vault

At a high level, the vault democratizes the volatility trade by abstracting away the executional complexities to anyone that seeks USD denominated yields. The vault uses the proceeds to bond to the protocol which then immediately purchases ETH, increasing the EPS. As STRAT never leaves the vault, this leads to pure EPS growth without STRAT dilution. A portion of the ETH will be taken into the treasury while a portion will be used as collateral to sell covered calls on Derive. As the vault receives calls for just the cost of capital (no premium) from the ETH Strategy Protocol, selling covered calls at any premium will result in the vault capturing this premium as yield.

ATM Sales

At-the-Market sales are when companies print shares to sell at the current market price to purchase more ETH. To implement a similar mechanism in DeFi, we pre-mint STRAT as defined by the ATM program and pair it into a weighted LP pool. The weights at launch will be thin on the STRAT side, and scales with volume and demand. We take ATM sales into treasury by taking a single sided buy tax when selling STRAT from the STRAT/ETH Protocol owned LP. Every time a sell of STRAT is made above a 1x mNAV, then the protocol essentially acquires >1x ETH for 1x STRAT, driving the EPS higher.