STRAT Economics
STRAT is designed to be a leveraged play on ETH, offering exposure without the typical risks of volatility decay or traditional liquidations. To maintain a premium over its NAV (Net Asset Value) and effectively sustain leverage on ETH, STRAT requires a source of revenue.
The revenue for STRAT comes from the implied option premium, which is generated through free debt for the protocol. As discussed earlier, the convertible note is essentially two products combined:
A loan to the protocol, for which the user receives a fungible debt token (CDT).
A call option sold by the protocol, represented as an NFT Option.
The implied option premium from the call option (item 2) constitutes the protocol's revenue. As long as there is bonding demand and the protocol can continue to issue and sell convertible notes, it will consistently generate revenue.
This recurring revenue stream is priced into the market as a premium on NAV, with the market often applying growth projections and revenue multiples (such as those used for stocks) to assess future value.
Demand Drivers
Fundamental Demand:
Non-liquidatable Borrowing on ETH:
Some users may seek to borrow stablecoins against their ETH exposure (through Strat) without the risk of liquidation. These participants follow a structured process:
Bond their ETH (USD value) to obtain the convertible note
Sell CDT for stablecoins (similar to borrowing against the eth) securing liquidity without facing forced liquidations.
Retain the call option (NFT), allowing them to regain exposure to ETH via STRAT at a later date.
This user behavior creates a fundamental demand for convertible notes, establishing a strong base that can stimulate broader speculative interest in the protocol.
Downside Protected exposure to ETH
A user seeking exposure to ETH without experiencing market volatility or risk can bond USD and hold a convertible note. This offers several benefits:
Downside Protection – If ETH trades below the user's entry price within 4 years, they can opt to be reimbursed in the USD value of their note, providing a safety net against price declines.
Upside Capture – If ETH trades higher, the user can convert their note to capture most of the upside from their initial bond.
This strategy allows the user to gain ETH exposure while avoiding market volatility, ensuring both downside protection and potential for growth.
Gamma Scalping
The conversion rights in a Long Bond, embedded in an Out-of-the-Money (OTM) call option, are inherently valuable. Users can extract the value out of these options by gamma scalping. Gamma scalping is a complex strategy where users short the underlying to created delta hedged positions, profiting off movements due to the convexity of the option.
Supply and Exercise Constraints
STRAT Supply: STRAT is minted only upon option exercise (i.e., burning CDT along with the NFT Option).
CDT Supply: Created solely through bonding. The protocol’s market-based bonding mechanism ensures that new CDT is backed by treasury assets.
Option NFTs: Potentially more abundant than the amount of outstanding CDT. However, one must hold or acquire CDT to exercise these options, sustaining consistent buy demand on the debt token.