The world of the superUMAns is never quiet! The community ninja troops is always working hard to spread UMA awareness and to educate the Cryptoverse about the top tools and products that UMA is creating for the world.
June came up with a new hot gem, the Range token - a new treasury primitive that will enable DAOs an innovative method to access funds and diversify the treasury without selling the native tokens. The innovative solution involves the usage of the native tokens as collateral to borrow funds. The tapped funds have no risk of liquidation!
The flexibility the advance security of UMA was used to build the perfect tool for DAOs treasury and community management. The shift from boring airdrops to KPI options was the first step to enhance DAO activity and to reward community members in a meaningful way. You can read all about KPI Options in SuperUMAns #2 - Explaining UMA KPI Options!
All DAOs will use the native tokens to create and provide liquidity which will result in benefits for community members. As the DAOs are ever growing, UMA created the tool that will support this growth. The Range Token will support the upwards trend, providing support for DAO expansion and a method of borrowing the funds required for diversity and operations.
The majority of top protocols are holding the treasury in the native token and some are valued at billions of dollars. The risk comes from the market fluctuation and May - June 2021 was a prime example, as Ethereum and Bitcoin lost over 50% of their highs, heavily affecting DOA treasuries. This series of events created to demand for a tool that will safeguard and prepare DOAs from future cataclysmic bear market by diversifying the treasury. To match the demand, the Range Token will act similar to a convertible debt in traditional finance.
Traditional finance has many options to access funding, such as equity sales, bonds and loans while DeFi protocols must sell native token to access funds. This process may be difficult, depending on restrictions or vesting schedules and finally a solution was created. Range Token was created to overcome the challenges and assist treasury diversification, while minimizing the immediate price impact that usually happens when native tokens are sold.
The Range Token was compared to a convertible debt, similar to when companies are receiving funds without issuing equity upfront. The DAO will use the native token as collateral to borrow the funds and at maturity it is paid back or if not, the range token holder is compensated with the equivalent amount of the collateral. The formula used is Range Token = Yield Dollar - Put Option + Call Option, which will use the settlement price of the native token to determine the number of tokens. If the native token is trading at $20 on settlement day, a 1000 USDC debt will be settled with 5 tokens (20 x 5 = $100). The numbers of DAO native tokens given to the Range Token holder is capped because the collateral cannot be liquidated. To compensate the exposure and the risk given by price volatility, the Range Token holder will receive a minimum number of DAO native tokens regardless of how much the price will raise.
I found a really good break-down in Clayton's tweet and a good example of how Range Token works. Let's assume that the Uniswap treasury designs a range token to borrow USDC using $UNI tokens as collateral. If thee $UNI price is $25, than for each 100 USDC borrowed, the token will be collateralized with 8 $UNI. There is a reason why 8 $UNI are used, as the Range Token will be fully collateralized to a price of $12.50 per $UNI (100/8) instead of the real value of $25 (100/4). The range token holder will own 8 $UNI tokens regardless how low the price will drop and the risk is limited even in the case of positive price exposure, as the range token holder will receive a minimum of 2.5 $UNI.
The expiry date is a set time in the future and when this will expire, the Range Token becomes redeemable for an amount of $UNI collateral. On the day that the range token becomes redeemable, the claimable amount depends on the $UNI value. If the token is valued under $12.50, than the range token holder will redeem 8 $UNI, while if the value is over $40 than the holder will receive 2.5 $UNI. For values between $12.50-$40 on expiry date, the range token is worth the face value of $100. The risk for the range token holder is reduced because the settlement is bound to a minimum / maximum pay out and because the holder will receives a constant dollar payout between the price range of the native token.
Why minting and buying Range Tokens?
The Range Tokens are creating an unique risk profile for long term investors. Buying the native token makes the investor vulnerable to direct exposure, while the range token is only affected by significant price moves. As Range Tokens will allow DAOs to borrow funds without the risk of liquidation, the demand will keep growing. Because the risk of liquidation is eliminated, the stability and value of the native token is not affected by the Range Token.
While the DeFi protocol will grow, the DAO will have the opportunity to sell the tokens at a higher value, as a result of the delay given by the Range Token unique attributes. New projects will receive time to expand and consolidate the concept before they will have to pay out.
Range tokens comes as an addition to UMA's KPI options and call options offer, providing DAOs with the tools required for diversity and evolution. The new asset class has unique risk exposure and created a token that rewards both parts involved in the contract.
The superUMAns Library:
SuperUMAns #1 - AMA about UMA with Hart Lambert!
SuperUMAns #2 - Explaining UMA KPI Options
SuperUMAns #3 - UMA scaling on Polygon
SuperUMAns #4 - What is fCASH by Harvest Finance?
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Thanks for this article, I am still learning about DAO