KIP Draft: Strategic Use of Treasury Rook for Yield Generation

Motivation

Rook price action has been atrocious since its all-time high in February 2020. With the Coordination Game’s poor reception by the market and a P/E ratio of 286 at the time of writing, the notion of additional downside on token price is a real prospect. This raises the need for Rook to explore alternate revenue sources beyond just MEV capture for the time being. One available opportunity is using a Ribbon Finance treasury vault for Rook.

The DAO would deposit Rook into its vault and sell monthly calls - two quotes provided by Ribbon are as follows:

  • Using a strike of 25% out of the money, we can expect a 3.17% yield per month → 38% APY
  • Using a strike of 50% out of the money, we can expect a 0.91% yield per month → 10.92% APY

Ribbon vaults operate using cash settled options rather than physical settlement. This means in the event of the option expiring in the money; the vault would transfer the cash value of the option (denominated in Rook) to the market maker. If the price of Rook goes up significantly during the month, the DAO will incur a loss, then continue as usual and sell the next month’s call option. In comparison, physical settlements are obligated to sell all of the Rook at the strike price (minus slippage) if the option expires in the money.

Ribbon is prepared to support cash or physical settlement for their vaults. In both cases, any Rook transferred to market makers in the event of a call option expiring in the money would most likely be market sold. This is why slippage is considered when the market makers quote prices for the physical settlement option.

The exact amount of Rook to use for this is up for discussion; 30k Rook would be ideal for collecting meaningful returns without damaging existing outflows to contributors. Premiums are collected in USDC and are available monthly for withdrawal.

Assuming we deposit 30k Rook, around 20% of the Rook treasury’s balance in its native asset, valued at ~$1.2M ($39/Rook). A 38% APY would lead to a gain of ~$445k and 10.92% APY to a gain of ~$132k.

Risks

  • The Ribbon Vault is exploited, and we lose our entire deposit
    • Nexus Mutual offers insurance on Ribbon Vaults which does cover their treasury products. This is an option the community can consider. For reference, the cost is 50.79 ETH for 1955 ETH worth of coverage for one year.
  • If the price of Rook rises significantly during the month
    • We will incur a loss if we use cash-settled options. Assuming we sell calls 25% out of the money: +50% at expiration → ~9.7% loss. +100%, ~32% loss.

Specification

If this vote passes, the DAO will allocate 30k Rook to sell monthly calls 25% out of the money with a cash settlement.

  • The DAO Multisig would transfer 30k Rook to the Ribbon Vault.

  • Yield would be claimed monthly and allocated as follows

    • 75% of the yield earned through this strategy would be deposited in Rook’s treasury

    • The remaining 25% of the yield earned would be used to buy Rook on the open market and streamed to xRook stakers within three months of being claimed at the direction of the Rook team.

  • Management of the position will be at the discretion of the Rook team

Thank you for this proposal. Leaving aside the colorful language and assumptions motivating it, the approach of speculating with core treasury assets in options markets sounds more appropriate for a hedge fund than for a DAO’s treasury.

1 Like

Thank you for your post. While your post has some great details in it, I believe that it is missing some data/discussion that would be valuable to include before further deliberation. More specifically, I believe this proposal should include the following:

• Discussion around the security of ribbon finance
• Discussion and analysis around the choice of ribbon vs other alternatives that could be more effective
o There should be numerous options that offer this service and analysis of each with pros and cons
• Further details on the status of the full holdings of the treasury as it relates to this position
• Further discussion of how this aligns with the interest of our mission
• Analyses of the current and anticipated Rook uses and the impact of this action on those
• Discussion of the process to monitor this position and how rebalancing, unwinding or adding to this position would be handled
• Determination of the official team monitoring the position

Lastly, if you have any current or historical short positions on ROOK please disclose them here as well

2 Likes

I want to echo @JasonW as well as @DaddyMatty. DAO treasuries are not investment funds and utilizing our native token holdings for speculation is not a precedent Rook should set. Further, the proposal is missing an explanation on how this action is aligned with the mission of Rook, which is to democratize and transform MEV into a public good.

2 Likes

Are there examples of other DAO’s who have pursued this option? Earning yield on idle assets is important, I’d like to see more discussion on this topic in community calls to gather more input from you and others.

Would love to but you guys banned me

Plenty of space here for you to answer @DaddyMatty’s questions in terms of the kinds of information that would be important to incorporate in order for this to be evaluated.

Will not spend that kind of time typing out answers