Discussion of a thUSD Bond Program to Enhance Liquidity and Drive Ecosystem Growth

General
1

threshold bonds

Executive Summary

This proposal outlines a novel bond program designed to address the liquidity challenges facing thUSD, the stablecoin of the Threshold Network. By offering a continuous issuance of bonds with attractive redemption options, a robust risk management framework, and a dedicated DEX pool, this program aims to attract capital, bootstrap liquidity, and generate sustainable yield for the Threshold DAO and its stakeholders. Furthermore, this program can be viewed as a conservative, managed, and automated version of the strategies Threshold already encourages its users to employ with tBTC and thUSD.

  1. Introduction

thUSD, while offering a decentralized and secure alternative to centralized stablecoins, currently faces limitations in liquidity and adoption. This proposal introduces a bond program designed to address these challenges and unlock thUSD’s full potential within the DeFi ecosystem.

  1. Proposed Bond Program

2.1. bthUSD Bonds

The Threshold DAO will issue zero-coupon bonds denominated in thUSD, represented by the bthUSD token. These bonds will feature:

  • Continuous Issuance: An evergreen program with rolling maturities ensures ongoing liquidity and investment opportunities.

  • Dual Redemption Options: Bondholders can redeem bthUSD for either thUSD (with accrued yield) or tBTC (fee-free) during periodic redemption windows.

2.2. bthUSD/thUSD DEX Pool

A dedicated bthUSD/thUSD decentralized exchange (DEX) pool will be created and seeded by the DAO. This pool will:

  • Facilitate Trading: Enable bondholders to easily buy and sell bthUSD on the secondary market.

  • Price Discovery: Establish a market-driven price for bthUSD, reflecting its value and accrued yield.

  • Enhance Liquidity: Provide a readily available source of liquidity for bthUSD holders.

2.3: Yield Generation and Management

The DAO will convert the proceeds from bond sales to tBTC, open a Collateralized Debt Position (CDP) on the Threshold Network, and deploy the resulting thUSD capital into diversified, yield-bearing DeFi strategies. This process will involve the following steps:

  • tBTC Conversion and CDP Creation: Bond sale proceeds will be converted to tBTC which will then be matched with additional tBTC (e.g. 50%) from the Treasury and used as collateral to open a CDP. A conservative Loan-to-Value (LTV) ratio will be maintained to mitigate liquidation risks. thUSD equal to the bond capital raised will be borrowed against this tBTC collateral.

  • Stablecoin Exchange and Deployment: The borrowed thUSD will be exchanged for other stablecoins (e.g., USDC, DAI) that are widely utilized in established DeFi yield farming protocols. This exchange will be conducted strategically to minimize slippage and maximize the efficiency of capital deployment.

  • Strategic Partnerships and OTC Trades: To further optimize capital utilization and potentially secure more favorable terms, the DAO may engage in over-the-counter (OTC) trades with DeFi protocols seeking stablecoin liquidity. Under such agreements, the DAO would exchange the thUSD at parity with a commitment to repurchase thUSD for bond redemptions. This approach aims to avoid undue pressure on the thUSD market while providing protocols with access to necessary liquidity.

  • Yield Strategy Selection and Implementation: The resulting stablecoin capital will be strategically deployed into diversified yield-bearing DeFi protocols and strategies. These strategies will be selected based on risk-adjusted returns, security assessments, and community governance.

  • Automated Harvesting and Aggregation: Smart contracts and/or decentralized automation networks could be employed to efficiently harvest and aggregate yield from the deployed capital.

  • Risk Management: Robust risk management practices will be implemented, including diversification across protocols, continuous monitoring of positions and market conditions, and pre-defined emergency procedures to address unforeseen events.

2.4. Redemption Windows and Buffer

  • Capped Redemption Exemptions: Regular redemption windows with predetermined caps will allow the DAO to manage liquidity and incentivize long-term holding of bthUSD.

  • System-Wide Buffer: A buffer funded by treasury reserves and excess yield will provide a safety net to accommodate redemptions and market fluctuations.

2.5. Alignment with Existing User Strategies

This bond program can be viewed as a conservative, managed, and automated evolution of strategies already employed by Threshold users. Users are already encouraged to utilize tBTC and thUSD in yield-generating activities. This program formalizes this practice, providing the following advantages:

  • Managed LTV Health: The DAO actively manages the LTV of the underlying tBTC collateral, mitigating liquidation risks.

  • Automated Yield: Yield generation is automated, simplifying the process and reducing the burden on individual users.

  • Socialized Gas Fees: Gas costs associated with yield harvesting and management are socialized across all bondholders.

  • Fixed Yield Instruments: bthUSD bonds offer fixed-yield returns, providing a more predictable and less volatile investment compared to variable-rate yield farming.

  1. Benefits

  • Enhanced thUSD Liquidity: The program will attract capital and bootstrap liquidity for the thUSD stablecoin, facilitating its use in DeFi applications.

  • Sustainable Yield Generation: Generated yield will be distributed to the DAO and t token holders, supporting the Threshold ecosystem’s growth and development.

  • Increased tBTC Utility: The tBTC redemption option will create additional demand and utility for tBTC within the Threshold Network.

  • Community Participation: The program will encourage community involvement in governance and yield-generating strategies, fostering a decentralized and participatory ecosystem.

  • Resilience and Stability: The system is designed to be resilient to market fluctuations and potential manipulation attempts, ensuring long-term stability.

  1. Implementation

  • Smart Contract Development: Secure smart contracts will be developed and audited to govern bond issuance, yield management, and redemption processes.

  • Treasury Management: The DAO will allocate treasury funds to support the buffer and ensure sufficient capital for the program’s operation.

  • Yield Strategy Optimization: The DAO will select and implement diversified yield-generating strategies with a focus on risk-adjusted returns and security.

  • Community Engagement: The DAO will actively engage with the Threshold community to communicate the proposal, gather feedback, and ensure transparency throughout the implementation process.

Conclusion:

This thUSD bond program offers a compelling solution to address thUSD’s liquidity challenges and drive sustainable growth for the Threshold Network. By combining innovative DeFi mechanisms with a robust risk management framework, a dedicated DEX pool, and a clear alignment with existing user strategies, this proposal has the potential to unlock the full potential of thUSD and contribute to the broader adoption and success of the Threshold ecosystem.

1 Like
2

Example Scenario: $1 Million Bond Offering and Optimized CDP Utilization
This section presents a example scenario, incorporating key observations, to illustrate the mechanics and potential outcomes of the proposed thUSD bond program. All figures and variables are subject to change following community input, which is welcome below.

Scenario Parameters:

  • Bond Offering Size: $1 million

  • Bond Yield (APY): 10%

  • tBTC Price (Initial): $100,000 per tBTC

  • DAO’s tBTC Contribution: 5 tBTC

  • Initial CDP Collateralization Ratio: 150% (15 tBTC collateral, $1 million thUSD borrowed), equivalent to an LTV of 66.67%

  • Target CDP LTV Range: <75%

  • DEX Pool Initial Liquidity: Seeded with separate capital from the Treasury or through an incentivized liquidity provision program

  • Redemption Window Cap: $100,000 bthUSD per month

Step-by-Step Breakdown:

  • Bond Issuance and Capital Acquisition:

    • The Threshold DAO announces the bond offering, specifying the terms and conditions.
    • Investors purchase bonds, denominated in thUSD, with a total value of $1 million. The bonds are represented by the bthUSD token.
    • The DAO receives $1 million in stablecoins (e.g., USDC) from the bond sale.

  • tBTC Conversion and CDP Creation:

    • The DAO converts the $1 million USDC to 10 tBTC.
    • The DAO contributes 5 tBTC, bringing the total to 15 tBTC.
    • The DAO utilizes the 15 tBTC to open a CDP with an initial collateralization ratio of 150% (LTV of 66.67%).
    • The DAO borrows $1 million thUSD against the 15 tBTC collateral in the CDP.

  • Stablecoin Exchange and Yield Deployment:

    • The DAO exchanges the borrowed $1 million thUSD for other stablecoins suitable for yield farming.
    • The stablecoins are strategically deployed into diversified yield-bearing DeFi strategies, potentially through OTC agreements with protocols seeking liquidity or TWAP trading to reduce market impact.

  • bthUSD/thUSD DEX Pool:

    • The DAO establishes a bthUSD/thUSD liquidity pool on a DEX.
    • Initial liquidity is provided through separate capital from the Treasury or an incentivized liquidity provision program (e.g. using royco or merkl)
    • DEX Pool Seeding: Utilizing separate capital or an incentivized program for DEX pool seeding ensures efficient use of bond capital and avoids potential conflicts.

  • Redemption Windows:

    • Monthly redemption windows allow bondholders to redeem up to $100,000 bthUSD (plus accrued interest) or the equivalent in tBTC (fee-free).
    • Each redemption reduces the outstanding thUSD debt in the CDP, improving the collateralization ratio.

  • LTV Management:

    • Redemptions: Regular redemptions gradually decrease the CDP’s debt, increasing the collateralization ratio.
    • BTC Price Appreciation: If the BTC price increases, the value of the tBTC collateral rises, further improving the collateralization ratio.
    • Dynamic Adjustment: The DAO actively manages the CDP, targeting an LTV below 75%, by adding or removing tBTC as needed, based on market conditions and risk tolerance.

  • Potential BTC Price Crash:

    • Even with a conservative LTV, a severe and rapid BTC price crash could lead to CDP liquidation.
    • In this scenario, the DAO’s 5 tBTC contribution is at risk.
    • However, the bondholders are protected, as the stablecoins in the yield farm can be used to cover the bond obligations.

##Key Observations##

  • Beyond addressing thUSD’s liquidity challenges, the proposed bond program offers several strategic benefits:
  • Dual-Product Growth: Drives demand and expands utility for both tBTC and thUSD, fostering synergistic growth within the Threshold ecosystem.
  • Expanded Integrations: Facilitates strategic partnerships and integrations with other DeFi protocols through OTC trades of bond capital, increasing the reach and adoption of Threshold products.
  • Simplified Yield Generation: Provides a user-friendly, fixed-income instrument with managed risk and reduced costs, making DeFi yield generation accessible to a wider audience.
  • Transparency and User Behavior: Publicly communicating the DAO’s LTV management strategy can influence user behavior and encourage responsible participation in the thUSD ecosystem.
  • Enhanced Stability: The DAO’s large CDP and predictable LTV range improve the stability and predictability of thUSD redemptions.
  • Sustainable Revenue Generation: Any yield generated in excess of the 10% APY promised to bondholders accrues to the DAO, creating a sustainable revenue stream to fund development, community initiatives, and further strengthen the Threshold ecosystem.

Conclusion:
This illustrative scenario provides an example and comprehensive representation of the proposed thUSD bond program. By prioritizing secure LTV management, engaging with protocols seeking liquidity, facilitating redemptions, and ensuring transparency, the DAO can add a new stream of revenue, consolidate redundant incentive programs, effectively mitigate risks, optimize yield generation, and foster a thriving and sustainable thUSD ecosystem.

1 Like
3

I’m actually for this idea generally, now that I’ve had a moment to sit with it and understand it.

The biggest risks (all solvable), as I see it are:

  • Yield must outpace costs. We’re promising 10% APY to bondholders. If farming returns fall below that, the DAO is now paying bondholders out of pocket. That’s the fastest path to a death spiral (this is of course mitigated by the spread on the CDP itself, but still somewhat of a risk).
  • Redemption caps help manage liquidity, but they won’t prevent stress if sentiment shifts hard against thUSD or tBTC. Capping redemptions at $100K/month prevents a liquidity run, but if market sentiment shifts against thUSD or tBTC, redemptions could pile up, forcing us to pull capital from yield strategies at bad prices (we might look at adjusting the redemption cap dynamically to mitigate this, if we agree it’s a significant enough risk).
  • Automation could reduce overhead, but human oversight is still needed. We can automate risk parameters, but in extreme conditions, someone has to make judgment calls—and if we get those wrong, it’s expensive (There’s an argument to be made that automation risk is a feature not a bug, though).

We should also take into account regulatory scrutiny this could attract. Bonds, when termed explicitly, are regulated in most jurisdictions, so this could attract an ambitious regulator… but then again, in the US, maybe that’s less of a concern moving forward this administration?

In general, again, this is well thought out and smart. I dig it.

2 Likes
4

I can give a longer response when I get home but one thing is the dex pool of bthusd/thusd is meant to serve as a release valve of sorts for the bondholders that want to exit in excess of the monthly redemption windows. also I don’t really care what we call it, bonded thusd or staked (like aave does with GHO) but I don’t think there will be any negative regulatory attention. the president dropped a bunch of meme coins, they announced a lot of changing regulation, even the Europeans consider DAOs differently in their mica legislation. it’s a rather low profile and simple offering - almost like a defi version of what Michael Saylor does with microstrategy except he buys more Bitcoin with the proceeds and we farm with it

2 Likes
5

Hi @lemonsquirt
Thanks for putting forward this discussion and elaborating a comprehensive proposal.

Main thing I will comment for now is that in my view one fundamental thing to improve significantly thUSD adoption is for to exist on any L2. I can’t see it doing much by existing only on Ethereum mainet. While it is the preferred blockchain for institutional and corporate players I don’t think thUSD will be their choice, at least not right now and for the amounts and volumes proposed.

Wasting gasfees on Ethereum mainnet is not what many are willing do do.
Therefore by existing on any possible well established Layer 2 makes it much easier for general retail choice.
And for that some work has to be done to deploy all the necessary stuff on the chosen L2, be able to bridge between them, etc. Is there any talkings currently going on to deploy thUSD on any L2 or is it something that still has to start ?
I don’t really consider existing BOB as a viable option for the moment.

Another point I wanted to comment is that while thUSD doesn’t have enough volume to be traded in bluechip lending platforms, some smaller ones could ne considered, but again only in Ethereum mainnet not sure if it will be worth it.

Regarding the proposed 10% APY perhaps that can calculated to find a more feasible number to start with.

2 Likes
6

yeah there are a lot of variables above which are open to change, apy being one. I agree about needing thusd on L2s but I didn’t want to make that part of this proposal. indeed we could, through royco, do exactly as they just did and take in deposits to be deployed upon launch to mitigate the cold start program and it could conceivably be integrated into this type of bond offering but I didn’t want to complicate things further at this point. once there is some inertia behind keeping thusd around I’m happy to explore that but I think if the only thing we did was bring thusd to L2s and nothing else, it would still have most of the problems I described.

2 Likes
7

Agree.
What I meant about presence in L2’s is that without it nor thUSD nor the bonds can succeed.

2 Likes
8

I agree it’s important and long term necessary for thUSD but the crucial distinction is that the bonds can conceivably work on mainnet especially because of the consolidation of txns. if the support for this idea comes with the caveat that it be used to launch thUSD on arbitrum and base instead of trialling it on mainnet, I would not object. I just didn’t anticipate that particular desire nor did I want to complicate this proposal further.

2 Likes
9

Yeah, you’re right. Bonds are well regulated, and there’ve been cases I’ve been witness to in the past where crypto products use tradfi terminology and attract SEC attention, but OTOH, they just gutted the SEC’s crypto enforcement, and the President just basically dropped a bunch of coins. Just pointing it out as a possible concern. Worth asking someone about, maybe.

1 Like