Create a Debt DAO AMO to mint $2.5m FRAX in order to fund Redacted’s credit facility.
Coming on the heels of the 4pool announcement, this opportunity would further cement the partnership between Frax and Redacted. We view this opportunity as supplemental to the Frax ecosystem & a case study for the future FraxLend product.
To our knowledge, this represents the first ever debt financing round for a DAO.
Debt DAO is building a marketplace for sophisticated debt products created specifically for DAOs. We are launching debt products based on trustless revenue-based financing via our Spigot smart contract. The Spigot allows borrowers to collateralize loans with future revenues. Lenders have confidence that their loan is backed by verifiable on-chain revenues. Borrowers gain access to the most flexible, low-rate debt with no upfront collateral.
As we bootstrap the marketplace, we are securing LP capital from strategic groups. We view Frax as highly strategic to our offering. In our existing setup, we are using a multi-sig to facilitate the flow of funds between lender & borrower. After our seed round closes this month, our smart contracts will be audited before deployment.
Debt DAO is asking Frax to contribute $2.5m to Redacted’s $5m loan. This will be structured as a credit facility. Redacted is keen to partner with 2 DAOs with the allocations split as follows:
- $2.5m FRAX from Frax
- $2.5m UST from Terra
- Terra’s commitment has already been received in the Debt DAO multi-sig.
The TL;DR version for the terms of credit is:
- 6 month term for up to $2.5m in FRAX
- 9% APR on drawn balance; 2% on committed but undrawn balance
- No upfront collateral
- Repayments to be made out of vlCVX bribe income and Convex farming rewards from Redacted’s treasury
Detailed terms of the facility can be found here: Credit Facility Details
- Through a partnership with Credmark, we have combined on-chain transaction data with block-rewinding to get the historical state of the chain. This process validated Redacted’s vlCVX bribe income and Convex farming rewards.
- Attractive loan to DeFi’s premier meta-governance DAO, secured against cash flow from leading DeFi yield sources which have become essential infrastructure for all protocols (Curve and Convex). The numbers below assume a $5m loan.
- Modest opening gearing (~9% debt to total treasury assets) and leverage (~0.3x debt to last-3-month run-rate income)
- Strong protocol cash flow de-risks lender in meaningfully shorter period than tenor of loan
- vlCVX bribe income and Convex farming rewards generated by Redacted’s treasury are sufficient to repay the loan in 3-4 months (vs 6 month tenor)
- Cash flow from treasury is sufficient to pay off the loan even at a ~16% APY on vlCVX bribe income (vs significantly higher historical APY)
- As part of the loan, a FRAX/BTRFLY pool on Uni v3 will be created.
- Assuming the full facility is drawn, there would be $5.0m of Uni v3 LP. This will increase liquidity on different platforms and allow smaller buyers to trade with lower gas fees.
- The notional amount drawn from the FRAX loan by Redacted must be matched with a 1:1 deposit of assets into FRAX/BTRFLY Uni v3 LP. Both Redacted and Frax will deposit assets to the Uni v3 LP.
- As an example, a drawdown of 500k $FRAX would require Redacted to deposit $500k BTRFLY and Frax to deposit $500k FRAX into Uni v3 LP.
- Once the loan is over, Frax and Redacted would commit to keeping the pool deployed & each owning half of the pool.
- Redacted will use Aloe Capital to manage the Uni v3 position. Aloe Blend manages liquidity on Uni v3 with the rolling hills strategy. Assets that would otherwise be idle are deployed to yield earning strategies to increase LP returns.
- Aloe Capital would use a rolling hills implementation to manage the v3 position so it provides at least the same amount of liquidity as a Uni v2 position at $5m of depth.
- You can use this simulation to show how a BTRFLY/FRAX Blend Pool would have performed over the past few months: https://blend-simulator-btrfly-frax.surge.sh
- For more info on Aloe, please see here as well as their audit report.
- Redacted intends to create a gauge on veFXS to use their veFXS emissions to direct rewards to their pool which would drive even more rewards to Redacted.
We would love to hear from the FRAX community regarding any questions or concerns & look to finalize this through a FRAX snapshot vote. We are very excited by the potential of a promising partnership between innovators in DeFi.
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