You may not have noticed but we are in the midst of a significant bear market for the price of BAL. This fact combined with the desire to expand the number of contributors in the Balancer ecosystem has led the Treasury subDAO to explore ways to bolster the DAO’s stablecoin reserves. One possibility is through the use of a Ribbon Finance treasury vault for BAL.
The DAO would deposit BAL into this vault and sell monthly calls - two quotes provided by Ribbon are as follows:
Using a strike 25% out of the money, we can expect 3.17% yield per month → 38% APY
Using a strike 50% out of the money, we can expect 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 BAL) to the market maker. Effectively if the price of BAL goes up significantly during the month we will incur a loss then continue as normal and sell the next month’s call option. In comparison, physical settlement would mean we are obligated to sell all of our BAL at the strike price (minus slippage) if the option expires in the money.
Ribbon has signaled they are prepared to support cash or physical settlement - in both cases any BAL transferred to market makers in the event of a call option expiring in the money would be market sold. This is why slippage is taken into account when the market makers will quote us the price for the physical settlement option.
The exact amount of BAL to use for this is up for discussion. 500k BAL has been discussed but we could go as low as 250k BAL. The collected premium would be in USDC and would be available to withdraw from our vault every month.
Assuming we deposit 500k BAL, that represents around 12% of the BAL in the treasury valued at ~$4M ($8 BAL). A 38% APY would lead to a gain of ~$1.5M and 10.92% APY to a gain of ~$436k.
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.
The price of BAL 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 200k BAL to sell monthly calls 25% out of the money with cash settlement. The DAO Multisig would transfer 200k BAL to the Ribbon Vault. The address of that vault would be independently confirmed via at least two sources.
I personally support allocating 500k BAL and selling monthly calls 25% out of the money using cash settlement. We will likely lose if BAL goes up but BAL going up relieves some pressure on our funding requirements as a DAO. This initiative’s main benefit is it helps to de-risk the downside scenario where this bear market drags on and the protocol’s revenue begins to fall.
As far as insurance, Ribbon v2 has been live since Sep 2021 without issues. Our deposit does not represent critical funds required for near term operation, just BAL that would sit in our treasury otherwise. I don’t think insurance is necessary here.
I highly advise against this proposal. While the goals are honorable I don’t think its worth the risk to deposit 10% of our treasury into vaults that give away all the upside and do not protect from downside.
If BAL goes up by 100%, we lose 30% of our capital and collect no premiums. If BAL drops by 50%, we collect no premiums and eat the loss (in usd) too. This strategy operates efficiently only if we stay in a +/-25% range. So if BAL price doubles during any month long period, we lose 30% of our capital. That is the entire year long gains wiped out.
I would love to find new ways to protect Balancer through rough markets but I think this is not worth getting involved in.
If you think BAL will go up, then this will eat your upside.
If you think your BAL will go down, this will do nothing to protect your downside.
This proposal only makes economic sense if we trade within -/+ 25% for every month long period for the year duration of this.
I will be voting NO on this proposal and I think veBAL holders should too.
edit: just wanted to mention that i would vote yes to this on gov council to send it to snapshot as it is a “well defined proposal”
We collect the premium in all scenarios except if BAL ends the month up more than 28% (25% + 3% yield from the premium). But otherwise it is a fair opinion.
I am also not entirely happy with this proposal @Mike_B . It is currently the best option to protect us somehow against the downside. What we could do is discuss how much BAL shall be allocated to this position (maybe less than 500k BAL, let’s say min. 250k?).
Fact is:
we have a large BAL reserve
that BAL reserve sits idle
we are transitioning to the SP model and need stable coin liquidity to pay SP entities sooner than later
Market selling BAL in a continued bear market condition is even worse than this option
So question is: what better option would we have instead of this proposal?
With the current market conditions and the investment options we have, this is the best bet currently. I am therefore slightly in favor and will tend to vote yes.
In spirit, I’m very much for exploring avenues like this. In practice, in regards to this specific proposal, still thinking through the numbers and don’t have a for/against opinion at this time.
In the meantime, a few things would be helpful for voters:
Let’s not frame this as ‘yield’. Writing calls is more of a trade.
Is there a revenue/budget analysis that we could link to? i.e. how much do we have in the treasury, how much are we making every month and what are our expenses? Knowing our financial situation would be very helpful in determining our appetite for risk.
Can someone simulate different scenarios? Similar to what @Mike_B did but maybe a bit of expansion would be helpful.
Has anyone done any volatility assessment on BAL? This would be super helpful since we’re purely going up against professional traders by entering the world of options.
As always, I hope we wait until there’s consensus on the forum before sending the proposal to a vote – this depends on settlement of discussions and not how many days.
Love the idea of utilizing derivatives to generate revenue for the Balancer Treasury. However there may be a more delta neutral way to do so and still extract a set amount of yield. I wonder if we can get anyone from the Ribbon Team in to talk through some different scenarios, rather than using our own resources to simulate this.
The problem IMO is that it does not actually protect from the downside. Do you mind elaborating on this aspect?
Current scenario in any given down month for BAL price: BAL sits in treasury wallet and loses value.
If we do this proposal: BAL sits in ribbon vault and loses value while we collect ~3% yield paid in USDC
Let’s not frame this as ‘yield’. Writing calls is more of a trade.
sure
Is there a revenue/budget analysis that we could link to? i.e. how much do we have in the treasury, how much are we making every month and what are our expenses? Knowing our financial situation would be very helpful in determining our appetite for risk.
None exists because the funding needs of the next 12 months will look a LOT different than the funding needs of the past 12 months due to the creation of the Balancer Foundation and the Service Providers that will soon come forward to request funding.
We have ~$4.2M in stables if Rari hack is repaid in full. We are stacking ~$100k USDC per week from the DAO’s 25% share of protocol revenue. I can say with a high degree of certainty we cannot fund the ecosystem with $100k/wk - the only reason we’re in a position to get away with it over the next few months is because we gained 2.5M FEI in the Tribe treasury swap and Copper did very well for us last year. Thus, exploring ways to increase our stable reserves with an acceptable risk/reward is an important task for the community in my view especially given the bear market could last awhile.
Can someone simulate different scenarios? Similar to what @Mike_B did but maybe a bit of expansion would be helpful.
Each month, if BAL price goes up less than 28% we simply collect the 3% premium in USDC. If BAL price goes up 50%, we lose ~9.7% of our BAL stack (we still keep the 3% USDC though). If BAL goes up 100%, we lose ~32% of our BAL stack (we still keep the 3% USDC). If you have a specific % gain you’d like to know the loss for let me know, otherwise not sure what scenarios have not been covered.
Has anyone done any volatility assessment on BAL? This would be super helpful since we’re purely going up against professional traders by entering the world of options.
Nope and it is beyond my skillset to do such a thing. I can only offer that looking at the monthly chart for BAL/USDT on Binance: over the last 21 months, BAL only gained more than 25% in three months (January->March '21) and we would have incurred a loss of around 40% of our BAL during this time period with this strategy. For the trailing 12 months from today, every month was red or up less than 28% so we would have effectively realized the full 38% expected “trading profit”
As always, I hope we wait until there’s consensus on the forum before sending the proposal to a vote – this depends on settlement of discussions and not how many days.
As long as an active discussion continues I completely agree it is ideal to hold off on voting. However, I also recognize we may not reach consensus on this issue discussing it here. I personally believe voters have enough information to come to an informed conclusion on the value of this proposal. Once the discussion has run its course here (no new messages for a few days) I will request Governance Council approves this to move to snapshot.
The risks section says we incur a loss if we use cash settled options, is that not also true for physical settlement?
I think this is a good idea given the current conditions. I’m just not sure on the amount. If 500k BAL is too much (who knows, maybe it’s too little), then we can lessen risk by going smaller or by having a plan to realize/protect some BAL gains elsewhere, in case they are short lived.
I’m not sure how to put a spreadsheet out here but I looked at the historic monthly volatility (calculated each day based on previous 30 days). In the past ~2 years 20% of days had a volatility of > 28%, but there hasn’t been one since the end of June 2021.
I think it would be extremely helpful for voters to be able to see a spreadsheet from BAL’s inception on how this call writing strategy would have performed. I’d put something together myself but I’m not confident enough in how options work for it to be accurate in $ terms.
Given the percentage of the treasury it would be, I think insurance would be worthwhile also & need to be deducted from what we’d expect return wise.
Historically it seems to me we’d have made losses in:
August 2020 ($21.59 → $32.81 +32.81%)
November 2020 ($9.90 → $14.87 +50.29%)
January 2021 ($13.65 → $26.48 +93.45%)
February 2021 ($26.53 → $34.47 +30.18%)
March 2021 ($34.52 → $57.42 +66.57%)
August 2021 ($21.64 → $27.74 +28.65%)
Those losses would be enough for this to be unprofitable I expect, based on the estimates @solarcurve has provided. Of course, we’re anticipating a bear market with this strategy and therefore ongoing reductions in BAL price, but my caution here would be that drives market cap lower and therefore also means that it take less money to move the market for BAL.
I think we could really do with some assessment from someone with an options background in terms of whether a strategy like this makes sense given BAL’s historical volatility and likely future volatility.
My perhaps uninformed view is that the most likely down market scenario is one in which there are months where BAL price reduces a lot, but in percentage terms followed by gains which would eat into our return. So e.g. BAL could drop 50-60% in a month, but then increase 50-60% the next month. The net result is a reduction in BAL price, and yield lost. I’m not convinced that we’re likely to have market conditions which see BAL regularly decreasing month-on-month without large % gains between which decimate the returns.
Effectively, BAL can reduce in price a lot over the next couple of years and this Ribbon vault strategy still be unprofitable. It doesn’t seem to address the anticipated risk in my view. What might be better is writing calls which last for longer than a month (e.g. half a year to a year), as we’d be less exposed to the month-to-month volatility.
edit: something that could also be interesting would be assessing if this would have been profitable for e.g. ETH or BTC from February 2018 - June 2020. There’s then also the question of whether we’d be able to anticipate the end of the down market.
You’re right that it’s really the short term gains which pose the most risk to capital. Especially with a one-time allocation. Though I do think it addresses what it sets out to address: to help bolster the DAO’s stablecoin reserves (for use as funding in the case of an extended downturn). And it does it without putting more sell pressure on BAL while it’s on the way down
[just gunna edit some of my opinions out cause i dont know jack]
General discussion is great and I think just airing options during a slow market is important for BAL to survive. I think this option should be taken holistically and therefore in saying this we should look at alternative strategies that may seek to provide yield in addition to ribbon vaults.
One unique protocol that I came across is Porter Finance. You can actually find Ribbon proposing to use this protocol to issue RBN bonds to raise USD as capital. We can do the same thing for BAL and use the USDC from bond sales to conservatively generate yield on compound, aave etc.
This eliminates the need to sell BAL, however, these vaults are typically overcollateralized by a significant amount.
We have also explored Porter quite a bit in our weekly treasury subDAO meetings - huge thank you to Jordan from Porter for being a great resource. My thinking is Porter makes sense if we have an immediate funding need we can’t meet - I don’t see any reasonable way to use Porter and yield farm and turn a profit. We are not in that situation right now as we should have the rest of the year covered funding wise easily.
This proposal is aimed at creating another income stream of stables for the DAO. It is not the same use case as Porter really. Doing this could alleviate the need to use Porter in 12 months for example.
I appreciate the thought here in terms of backtesting, but honestly I’ve found that backtesting doesn’t really mean much in the end, there is the old adage, past performance is not indicative of future results.
An alternative that I don’t remember if someone else mentioned, but would Ribbon also support buying calls on BAL at the same time as writing? if they do, you could create a bear call spread which would limit downside and upside. now option spreads aren’t without their own risk, but i’m curious if the Ribbon contracts can be exercised/assigned early or not, if they can’t and they always run to expiry the embedded risk in a spread goes away.
To those who are unfamiliar with covered calls, its a way to earn USDC today without selling a single BAL by collateralizing the BAL and earning yield based on price movements (options).
@Mike_B you earn yield if BAL goes down. So sure it doesn’t protect BAL from going down, but it subsidizes that loss with USDC.
It is true, backtesting isn’t perfect but it gives some indication. Had Balancer been running a covered call strategy for the past 6 months, it would have earned 15% in yield in USDC which is the goal. See below
I am not going to repeat everything @solarcurve said, but I will say this:
Active Management
This isn’t a one-way proposal where if it gets passed it “cannot be unpassed”. Balancer has a dedicated subDAO that deals with the treasury and can actively manage it. If members feel that it is time to withdraw funds and stop running a covered call strategy, it is free to do so.
Earning Cash
The bottom line is that the DAO wants to bolster stablecoin reserves. If you want to earn cash, you need to take risks - there is no free lunch. This goes for lending, LP’ing, and of course selling options. There is unfortunately no “magical way” to just earn yield that makes everybody happy.
My concern with this is that the period has been perfect for the strategy to generate yield. Since BAL’s inception, the results would be very different.
@bakamoto20 I agree - that is why we would not necessarily have recommended to use this strategy during a raging bull market. We are in different conditions now!
