UMA has introduced the Range token, a treasury primitive allowing DAOs to access funds and diversify their treasury without selling their native tokens. Instead, DAOs can use their native tokens as collateral without the risk of liquidation.
A Liquidity Problem
DAOs have become increasingly more significant, with some DAO treasuries valued in the billions. However, a point of interest is that these assets are held as native tokens of the particular project. Only a fraction is held in stablecoins or liquid assets.
Having only the project’s native token is not problematic during a bull market. However, it could be during a bear market. The recent sell-off with the ETH/USD price down 50% and the decline in the valuation of DAOs is a good example of what could happen during a bull market.
Diversification Is The Answer
There is an increasing need for DAOs to diversify their treasury to ensure that their operations are well-funded and their protocol is on track to meet its objectives.
The Challenge Before DAOs
DeFi projects currently have one reliable way through which they can access funding, and that is through a sale of their native token. Compare this with traditional finance and the numerous options such as bonds, direct loans, and equity loans, to name a few. Each instrument in traditional finance serves a unique purpose, raising funds through different means.
DAOs, despite restrictions and vesting schedules, need funds to cover expenses and compensate their teams. DAOs need the security of funds to navigate the volatility of crypto markets while also minimizing the impact on their tokens when divesting. Range Token gives DAOs an option for diversifying their treasury and overcoming some of the challenges mentioned above.
The Range Token
A Range Token can be compared to convertible debt, allowing companies to raise funding without any equity upfront. Through the Range Token, DAOs can use their native token as collateral and raise funding. If the debt cannot be paid, the token holder is compensated with the equivalent amount of collateral (in this case, the native token), using the settlement price to determine the number of tokens.
If a token is trading at $25, then a debt of 100 USDC will be settled with four tokens. However, the Range Token seller (In this case, the DAO) cannot be liquidated, and the number of tokens that can be given to the token holder is capped.
A Short Put Option
The token holder acts as a short put option, having exposure to the downside of the token after a certain price point. As compensation for this risk, Range Token holders are rewarded a “call” option on the native token. This helps to create a trade-off between the seller and the buyer.
The Road Ahead
Range Tokens allow DAOs to diversify their treasury and accompany other primitives, such as call options and KPI options. Range Tokens will eventually become an asset class for DeFi investors, offering unique risk exposures. UMA will also be minting and distributing its range token, demonstrating the utilization of the tool.
Disclaimer: This article is provided for informational purposes only. It is not offered or intended to be used as legal, tax, investment, financial, or other advice.