ShapeShift Enters Convertible Bond Market with HourGlass, Arbor Finance

Decentralized autonomous organizations (DAOs) are gradually gaining traction in the Web3 space and beyond as many are beginning “to explore possible ways of contributing to one.”

While DAOs have significant operational benefits such as organizational transparency, decentralization, and ability “to utilize a wide variety of assets to operate, there are some challenges DAOs must still overcome.”

Being in their infancy, DAOs face difficulties “with raising funds and financing.” It is a known fact that most DAO treasuries “have high concentrations of their native token一some relying heavily on selling their governance tokens to fund operations.” This puts “direct sell pressure on the token price, potentially affecting long-term holders.”

Some DAOs一such as ShapeShift DAO一”do not have a legal business registration due to their decentralized nature.” Therefore, they are “unable to secure credit via traditional forms of financing.”

Since the majority of DAO’s assets are cryptocurrencies (and often more “risky” assets such as the native token of a protocol), traditional banks “do not accept such assets as collateral when applying for loans.”

This is where HourGlass and Arbor Finance come in — “offering permissionless debt-based financing via convertible bonds.” This form of financing “allows DAOs to secure the funds they need to continue developing and growing their organizations without sacrificing their governance tokens.”

There are some DAO financing options that exist currently, which are as follows:

  • Token-based (equity) financing: token sales add direct sell pressure and reduce a DAO’s overall share of its governance token.
  • Variable Rate Borrowing: Margin lending–popularized by platforms such as the discontinued Rari Fuse–results in liquidations when collateral value falls below the LTV (loan-to-value) limit, making it subject to volatile price movements. Additionally, high APY’s — sometimes jumping into the triple-digits–can make paying back these loans burdensome.
  • Discounted bonds (i.e. Bond Protocol): DAOs can sell discounted tokens on platforms such as Bond Protocol. Holders can buy discounted, unvested tokens and sell their current holdings at a profit. This process results in demand for the offering, but can add short- to medium-term sell pressure to the token price (experimenting with parameters such as vesting time may help reduce this pressure).

Convertible bonds “provide a unique solution for DAOs looking to obtain credit within decentralized finance, adding another tool to the list of aforementioned options.” This is done via “borrowing stablecoins against the native token, at a fixed-rate, without the risk of liquidation.”

ShapeShift DAO has “issued a convertible bond using HourGlass and Arbor Finance protocols, borrowing up to $500,000 USDC with each protocol.” These offerings “are overcollateralized 250% by FOX, the DAO’s governance token.”

ShapeShift’s plan is “to pay off their current expensive variable-rate loan on Rari Fuse (currently around 135%) taken earlier this year and effectively convert it into an 18-month fixed-rate obligation with an estimated rate of 20%.”

Refinancing effectively “saves the DAO over $50,000 in interest payments over the next three months一adding invaluable runway to the organization’s stablecoin reserves.”

HourGlass allows DAOs “to borrow stablecoins against their governance token as a part of a fixed-rate, fixed-term, zero-liquidation loan.” At high-level, this “allows DAOs to raise funds to support their protocol growth, while avoiding the risk of losing their governance tokens.”

As explained in the update, Arbor enables DAOs “to raise debt based financing by issuing convertible bonds that are fixed rate/term and non-liquidatable.”

For lenders, Arbor “offers transparent, over collateralized, and high yield opportunities where they receive a fixed rate of return along with upside to treasury token appreciation.”

HourGlass Bonds are “composed of tranched debt, meaning the collateral is stratified into a senior portion and a junior portion.”

The senior portion is what is “allocated to a lender, and is paid out first.” This, along “with a default penalty of 75%, provides an additional layer of protection for lenders if the DAO defaults on a loan. This is possible because of the ButtonTranche protocol.”

Arbor Bonds do “not have tranched-debt.” The lender is “compensated with the total deposited collateral if the DAO defaults on the repayment.”

HourGlass bonds “are convertible at maturity.”

Arbor Finance bonds “allow the lenders to convert the bond into the underlying collateral at a pre-defined strike price.” This added benefit “creates a win-win relationship between DAOs and Lenders whereby Lenders get token upside and DAOs get better rates.”

For more details on this update, check here.

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