The path of reimbursement

On Friday, the $RGT token holders voted in traditional bonds as the route to reimburse all REPT holders who lost money. This post outlines what that would look like, votes that need to happen and ideally answers any questions in between.

Firstly, what is a bond? A bond is essentially a piece of debt, an instrument that says you owe one person a specified amount. There are a couple cool things about putting debt into a bond. Suddenly, debt can be exchanged (ie I can sell the amount that someone owes me) and it is easily accounted for. Bonds are really popular in traditional finance and various public companies sell bonds and then use that capital to re-invest in growth. These bonds are paid back over time (ideally) or else they will lose value on secondary markets (if it’s traded on any) and eventually the bonds are defaulted on.

So, what would a bond for the Rari Protocol look like? The first thing is that governance chose to distribute bonds, not to sell bonds. What this means is that governance will essentially deliver “I owe you’s” to everyone within the REPT pool. Given that ~$11m was hacked, this is a lot of “I owe you’s” and given that the protocol currently earns less than $2m a year, this could end poorly if not properly handled, that is why I wrote this post: to make sure it is handled properly.

Essentially, I believe that governance should create a $iouREPT asset using the Yield Protocol (this will be a basic bond as described above) and then create a liquid market around this that would permit the buying and selling of this asset.

There are a few things that governance would need to vote on in the creation of these bonds:

• Payment intervals: how frequently will governance be making payments towards these bonds
• Liquidity mining: whether we will liquidity mine $iouREPT<>ETH pair on the YieldSpace AMM that is chosen
• Maturity date: the date that we are aiming to pay off the debt by (at this point the $iouREPT will be redeemable for that amount)
• Multi-bond structure: creating a $fiouREPT asset to represent faster payment to smaller holders, enabling us to payback a large % of accounts upfront and only larger holders will have to deal with longer maturities. This would potentially fragment liquidity, which defeats the purpose of liquidity mining.
• Payout currency: deciding the payout asset. Likely ETH or DAI.
• Backstop: instead of incentivizing the bonds with liquidity on YieldSpace, we can direct $RGT to act as a backstop for the bonds. This should not be 1:1 but maybe 1:50 (portion lost:rgt backstopping) because there is the bond still active, this is just an extra benefit. This essentially creates an option. Alternatively, we could also vote (now, increasing confidence or later, in reaction to demand/need) to use the $RGT to make the bonds whole at maturity if they are not paid off fully.

Nearing a payment or maturity date, governance can also choose to find alternative means of funding to pay off the debt for that period. Ideally the DAO has a regulatory green light to have complete flexibility at this point, which would open up the possibility of potentially liquidating $RGT for a debt payment and making use of the tokens we gave to the DAO. I do not want to see the DAO default on a payment and I don’t think any of our token holders do either, it would create a massive trust gap.

I believe that we can create a healthy marketplace around the $iouREPT assets and help serve the $REPT holders right. Also, if we can help create liquidity within the $iouREPT asset, then we can enable users to borrow against it within Fuse which further helps our product lineup. I will refrain from sharing my personal thoughts on each of the debatable topics above for now because I want to hear what y’all think.

I am currently working with the Yield team to ensure that we are not missing any potential variables that need to be voted on. Once I receive clarification, I will shift all of these votes onto the forum and then the Snapshot.

The purpose of this post was solely just to educate people on the bond products and what to expect from future votes. As always, feel free to reach out to me in the Discord with any questions. We’ll get through this and come out stronger.

Take care y’all.