Introducing Bond Voucher (Now Convertible Bond)

PSA: The Bond Voucher removes the embedded convertibility featured in this piece, catering mainly to the financing needs of crypto institutions such as market makers, VCs, and/or asset management protocols. There’s a version of Bond Voucher which retains the important convertibility feature and is now re-named Convertible Bond. That said, every mention of “Bond Voucher” in this piece refers to the Convertible Bond, not the new Bond Voucher.

In this article, I will outline the next member of Solv’s financial NFT family–the Bond Voucher, the first market-tested debt instrument in DeFi that helps DAOs tap into the debt capital markets.

Understanding the Bond Voucher

The Bond Voucher is a debt instrument that allows DAOs to raise capital by issuing a convertible bond, or a pure form of debt after removing the embedded call option.

The idea of the Bond Voucher is simple. When used as pure debt or as a convertible bond with an unexercised call option, the Bond Voucher is identical to a zero coupon bond, meaning it will be initially issued at a discount to face value, and then at maturity when investors burn the Voucher, they will receive the full face value. When used as a convertible bond, the investor can convert the Voucher to a fixed amount of native tokens if the underlying’s market price is greater than or equal to the conversion price at maturity (the embedded option is European).

Both forms of the Bond Voucher can give DAO debtors external sources of funds and give creditors a high yield. When issued as a convertible bond, the Bond Voucher can grant investors the upside if the project is rising in value, but can result in dilution and a shift in the voting power away from its existing holders and toward the converters — though the amount of dilution will be less than if a token sale were used to raise the same amount of capital. The Bond Voucher issued as pure debt doesn’t exhibit these issues, though it removes the upside for investors and hence their ability to express a specific market view.

Upcoming Bond Voucher sales on Solv will be issued as convertible bonds for the aforementioned advantages, and the maturity of most crypto projects means that it is likely that convertible forms of debt will more easily be able to raise funding. For this reason, this article will focus on the Bond Voucher as a convertible bond — but do note that DAO debtors are free to issue the Bond Voucher in whatever way suits them most.

Here’s a sample Bond Voucher, numbered “6800”.

Like any Bond Voucher, #6800 has a face value, maturity date, and (since it’s issued as a convertible bond) a conversion price, specifically:

• Face value is the amount the Bond Voucher can be redeemed for at maturity, denominated in stablecoin.
• Maturity date is the date on which the Bond Voucher will mature and on which the face value can be redeemed or the embedded call option can be exercised.
• Conversion price is the specified unit price where the underlying asset can be purchased at maturity. Note that this means investors can only exercise the option if the price of the underlying asset is greater than or equal to the conversion price at maturity.

Repaying the debt

All creditors want their debtors to keep up with their debt obligations, and so Solv’s Bond Vouchers have three policy modules that DAO debtors can use to reassure investors on their ability to repay debt. These modules directly affect the DAO’s credit quality and are a good way to show investors how serious the DAO is about repaying their debt.

• Collateral. Although collateralizing isn’t mandatory when the Bond Voucher is issued purely as debt, DAOs issuing the Bond Voucher as convertible debt must collateralize sufficient native tokens to back the embedded call option in case it is exercised. And since there’s no ceiling on the amount of collateral, it’s a good idea to collateralize as many native tokens as possible to keep investors reassured. Formally, with Bond Vouchers issued as convertible bonds:

• Third-party fund manager. The proceeds of the Bond Voucher sales will be sent to a neutral, third-party protocol that manages the use of funds. When the Voucher reaches maturity, the funds will be automatically withdrawn from the protocol to repay the investors.

We will begin implementing this feature using the multi-signature wallet in the early stage and then, later on, explore other options such as potentially partnering with asset management protocols (such as Enzyme) who can help manage the safety and usage of the funds for a fee.

• On-chain I.O.U. The DAO issuing the Bond Voucher will sign an EthSign-powered agreement acknowledging the DAO’s liability for the debt, including details such as the date of the agreement, the amount of debt, the date for repayment, means of repayment (where Solv Smart Contract’s address will be specified), and the e-signature of the DAO.

The unmatched level of transparency the blockchain offers over every transaction record, data, and code makes DYOR simple and allows investors to easily differentiate between investment grade and junk bonds. I list two examples.

1. Balance sheet. With just a quick look-up on the treasury’s address, accessing a DAO’s financial reporting has never been simpler. Platforms such as Dune Analytics now allow the community to easily follow, create, and share balance sheets and other key metrics of DAOs.
2. DAO governance. The fact that DAOs are built on open-source blockchains means anyone can view their code, proposals, and voting processes. Such visibility and transparency not only provides investors key information before investing, but also can help DAOs prove their creditworthiness when issuing debt.

Default (and curing a default)

Nobody likes events of default, and Bond Voucher investors are no different. The following outlines a multi-stage repayment process to minimize default risk. The failure to complete one event will immediately trigger the next one. For events 1–4, the existence of a remaining balance is considered a failure to fulfill that event.

1. The investors are paid tokens converted from the Bond Voucher, assuming the call option is exercised. (Skip to this step if the option is not exercised.)
2. The multi-signature wallet that monitors the use of proceeds issues the funds back to the investors.
3. The DAO receives a notice of default, urging it to catch up with the payment immediately. The DAO resolves this by sending treasury funds to the Solv smart contract to pay off the remaining balance.
4. The collateral is liquidated.
5. The DAO is in default, which is reported and recorded permanently into an on-chain credit history of the DAO.

Why debt financing is on the rise

A month ago, Unslashed and Perpetual raised $4 million USDT by issuing Convertible Vouchers. Similar to most other DeFi DAOs, they actually held nearly all of their treasury assets in their native tokens, and for that reason, both Perpetual and Unslashed looked for ways to diversify their treasury to fund operations.

Debt financings have a similar set of benefits for DAOs as it does for traditional corporations:

• It gives DAOs consistent, incremental funding to accelerate growth, fund their operational expenses, and/or bootstrap protocol owned liquidity.
• It is less costly than token financings as it results in less dilution, or no dilution (depending on whether the debt is convertible).
• The DAO retains governance/ownership control as opposed to divesting governance tokens to raise capital.
• It prevents (or with convertible debt, at least significantly delays) sell-offs in the spot market, which is bad for token prices.

Fundamentally, fast economic growth increases the demand for money, and therefore the likelihood for DAOs to borrow money to finance their projects. Meanwhile, the unmatched level of transparency the blockchain offers rapidly builds (or breaks) trust among lenders and borrowers, arguably making DeFi a more efficient debt financing market than TradFi debt capital markets.

Endnote

Solv provides a host of one-stop, cheap, and modular solutions in the token financing lane (the Vesting Voucher) and the debt financing lane (the Bond Voucher). So far, we have helped over 40 DAOs achieve a wide array of financing, allocation-managing, and community-building objectives and will help more this year.

If your DAO would like to get started with Solv Vouchers or if you would like to talk about the Bond Voucher, or have any other questions about our Vouchers, feel free to DM us on Twitter, hit us up on Telegram (@RyanChow778), or start a conversation in our Discord (you can also email us at contact@solv.finance if you prefer).

If you enjoyed reading this piece, feel free check out my article on DAO treasury management and Solv Vouchers here. If you’d like to dig deeper into the Bond Voucher, here’s the doc.

Special thanks to Yuanhan Li for the valuable feedback!