Payout Breakdown for the Convertible Voucher
A structured product that can be converted into a predetermined number of tokens or stablecoins under certain conditions.
What is Convertible Voucher?
As the second member of Solv’s financial NFT family, Convertible Voucher is a structured product that can be converted into a predetermined number of tokens or stablecoins under certain conditions.
Essentially, it features a flexible payout mechanism based on multiple release parameters including the future trading price of the underlying asset and a bond range.
As an asset class, Convertible Voucher allows crypto investors to receive healthy returns on a token in a relatively unstable climate.
Release parameters of the Convertible Voucher
To understand how Convertible Voucher works, let’s go over several defining release parameters of this instrument:
- Maturity Date: the day when interests of a Convertible Voucher are delivered, in UTC.
- Settlement Price: the unit price of the underlying asset, which will affect the amount of payout. It is calculated by taking the average of closing prices of the last seven trading days before the Maturity Date.
- Bond Range: an arbitrary price range set by the issuer that defines the payout mechanism of a Convertible Voucher. Should the Settlement Price fall inside this range, the issuer (usually a project) is obliged to make payments of a fixed amount to the holder, in its native token or stablecoin. Like any price range, a Bond Range is the difference between the highest and lowest prices:
4. Face Value (sometimes called Nominal Value): the value of the Convertible Voucher, as displayed on the image file of the Voucher. It’s the amount paid to the holder at maturity, should the Settlement Price fall inside the Bond Range.
5. Annual Percentage Rate (APR): the yearly interest earned on a Convertible Voucher (expressed as a percentage), if the Settlement Price is inside the Bond Range.
Calculating the payout
As discussed in the previous section, when the settlement price falls inside the bond range, the amount paid to the Voucher holder would just be the Voucher’s face value. As figure 2 shows, #30’s value (the blue curve) keeps a steady $1,000 as the settlement price traverses across the $0.50-$1.50 bond range. Assuming the Voucher was purchased at a discount for $800, in 294 days the holder will be offered a full face value profit of $1,000, generating a ROI of 25%.
If the settlement price ends up anywhere over $1.50 (upper bound), the holder receives a fixed payout 666.67 SOLV, generating a ROI of at least 25%. If the settlement price drops below $0.50 (lower bound), the holder receives a fixed payout of 2000 SOLV and a negative ROI.
Note: To protect investors’ interests, the project minting a Convertible Voucher is required to lock its tokens in the amount that is sufficient to pay the owner should the settlement price hit the floor of the bond range. In the example of #30, the issuer, Solv Protocol, must deposit 2000 SOLV before issuing the Voucher.
How is buying the Convertible Voucher really different from buying the project token?
Buying the project token provides immediate upside and downside exposure, whereas buying the Convertible Voucher pays a yield and only provides upside and downside exposure to the project token on significant moves.
If that still confuses you, don’t worry–let’s clear it up with some numbers!
Suppose the current price of the token is $0.80 and the total cost of investment is $800, compare two investing strategies:
Strategy A: Buy 1000 SOLV tokens: 1000 SOLV $0.80/SOLV = $800
Strategy B: Buy Convertible Voucher #30 worth $1,000 (face value), with 20% off: $1000 （1–20% ）= $800
Suppose the settlement price drops from $0.80 to $0.20 (lower than the range), strategy A will produce a $200 payout, equivalent to a net profit of -$600, or a -75% ROI. The same price would, in strategy B, generate a -$400 payout, bringing up the ROI to -50%. (See figure 3.2) When the settlement price is $2.00 ($0.50 over the range), strategy A will pay $2,000 or a 150% ROI, whereas strategy B produces a 67% ROI, a lower return.
This means that from a return/loss viewpoint, buying the Convertible Voucher weakens the gain in the upward price movement but, in exchange, provides a resistance against a downward movement (see figure 3.1). Though strategy A and B (outside the range) both mean taking a position with SOLV, a long period of holding SOLV without a protection mechanism in place exposes the investor to substantial loss.
In most cases, Convertible Voucher offers investors a stable APR at around 10% when most lending and borrowing platforms in DeFi such as Compound are offering a much less competitive yield, from 1% to 3%.
Why Should I Purchase Convertible Vouchers?
Convertible Voucher is a new digital asset that allows crypto investors to receive healthy returns on a token. Its unique payout mechanism takes into the account the volatility that currently characterizes DeFi and makes it safe to invest in promising, new projects while retaining strong toleration of risk.
The beauty of Convertible Voucher is that it requires ownership of tokens, not necessarily the same owner. Like any NFT owners, holders of Convertible Vouchers enjoy complete freedom to trade or transfer Convertible Vouchers on the Solv platform if they like, so long as the Voucher hasn’t expired.
All in all, lending out stablecoin through Convertible Vouchers produces a very competitive overall yield when compared to existing lending and borrowing platforms. In a particularly unstable climate, Convertible Vouchers offer passive investors rare peace of mind not found in most investment products of DeFi.