UMA Range Token Retro

Analyzing The First Implementation by a DAO

The first range token was minted on June 30, 2021, using $UMA as collateral, to raise over $2.6 MM USDC from a small group of DeFi enthusiasts. This inaugural token settled on August 31, 2021.

In this article we review the specifications of the token, analyze how the DAO and the token holder fared, and share some of the feedback received from the DeFi community and investors with regards to this treasury primitive.

Range Token

The range token allows DAOs to diversify their treasury without selling their native tokens. Instead, DAOs borrow funds with their token as collateral, without liquidation risk, and delay selling these tokens to a later date to bet on a higher valuation.

The range token acts like a “crypto native convertible debt”.

As a review, the first UMA range token (rtUMA-0821) had a $4-$12 price range and expired on August 31, 2021. Each range token was sold to private investors at a price of $0.963 to provide close to a 25% APY.

Depending on where the price of UMA settled the following scenarios were possible:

1. If $UMA was within the $4–12 range, the investor received $1 worth of $UMA and earned a 25% APY [(1 / 0.963)^(365 / 62)-1]
2. If $UMA is > $12, the investor earned an effective APY higher than 25%. The investor received a minimum of 0.08333 $UMA which implied he/she bought $UMA at $12 no matter how high the price of $UMA was. Effectively, the investor had long exposure to a $12 call option.
3. If $UMA is < $4, the investor earned an effective APY lower than 25%. The investor received a maximum of 0.25 $UMA which implied he/she bought $UMA at $4 no matter how low the price of $UMA was. Effectively, the investor had short exposure to a $4 put option.

A pricing sheet similar to what was used at the time of minting can be found here and the payout chart is graphed below.

Indications of interest were gathered about one week prior to the minting of the range token and at that time $UMA was trading around $8. The price of $UMA at settlement on August 31, 2021 was determined by the Optimistic Oracle to be $12.954. Using these two prices as a reference we can do a simple analysis to understand the economics of the DAO and the investor.

The DAO’s Perspective

Ahead of minting the initial range tokens, UMA protocol could have sold their native tokens to private investors or the market around a price of $8. For the size of $2.6MM worth of tokens, an immediate sell into the secondary market would have very likely resulted in sizable slippage. Selling tokens directly to private investors at the time and demanding any lock up period would likely have required a meaningful discount. Putting those two facts aside and with perfect execution at $8, raising $2.6MM would have required selling 325,000 $UMA tokens.

The range token allowed the DAO to raise the same funds upfront, lock up tokens for 2 months, and determine the sale price of its native tokens at a later date.

Investors paid 0.963 for each rtUMA-0821 (UMA range tokens expiring on August 31, 2021). Therefore, in exchange for $2.6MM, investors received 2,699,896 rtUMA-0821 ($2,600,000 / $0.963). At expiry, the price of $UMA settled at $12.954 which exceeded the high price range and rewarded the investor 0.08333 $UMA per rtUMA-0821 or in total, investors received 224,982 $UMA tokens (2,699,896 * 0.08333).

As a result, the DAO was able to save over 100,000 UMA tokens to raise the same amount of funds. Instead of selling $UMA at $8, the DAO sold $UMA at $11.556 ($2,600,000 / 224,982 $UMA or $12 * 0.0963). Of course, the opposite could have happened if the price of $UMA went down over the life of the range token. Generally, a DAO that believes its token price is undervalued would prefer raising funds using range tokens.

The Investor’s Perspective

Range token investors could have bought $UMA at $8 prior to the minting of the range token, but effectively bought $UMA at $11.556 instead. That difference is 44% higher; however, these range token holders arguably had much less risk. Range token holders had no price exposure to $UMA between a range of $4 — $12 and actually had favourable price exposure above $12. It is only in the scenario below $4 on $UMA that the investor had negative exposure.

At expiry, investors owned $UMA at a decent discount given it was trading at $12.954 or effectively 12% higher than their purchase price of $11.556. Annualizing that return would equate to a 96% APY [(12.954/11.556)^(365/62)-1] which is much higher than the original 25% APY expected if in the $4-$12 price range.

Risk reward seemed favorable to the investor helped by the attractive APY which provided a cushion or kicker in all scenarios. One disadvantage to the investor we should highlight is the lack of liquidity. There is currently no range token market given it is a new treasury primitive. Longer dated range tokens would face an even bigger liquidity challenge. This is in comparison to buying native tokens of a DAO that can be swapped readily on most exchanges.

An on-chain analysis implied the private investors of the $UMA range token are very supportive of the protocol and used it as a way to either initiate or add to their UMA investment.

One concern DAOs have is a flood of selling once the range token matures and investors can redeem for their native token. This concern is no different from fund raising in traditional financing where choosing your investors is very important. Of the 14 range token investors only 3 appeared to have sold their $UMA upon redemption and those sales made up a small percentage of the total (~5%). The remaining investors held their $UMA and in many cases are existing investors that added to their holdings.

Feedback from DAOs and Investors

Since the introduction of the range token, the UMA team has received overwhelming positive feedback from many DAOs. We have answered many questions, have been invited to speak at numerous community calls, and have worked with many DAOs on structuring their own range token.

There are a few observations to highlight from our interactions.

DAOs are surprised how easy it is to deploy a contract and mint range tokens. The real work involves marketing and educating the community of the DAO. A structured product with embedded options can be daunting to many, so packaging the information in an easily digestible way is important to help everybody understand the economics. In general, the idea of raising funds now and betting on the success of their own protocol is very appealing to many DAOs.

Feedback from investors such as venture capitalists have been mixed.

These investors understand the benefits of the range token for the DAO, but believe the structure caters more to people looking for yield and a less volatile investment. Venture capitalists for example are seeking 10x to 100x type returns and are willing to ride the investment to zero in doing so. Some believe the range token would be more suited for later stage investments or “blue chip” DeFi projects that have already seen a significant rise in their token price and could arguably have less volatility and upside relative to younger projects.

The feedback above led the UMA team to create the success token.

The success token is a treasury primitive for fundraising that simply combines a native token with a call option or KPI option. Instead of selling their native tokens at a discount to venture capitalists, a DAO sells its tokens at the market price, but grants the investor upside if it is successful in achieving its goals (KPI option) or rising in value (call option).

Said differently, instead of rewarding investors a discount upfront, investors need to earn a bonus that is paid later. The success token addresses some of the previous feedback — it is easier to understand, it provides more upside to an investor, but with no downside protection, and it aligns the incentives of the investor with the protocol to better define a partnership. The success token appeals to venture capitalists who are not just looking to invest money, but also want to be heavily involved with a project to build a relationship and push it towards success. Multiple DAOs are working on launching a success token soon and UMA may deploy its own to show the DeFi community how it works.

Conclusion

The inaugural UMA range token was successful in showing the DeFi community how the treasury primitive works and in generating a lot of discussion and feedback.

The range token is especially suited for established projects where there are existing partnerships with investors. The range token can be used for add on investments, like in the case of UMA, where a relationship is already formed.

For younger DAOs looking to build a partnership with and leverage the resources of a venture capitalist, the success token appears to be the better fundraising vehicle. It is a simpler structure for these investors and it better incentives the investors to work for the protocol. The UMA team is working with multiple DAOs looking to launch range tokens or success tokens. We are happy to answer any questions and provide support in deploying their own tokens.

Reach out to us on Twitter, Discord, or by email at hello@umaproject.org to ask questions about how to deploy success or range tokens for your DAO.