Intro
I am keen to present an innovative idea on achieving sustainable yields by employing so-called on-chain covered call strategies on $MNR.
Idea
The idea is to leverage a portion of Numerai treasury for covered call lending. This approach involves lending out a smaller part of currently idle $NMR tokens. By doing so, Numerai can generate significant upfront revenue in USDC (see below). The earned USDC can be immediately utilized for community needs (e.g. competition payouts etc.). And unlike a simple token sale, covered call lending enables the treasury to diversify its holdings into stable assets without an immediate market impact.
Benefits
• Idle $NMR tokens can be used to generate upfront USDC revenue
• Immediate revenue and liquidity for operational and developmental activities
• Diversification of the treasury into stables
• Tokens don’t need to be sold, thus there’s no immediate market impact
Example Scenario
The diagram below shows indicative upfront premiums (as of 12. February 2024) that the Numerai treasury (or any other large token holder) could earn across various loan duration (Days to Expiry) and upside cap (Relative Strike Level) combinations.
For instance, lending $100k of $NMR for 90 days with a 110% strike could yield around $12’200 USDC upfront (equal to approx. 50% APY). After 90 days, two outcomes are possible:
a) If $NMR price doesn’t increase by more than 10%, Numerai treasury receives the originally loaned $NMR tokens back
b) Else, Numerai receives $110,000 USDC (110% of the initial loaned $NMR tokens’ value).
The stablecoin premium is paid upfront, immediately, and irrespective of the outcome, providing a strategic benefit over merely holding $NMR tokens. Additionally, it is crucial to note that Numerai can freely select both the duration and strike level.
Conclusion
This proposal outlines how the Numerai treasury can generate USDC cash revenue by using idle $NMR treasury for covered call lending. This approach not only diversifies the treasury but also avoids market impacts that could arise from outright selling $NMR tokens. I’d love to hear the community’s thoughts on this idea and more than happy to outline a detailed draft.