Summary
The purpose of this proposal is to make ShapeShift DAO an official launch partner of Porter Finance and to empower the TDMC (Treasury Management and Diversification Committee) to advise on the partnership. (Background on the TDMC)
Porter Finance is creating a protocol for DAOs to borrow against their project tokens at fixed rates with no liquidations. We would be honored to have ShapeShift DAO as a launch partner. In return for launching with us, ShapeShift DAO will receive ownership in the protocol and have all fees waived.
Abstract
Porter Finance will be launching our first products in late May: Simple and Convertible bonds. These instruments allow DAOs to borrow at fixed rates with no liquidation risk. Here’s how they work:
Simple bonds
This is our take on a simple DeFi bond. They are intended to be sold to investors at less than $1 and redeemable at maturity for $1. The difference between the sale price and $1 creates a return for the investors. To create Simple bonds, a DAO chooses some configurations (maturity date, amount, number and type of collateral tokens), deposits collateral, and mints the bonds to their wallet. The bonds are then sold via auction or OTC through the Porter Finance marketplace. At maturity, $1 is repaid for every bond sold. Refinancing can be handled through a new issuance.
Convertible bonds
This is our version of a convertible DeFi bond. It is functionally identical to Simple except it adds convertibility. This allows the lenders to exchange their bonds for some collateral tokens up until maturity as configured by the DAO. This gives a call option to the bond holders and lowers the rates the issuing DAO will pay.
We propose ShapeShift DAO use either Simple or Convert bonds to refinance a portion of its existing loans.
Motivation
Currently, ShapeShift DAO is taking on interest rate risk and liquidation risk while borrowing in Tetranode’s Rari Fuse pool. Earlier this year, while borrowing from the Fox and Frens Fuse pool, ShapeShift’s borrower interest rate went from single digits to 28% when lenders withdrew their capital from the pool. The variability of rates presents an existential risk to ShapeShift’s borrowing capabilities. In addition to interest rate risk, ShapeShift DAO also takes on liquidation risk. If the price of FOX were to fall precipitously during a flash crash, ShapeShift DAO’s lending position could be liquidated at ridiculously low prices, creating painful losses for the DAO.
Taking out a loan through Porter will eliminate the interest rate risks and liquidation risks ShapeShift DAO currently faces.
In true web3 fashion, ShapeShift DAO will also receive ownership in the Porter protocol for being part of the launch cohort. This aligns Porter with ShapeShift DAO’s interests and also rewards ShapeShift DAO for their early support.
Specification
This proposal empowers the TDMC to advise on the use of the Porter Finance platform to achieve its mandate.
Issuance specifications
Issuance specifications will be determined closer to launch date by the TDMC.
Compensation specifications
We will subsidize ShapeShift DAO’s debt offering with 5% APR of $PRTR, our future governance token, assuming a $100M FDV. For example, if ShapeShift DAO issues and sells $5M of bonds with a 1 year tenor, they will receive $250k in $PRTR (0.05*$5M = $250k). This equates to 0.25% of $PRTR FDV ($250k/$100M = 0.25%). This acts to subsidize ShapeShift DAO’s borrowing costs with a venture investment unavailable to other investors. We have not yet released our governance token, therefore ShapeShift DAO will receive either an NFT or ERC-20s that will be exchangeable for Porter tokens upon release.
Additionally, we will wave the 1% fee we would normally charge on any debt issued.
Benefits
- ShapeShift DAO will be removing liquidation risk and interest rate risk from their lending positions.
- ShapeShift DAO will receive ownership in the Porter protocol, aligning our interests.
Drawbacks
- Borrowing at a fixed rate with no liquidation risk increases the risk a lender takes. Therefore, ShapeShift DAO may pay higher interest rates than what is offered in Fuse at the moment. Currently, ShapeShift’s is borrowing from Fuse at ~5% variable rate with ~400% collateralization. At the same amount of collateral, Porter can offer an ~11% fixed interest rate.
- However, if ShapeShift DAO increases the amount of FOX they are willing to use as collateral, that borrow rate can decrease to as low as 5.5% fixed.
- ShapeShift DAO could also reduce their borrowing cost by making their bonds convertible into FOX tokens. Currently, a Convert bond with 400% collateralization convertible into 1 FOX token ($0.38 at time of writing) would provide ShapeShift a 5% fixed interest rate.
