Our vision, has and continues to be that ETH is the best investment of the generation and a giga long that cannot be liquidated is the generational trade.

We’ve raised 12,273 ETH (~$50M USD) to date, the next phase was to raise the debt required.

What our initial equity raise unlocks for all STRAT holders is a coordination game of long-term ETH bulls ‘pooling’ their ETH together to demand better debt terms from the market that are not available individually. This is protocolised and done 100% onchain.

Our initial proposal was to sell convertible notes directly to the market [whitepaper], and let market participants execute the convertible arbitrage trade themselves. We got strong feedback that this needed to be abstracted for DeFi natives to adopt (most degens don’t understand options).

Our first iteration of abstracting this trade, and thus getting better terms on our debt than any holder could individually was to wrap it up as a perpetual note issued by the STRAT protocol [ESPN Announcement].

The USD raised through it is deployed into an automated calendar-spread options strategy. This allows STRAT to keep exposure to ETH upside while debt holders receive sustainably high interest funded by the strategy itself.

By all metrics the trade worked. We generated ~30% real yield on average over the last 4 weeks. However, we struggled to scale past the initial 5m TVL. Why? We didn’t pattern match to what DeFi investors are expecting (vaults with redemption). Our idea was to pattern match with TradFi preference shares, where participants would enter and exit via the secondary market. Our professional investors were more than happy to keep their capital deployed, however, if and when they decide to withdraw, they needed certainty on their redemption price.

Our latest iteration is pushing towards this, having a redemption buffer mechanism, a classic yield bearing ERC4626. As far as STRAT and debt holders are concerned, perpetual bonds and (basically) exit fees via an LP are semantically the same as paying out interest along a curve and incentivising users to lock (for greater yield). By controlling the yield paid out and incentive to lock, ESPN can encourage debt holders to remain in the system when it’s beneficial to STRAT, and target a given redemption liquidity to ensure those who want to exit can do so. ETH Strategy’s $50M (and growing) balance sheet underwrites this.

At a high level:

1. No more LP rewards. All debt holders can redeem directly for their principal + yield.

2. All yield is paid out to debt holders by steadily increasing the asset base. This will be redeemable as per the standard erc4626 interface.

3. The interest rate model is decoupled from the strategy itself. This makes yield predictable (for debt holders) and it is a crucial lever (along with locks) for STRAT to manage redemption liquidity.

4. ESPN holders can lock for a greater share of the total yield

We’ll share more details on the interest rate model in the days to come. At a high level, it will be similar to Aave or Morpho (yield increasing as utilisation increases), Crucially, the yield ESPN pays out is no longer directly connected to how it generates revenue by deploying its balance sheet. That said, we are still targeting high average yields over long time horizons (~20% APY based on backtested and Monte Carlo simulations).

The mental model here is the protocol has taken on debt at some rate, it will then use all assets on its balance sheet to generate revenue to pay down its interest expense. This will be split between lindy, deterministically liquid strategies (eg. eth staking) and stochastically liquid strategies (e.g. selling covered calls). The split between the two will be guided by our target liquidity buffer. 

The protocol will generate revenue (using all assets on its balance sheet) ESPN will now, on this debt, generate revenue via a mixture of lindy liquid strategies alongside the convertible note arbitrage trade which underpinned ESPN.

In order to manage and incentivize the correct liquidity ratio, we’re introducing a locking model for ESPN. This should be familiar to DeFi users of Curve gauges or (more accurately) FRAX liquidity gauges. This allows ESPN to autonomously allocate capital between deterministically liquid holdings, and the stochastically liquid convertible note strategy.

The proportion of deterministic to stochastic liquidity is determined by the lockup period. At the maximum lockup (initially set to 1 year), 100% of funds is deployed in the convertible note strategy. At no lockup, 60% of funds are deployed in fully liquid strategies, while 40% are deployed in the convertible note strategy.

This iteration on ESPN solves our problem space, most importantly, the product pattern matches with what the industry is after, all investor feedback to date has been very positive.

After hundreds of conversations, we don’t see any other major roadblocks to unlock deca-millions in TVL, coiling the spring for the unliquidatable generational long which is undoubtedly the greatest trade of the generation.