Protocol Debt

Covenant enables protocols to issue debt and manage their cashflow

Protocol treasuries are currently capital-inefficient, in that their holdings are mostly 100% in native tokens, and they sell these tokens on open market trades to fund operations.

This incurs a high cost, given current low market valuations, and is perceived negatively by protocol users. Protocols are ultimately leaving value on the table, and forgoing the upside from future market rallies.

The alternative is for protocols to issue debt. Debt postpones token sales into the future, and instead only requires payment of interest while allowing protocols to use cash upfront for operations and community building purposes.

For this, we enable protocols to issue tradable perpetual debt, collateralized by their treasury holdings (e.g, native tokens, liquidity positions, protocol revenue, etc). In particular, the debt is designed for ease of maintenance:

  • Friendly liquidations - Positions are open to liquidations only after interest has accrued above a threshold defined during issuance, and is not triggered by collateral marked-to-market, which exposes protocols to forced liquidations in times of market stress.

  • Capital efficient - Debt is minted with a high LTV (+95%) vs the collateral value at time of issuance.

  • Capped market rates - Interest rates are market defined, but capped at the guild level.

We are working with a few protocol partners to issue debt in the coming months, and will add details as protocol-specific guilds are deployed.

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