Issuance Policy

Variables behind bond issuance.

In order for bonds to be effective, there needs to be a specific issuance strategy that adheres to basic economic principles. Issuance is based on three key attributes: treasury value, market value, and issuance opportunity score.

Treasury value is the floor value of SHD as dictated by the following equation: collective value of uncorrelated assets on treasury / # of SHD in treasury.

Market value is the average price of SHD across all actively traded markets.

Issuance opportunity score (IOS) is an attribute that defines how lucrative a bond issuance opportunity or buyback action could yield for the ShadeDAO.

Whenever the market price of SHD is greater than the treasury value of SHD, there is an opportunity to sell SHD to the open market to earn arbitrage profits between the ShadeDAO valuation for SHD and the treasuries valuation of SHD. The fundamental rules of issuance are as follows:

  • Treasury value < Market value --> issue bonds

  • Treasury value > Market value --> perform SHD buyback

  • Treasury value = Market value --> no operations

In order to understand how lucrative a bond issuance or buyback opportunity is, there is a tracked offchain variable known as issuance opportunity score that can be used to help inform bond issuance in relation to the depth of the discount, how many assets are sold, and how long the vesting period is. IOS is defined by the following variables:

Negative IOS implies a SHD buyback opportunity for the treasury off of the secondary market. The more buyback that occurs, the less SHD that will exist in active circulation, thus pushing market price back to a price point that is greater than or equal to the treasury value of SHD. Whenever the opportunity floor is greater than beta, the rate of potential issuance should be throttled. This is to prevent aggressive issuance tied to opportunities that are not significant.

The following chart is an example of when the opportunity floor is set to $20 (bond issuance isn’t drastically modified until beta grows beyond $20) and where the monthly available issuance amounts to IOS * 10,000. Additionally, scenarios where Beta < 0 signals SHD buyback opportunities that should be performed by the ShadeDAO.

The smaller the opportunity floor, the smaller the required Beta is needed before the cubic function begins to influence the issuance opportunity. Due to the nature of the cubic function impact on Beta, the greater the Beta, the more aggressive issuance is. Finally, the issuance rate is a percentage value that loosely determines what percentage of supply can be released in the form of bonds over the course of a year. Between the modification of the issuance rate and the opportunity floor governance from both tokenholders, the respective bond issuance assembly within governance should be able to finalize a bond issuance policy that is stable and sustainable while also remaining opportunistic to pricing disparities.

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