Hello All,
I have an idea for a financial asset that I believe would be particularly relevant within the crypto space. It can be used as an leveraged vehicle for investors or as a tool to manage treasury. I am posting my idea here because I would love to hear all of your opinions and I would like to know whether it’s possible to build with UMA. I would love to team up with dedicated developers to make this happen.
Any crypto investor can relate to the intense volatility in this space. I love leverage, but have been destroyed by it several times - mainly because of unlucky timing. Any FUD event can completely liquidate your investment, even if your belief in a particular technology is strong. Furthermore, BTC and ETH define the market and move altcoins in a particular direction - whether that is warranted or not.
My idea is to build a leveraged financial asset that measures a specific token’s performance relative to a basket of other tokens - a relative performance token (RPT). For example, I am an UMA-maxi and I believe that it will always outperform its peers, whether that be in a bear or bull market. I seek leverage, but I want to be protected from absolute macro events (i.e., FUD). I can design an asset that measures UMA’s token price over a specified time frame (i.e., return) (let’s say, one year), relative to a peer group of other tokens. That peer group can be anything really - Defi assets, Top 100 tokens by market cap - but probably should be something relevant. At the end of the one-year measurement period, each asset’s one-year return will be measured, and the group of tokens will be sorted from high to low return. The payout of the RPT will be based on UMA’s ranking within that group (percentile rank). It could be binary: payout of 2x for upper quartile performance / 0.5x for lower quartile performance / 1x for median-ish performance. Or, it could be linear along any sort of payout curve based on the measurement asset’s percentile rank. You can of course create an RPT for any token (Sushi, Uniswap, etc).
The pricing of the RPT token will likely need to be contingent on several factors - the asset you are measuring, the peer group, historic volatility of the assets, the payout curve, etc. - but I believe it is possible with some financial models, particularly a Monte Carlo simulation. There are, of course, kinks to this design that will need to be worked through - like the price of the RPT, whether its price fluctuates with demand, and the details with how the payout works, all of which I think are achievable with the right minds at work.
A little bit about myself - I work at an executive compensation consulting firm. We are engaged by the board of directors of major corporations to design incentives (primarily performance-based incentives) for C-Suite executives. Although I love my work, my hobby has been crypto over the past couple of years. I love discovering new protocols and learning about new financial applications. Part of my work is designing incentives for CEOs, CFOs, and other C-Suite folks. The vast majority of their compensation is equity-based (~50-70%), and about 50-75% of that equity compensation is performance-based equity or performance share units (PSUs). Executives receive target shares that ultimately payout at the end of a given performance period (typically three years) based on a pre-determined performance measures. Companies can use financial measures like absolute revenue growth, EBITDA, or ROIC. Or, they can choose to measure performance on a relative basis. I have experience designing relative total shareholder return (rTSR) performance share units for these executives - which measure a company’s stock price return relative to other companies. Essentially, these function similarly to the design I noted above. Executives receive target shares (let’s say 100K), that may increase for upper quartile stock price return versus a peer group (200K shares), or decrease for below median performance (50K shares, or even 0). This design protects the executive from absolute market movement, while providing leverage both in the amount of shares that the executive earns AND the stock price appreciation. Relative measurement is important to retain the executive during volatile macroeconomic events. For example, during the recent pandemic. If I am an executive of a major restaurant, I likely would not hit my financial performance targets during the pandemic, however, I could earn my relative TSR PSUs because I may outperform other restaurant peers (my company may be more financially stable, or have a digital platform, that the market will price into my stock).
I think this type of design can be applied to the RPT, and would be very helpful for investors who seek leverage, yet want to be protected from macroeconomic events affecting all coins. Investors may even using the RPT as a hedge. And, protocols can use this vehicle to diversify their treasury while staying loyal to their native token.
I do not have a developer background - but I believe my experience designing these assets for my clients is invaluable and - when combined with a team of dedicated developers - we can bring this asset to life.
I welcome all thoughts on the idea!
Cryptowsky
. These are the current constituents of DPI. If this RPT is designed to measure Sushi’s relative performance from 6/20 to 7/20, then Sushi would score at the 42nd percentile (or ranked 8th per your methodology).