The proposal is to use the Range token as a mechanism to raise capital without risk of using markets where liquidation is a risk.
The process of using the Range Token is straightforward - POOL is used as collateral to mint a range token which is convertible debt. At maturity, the debt is paid using the POOL token. If the token price is expected to grow, the overall number of tokens needed to repay the debt is less than the start. Delaying the selling of tokens directly provides two benefits i) potentially reducing the number of tokens that need to be sold and ii) allows the purchaser of the Range Token a yield profile.
The Range Token is a product that comes from the UMA protocol. To learn more about the concept, you can read the two-part article series, along with UMA’s example of how they employed the Range Bond concept to raise $2.6 Million. Part 1, Part 2, and fundraising article.
In order to illustrate an example of how a range bond can be employed to raise capital, let’s run through an example. Please keep in mind the chosen numbers are speculative, and we can come up with numbers that are comfortable to the community.
3.5MM POOL is used as collateral to raise $5.8MM. Please keep in mind that this position cannot be liquidated, meaning there is no risk to the POOL. At the current price of ~$9.00, we can run through how the terms of the Range Token will play out:
Worst case scenario:
In a worst-case scenario with POOL price at $2.00, we would have to pay out the entire 3.5MM POOL to Range Token investors, but the POOL market cap would only be 3.6MM, and we have 6MM sitting in our treasury. Note that part of the payout structure of the range token is to give the Range token holder exposure to a put option. Meaning this limits the downside.
Best case scenario
In a best-case scenario with POOL price at $25.00 at the expiry time, we would pay out 280,000 POOL to Range Token holders. We should have been able to buy back much higher than this amount of POOL with the completed buyback that began at $9.00 per POOL. Also, this effectively means POOL is sold at $20.75, which is much higher than the current price; in this scenario, both the team and the investor win. The group naturally has to use fewer tokens to convert to pay back their debt, and the range token holder earns the yield from the increase in price plus the upside of a call option.
To illustrate this, you can view the payout structure for this specific scenario by the UMA team.
It should also be noted that the parameters of the Range token payout can be customized to fit the needs of PoolTogether.
We should explore this opportunity and come up with a number that works for the PoolTogether mission.