WFC TL:DR

The simple Y/N is:

Should we continue/conclude negotiations with ABO Digital to secure $30m of guaranteed stablecoin financing over the next 3-5 years for Kusama ecosystem development?

Stablecoins

There is general agreement that it would be beneficial to acquire stablecoins for the Kusama/Polkadot treasuries for the following reasons:

• Improve conditions for proposers and voters by removing extreme volatility from payments.
• Diversify, structure and budget the treasury's holdings to provide strategic foundations for growth.

Polkadot's asset hub treasury is steadily acquiring USDT/C via a fully on-chain and automated process utilsing Hydration's dollar-cost-averaging feature as outlined in this proposal.

Benefits

The benefits of this approach are:

• Low risk. Dollar cost averaging aims to moderate the volatility of market cycles by enabling a steady exchange of DOT to stablecoins.
• Automated. Once approved, the parameters are effectively set and forget and the arrangement will execute predictably through the lifecycle of the on-chain agreement.
• No middle men. The deal is executed completely on-chain and requires no intermediary or oversight.

Downsides

The downsides of this approach are:

• It is slow. DCAing is good for steady acquisition of stablecoins, but it is not well suited to more aggressive spending requirements - for example the Polkadot treasury cannot acquire USDT/C fast enough to keep up with its outflows.
• It is fixed. Once the on-chain logic is committed there is no way to adjust the parameters given market conditions and/or project updates which could have a direct impact on the token price.
• It is passive. There are many reasons why retaining strategic decision-making over the timing and size of the exchange of treasury assets to stablecoins make sense when considering a more experimental mandate.

An alternative approach.

We believe there is an alternative approach to acquiring stablecoins for the Kusama treasury that better suits the canary's chaotic mandate.

Background

ABO Digital are a crypto specific division of ABO who specialise in structured financing for publicly listed companies.

Deal

We have negotiated in principle a $30m financing deal that requires ratification by the Kusama collective and the estabishment of a British Virgin Islands entity to contract the deal on behalf of the community which is referenced in this parallel wish for change.

The deal would give the Kusama community and its legal proxy the right but not the obligation to draw down on a guaranteed $30m facility structured over 3-5 years, allowing for a more active approach to strategic planning and budgeting.

Terms

ABO Digital would receive a 10% discount on the spot price EM7/14/30 etc to be 'in the money' but their primary profit comes from the upside on the token since they do not dispose of their tokens immediately.

This aligns both ABO and Kusama towards generating positive returns over time.

There is also a structuring fee for the deal.

Flexible draw-downs

The size of each call on the facility is up to the Kusama community, but it would make sense to start small - say $500k with the first draw-down and then move to larger amounts when strategies have been proven out and additional funding is needed to generate further momentum.

Control

Since there is no obligation to draw down from the funding, the community retains complete control over the timing and the amounts - it could ultimately choose to only draw down a small amount of the potential $30m.

Potential for lower cost of capital and better strategic planning

The deal is a convertible note structure, meaning when a call is made by the community or a delegated group to draw down on the facility the Kusama treasury receives stablecoins immediately, whilst ABO have 12 months to sell down their received KSM.

This compares favourably with current spending where many proposers receive KSM (or DOT) and dispose of their holdings immediately either to finance their projects or to exit a short term strategy.

This up-front funding enables the community time to execute strategies that aim to create positive price action, ensuring the next draw down is at a more favourable price, ultimately lowering the cost of capital acquisition over time.

Given successful strategies, this approach would enable the community to acquire a much larger amount of stablecoins than a passive DCA would over a similar timeline.

High risk, high reward

Of course there is no such thing as a free lunch and this active strategy has potential downsides.

If the price decreases, the cost of capital naturally increases - this is why this is a higher risk/reward than with an automated DCA strategy - and therefore more suitable to Kusama's chaotic mandate.

Overview of the structure and process

A basic overview of the structure and process.

Kusama native stablecoins via Brale

Kusama no longer has native USDT after Tether removed support for the network however Brale will be integrating their US regulated issuance platform into Kusama asset hub mid September allowing for the native minting and redemption of USD stablecoins.

With this and a Kusama legal entity in place the stablecoins from this deal can be natively minted in Kusama AH, with the yield remaining within the ecosystem.

Further reading

Polkadot forum: Introducing an alternative financing strategy, structure and partnership for maximising the potency of Kusama’s treasury