AIP #10: Bad Debt Repayment Plan

AIP #10: Bad Debt Repayment Plan

During the collapse of the Terra ecosystem, our UST lending markets have created approximately 12M MIM of bad debt. We have created several proposals to repay this bad debt and we believe that SPELL holders should decide our path forward.

Intro

This proposal aims to decide on a clear path forward that outlines both timing and methods which will be used to repay the bad debt, created by the sudden UST depeg. If you are interested in learning more about the bad debt, we encourage you to read this article here.

It is critical that the debt is indeed repaid in full, but there are multiple ways to do it, over different timeframes. We have identified 3 possible choices that use a combination of treasury funds and protocol revenues.

The Abracadabra Treasury currently consists of a variety of crypto assets:

  • 6,580,153 CRV Tokens
  • 996,059 USDT
  • 280,153 USDC
  • 3,300,000 yveCRV
  • 5,312,299 MIM Tokens
  • Other assets (including ETH) that at the time of writing are worth ~$300,000

At the time of writing this proposal, the Abracadabra treasury holds ~$15M. Token holdings can be verified on-chain here. You can also check for the list of tokens and its value here. Unfortunately some positions pricing is not supported by gnosis-safe.

The total outstanding bad debt amounts to approximately $12.5M.

The advantage of using treasury funds is that the debt would be repaid faster; however, this also means that we have to liquidate treasury assets (e.g., CRV) and shorten the protocol’s runaway to ~12 months. Using protocol revenues, on the other hand, would take longer but would have less impact on our operations.

Option 1: Using Treasury Funds

The first option is to liquidate treasury funds to immediately repay all bad debt. We would simply use all stable assets (Excluding $2.5M of MIM to secure protocol expenses for the next 12 Months) and then begin selling CRV tokens until we reach the full $12.5M. The exact amounts of token to be sold will depend on the price of CRV at the time we initiate the operation.

After this process has been started, CRVs will be sold for MIM and the MIM will be deposited into the cauldrons, effectively closing any open bad debt positions.

Option 2: Using Protocol Revenue

Abracadabra continues to be a profitable protocol. Currently, 25% of all protocol revenue goes towards the operational treasury, while the remaining 75% goes to SPELL holders via mSPELL and sSPELL distributions.

We propose to temporarily increase the operational treasury share from 25% to 80%, and use this to pay down our bad debt positions over time. We will provide a UI where users can track our repayments until all debt is fully repaid. Unfortunately, we do not know how long this process may take as it directly depends on how much fees our protocol produces. The more fees we earn, the less time it will take.

In the current market conditions, we believe it is prudent to reduce the amount of fees distributed to the stakers in order to preserve protocol stability.

This approach allows us to avoid depleting our operational treasury, giving us a longer runway to pay for continuous development and attract contributors to our platform.

In addition, our CRV reserves remain untouched and can be used to boost the liquidity of the MIM-3pool while allowing the protocol to reduce the emission schedule of SPELL. Less SPELL emissions lowers the sell pressure on our governance token while the protocol incentivizes liquidity through CRV rewards.

Option 3: Combination of Protocol Revenue and Treasury funds

The last option is a mix of Option 1 and Option 2. We propose to use the $4M of MIM currently in the treasury, as well as other non-CRV assets, to partially repay the bad debt, and increase the treasury cut to 50% of the protocol revenue (i.e the amount destined to the protocol treasury) to repay the rest of the bad debt over time as well as to sustain runway for operational expenses.

Like in Option 2, the amount of time that will be required to repay all bad debt will depend on protocol fees.

Current Revenues

You can find data on the current treasury revenue here.

The Voting

The proposal has been voted upon on the 2n of November 2022, and option 3 has passed with an absolute majority! You can find the voting here.

Therefore, if you have suggestions or feedback, please do not hesitate to voice them both here and on Discord!

3 Likes

Option 2 sounds like the safest and most stable option… can see that debt getting paid off fairly quickly!! Especially as abracadabra.money grows with $Spell $MIM and soon $MIG!!! Bright future ahead with A LOT of magic :open_book::man_mage:

I prefer a longer time horizon for repayments. The treasury plans to use the CRV to reduce SPELL emissions so selling all of it seems short-sighted and not in the long-term interest of SPELL holders. On the other hand, we’ve been holding onto idle CRV and not using it for months so maybe selling some of it wouldn’t be too bad. As the debt is not currently causing a problem for the protocol, I don’t see the need to settle the debt immediately. The only time it would be an issue is if nearly all the debt was repaid then some LPs would be stuck with MIM that had no collateral backing it. If we pledged that the treasury would cover those MIM, there perhaps isn’t a need to pay off all the debt now.

This kind of thinking does hurt the trustlessness of MIM and for that reason I think we should repay some of the debt.

Option 1:
This seems like a drastic step. The debt is not causing any immediate issues and liquidating all CRV hurts the long-term plans of Abra. While I’m not a fan of having CRV sitting idle, it’s important to retain some maneuverability to plan for the next stages of the project.

Option 2:
This approach seems overly harsh for investors. While it’s undoubtedly good for the protocol long-term to not have to liquidate assets, I fear an 80/20 revenue split would hurt SPELL holders too much and lead to long-term consequences like reducing the effectiveness of our bribes.

Option 3:
I like option 3 as it makes a strong statement that we are committed to paying off the debt, but doesn’t treat it like a crisis. It also keeps SPELL staking utility. TBH, I would consider making a smaller initial payment like 2M perhaps from liquidating some of our CRV holdings.

2 Likes

Option 3 sounds like the smartest option to me. No real advantage to holding the stables long term and maintains a larger incentive to stake SPELL. Overall I think that the protocol needs to be accumulating and locking more CRV not selling, especially in these exceptionally bad market conditions.

I would consider option 2 more viable if the treasury was planning on using the stables currently held to buy and lock more curve.

1 Like

I am glad their is progress being made. In the spirit of acting as rational and productive as possible. The goal of this proposal should be focused on the following

  1. Keeping Abracadabra and Spell alive
  2. Working towards paying off debt

Personally, option 3 seems like a variation of the best option. Their are a number of factors to consider.

  1. spell holders use the cauldrons
  2. reducing profit share reduces the likelihood of holding a spell position.
  3. potential loss of user base.

50% revenue share is in line with many protocols in the space so i believe this is a fair assessment

What do you do with 50% treasury share? This is critical

  • allocating 50% of revenue does nothing for the long term scalability if revenue does not grow to critically.
  • our current model has no directional purpose for the utilization of treasury revenue

My suggestions to this proposal: Utilize a variation of option 3

  1. Allocate 3M MIM to Debt immediately
  2. 50% of the “50% treasury cut” goes to allocation directly towards debt
    3)50% of the treasury cut goes to scaling curve , reassesment of curve investment strategy every 5M curve obtained with a specific operation goal of aquiring 80m CRV

FrOG

4 Likes

Option 3 with a smaller initial payment sounds like a good idea!!! Maybe even upping the treasuries cut to 60%…

interesting, why not increasing the inital debt repayment to 4m tho?

this way we would have repaid 1/3 of it right?

1 Like

My preference would be to pay down $4m or so of the debt with the MIM in the treasury and then go hard locking the Curve to incentivise MIM/3CRV to restore the balance and allow new cauldrons to be added. We could pay back the remaining $8m with the existing 25% to treasury if we get new fee generating cauldrons going on new chains eg. Optimism. A lot of the fees generated in the past were from Borrow fees, those instant one-off fees to open a position.

1 Like

I’m not opposed to a specific value- my thoughts were 2-5, leaving enough mim available if needed to scale velodrome and or others

2 Likes

Keep that runway nice and clear… keep more stability. Once accrued fees return to what they were, and even stronger, that debt will be paid off fairly quickly. Pulling from the treasury now, before possible big market rebounds, would not be the best idea IMO. Abracadabra.money has A TON of locked potential that a nice full treasury could help unlock. :man_mage:

Agree with most of the previous comments, 3rd option looks like the best path forward to :

  • Keep runaway
  • Not destroy staking yield ( especially unfair for most recent stakers )
  • Repay a share of the bad debt while keeping a buffer for future devs/partnerships

I’d be in favor of an initial repayment of 5m, and a smaller increase of the staking share of the treasury up to 40% to keep it attractive to users.

Worth to note that if revenues start to climb up again, the treasury share can either be lowered, or maintained to repay faster as fees grow back.

Considering the treasury, according to Zapper :

  • Keep 3m$ in MIM for runaway / Repay 2.3m$ MIM
  • Swap and repay 1m$ from USDT
  • Swap and repay 1m$ from CRV
  • Swap and repay 700k$ from various other assets, could also come from CRV allocation

End of this :

  • 10m$ left in treasury ( MIM/CRV/yveCRV )
  • 7.5m$ left as bad debt

The main unknown here remains of course the duration of the total repayment with revenues.

If the market start to look good again, I’d also be in favor of selling a bit more assets along the line to close that chapter of Abracadabra faster.

:mage:

3 Likes

Please see and consider my RFC before considering selling curve

1 Like

Keeping the treasury 10m+ should be priority, and should probably avoid selling $CRV. I think focusing on building accrued fees and using those to pay back the debt should be the focus of abra. Starting out at 40% to the treasury and upping to 60% if the team manages to grow the accrued fees (With the help of the community of course!!). I like your idea clonescody, very much for the spellcaster!! But spellcasters are tough, and im sure we could even let the treasury take 80% to pay off the debt. Once the debt would paid though, im sure there would be a way to reward stakers who took the hit :heart::man_mage:

I agree, and I believe that 40%-50% is in line with most other protocols during this bear market.

I also agree towards waiting a bit to liquidate other assets to get a better price!

1 Like

Better pay off bad debt slowly, so option 2

1 Like

Definitely wait!! Appreciate whats held, we have all the time (and magic) in the world :man_mage::magic_wand::dizzy:

Pay all debt immediately: the longer you hold the debt the worse it looks. There is increased FUD on the internet due to this situation and I think the faster we resolve it the better it will be for the ecosystem. Liquidity is sufficient enough to restore the cauldrons and remain very profitable.

2 Likes

I’m inclined to agree with the above post. There is so much FUD right now my head is spinning.
There might be a pre December mini bull run, but after December its going to be worse than it is now. Wouldn’t it be better to be debt free going into that mess?

1 Like

I’m with Shibaattacknow. I believe we should not sell Curve .

1 Like

To me Option 3 seems to be the most reasonable approach. Having this bad debt hanging over the protocol is not a good look and I think that delaying the resolve of this issue just exacerbates that. While I understand that CRV is being held by the treasury as a strategic asset, holding this much unlocked CRV isn’t really furthering any particular protocol goals and really just exposes the treasury, that already has an uncomfortably low level of margin above the 12M dollar level of debt, to additional volatility. For this reason I think a portion of the available CRV should be allocated to paying down the debt in addition to the other measures outlined in Option 3. If reacquiring those CRV is important later strategically it can be reacquired at a later time using protocol revenue once the debt is paid. If the holders are not comfortable locking the curve it doesn’t make sense to hold in my opinion with this debt outstanding.

2 Likes