Ethereum (ETH) currently boasts a market capitalization of over $400 billion, ranking just outside the top 20 assets worldwide. This scale is a blessing and a curse - ETH is a hard sell for non-institutional investors and crypto natives, who opt for higher-beta alternatives in search of greater upside.
Existing leveraged solutions—such as perpetual futures or margin lending protocols, carry high liquidation risk and funding rates, while leveraged tokens endure volatility decay due to frequent rebalancing. These drawbacks push many would-be ETH investors further down the risk curve, undermining ETH’s position despite its deep liquidity and robust DeFi infrastructure.
This paper introduces a PvE protocol utilizing long-dated convertible debt—reimagining Michael Saylor’s “MSTR” strategy in a DeFi-native environment. By leveraging ETH’s liquidity to raise a substantial on-chain treasury, we enable participants to gain leveraged upside without the risks of liquidation or rebalancing (aka volatility) decay. The result is a token accretive to ETH, providing enhanced returns for both crypto natives and new entrants seeking higher-beta exposure—securely and transparently on-chain.
Treasury Expansion via Bonds
Bonding is the core mechanic by which protocol treasury expands. The protocol has both short and long duration bonds.
Bonds allow sophisticated market actors to capture some of the STRAT premium in exchange for USD, which it then uses to buy market buys ETH. All bonds are priced in USD using the formula:
PRICE + (BCV * DEBT_TO_MARKETCAP_RATIO * PRICE) where:
Price is the 1 day TWAP price of STRAT, pulled from our LP
Debt to Market Cap Ratio is the total supply of CDT / Market cap of STRAT. It represents our ability to take on debt as a protocol. Debt in the protocol is issued as CDT (Convertible Debt Token). When debt is low relative to our market cap, our bond premiums are lower, to encourage more bonding, conversely, when our debt is high compared to market cap, our bond premiums increase.
BCV (bond control value) is a governance controlled parameter, controls how quickly bond premiums change based on demand and STRAT market cap.
(2) and (3) cause bond prices to shoot up the more debt we have, so we only take on as much debt as the market allows via the STRAT premium.
Crucially, BCV allows us to dynamically control the magnitude change to our option premium as our debt to market cap ratio moves around. This allows the STRAT holders to decide how aggressive (or otherwise) they want to price bonds as a community. We expect on launch for BCV to be low and increase over time.
We issue bonds to buy the following assets:
Long Bonds: USD(stables) bonded to protocol, which the protocol uses to buy ETH (deposited into a STRAT/ETH morpho pool)
Short Bonds: CDT bonded to protocol, protocol burns CDT
Long Bonds (convertible debt)
Long bonds are priced in USD. All debt accrued via long bonds are convertible notes, used to purchase ETH into protocol treasury.
Semantically, bonders
Deposit Stables, in exchange for 2 tokens, CDT (Convertible Debt Token) and an NFT Option, These 2 together represent a convertible note
The protocol then acquires the asset the bond was fundraising for into treasury (ETH)
The bonder has the right to burn their convertible note (NFT representing the option and CDT) for STRAT at any time before the expiry date. After expiry, they can exchange their note for USD.
CDT is perpetual debt, it is analogous to “corporate debt” but for the STRAT protocol. All CDT on its own is fully fungible and represents a liquid debt market in the form of a float-coin (stable within a range, not entirely pegged).
The NFT is a standard american call option for STRAT, which can be exercised up to its expiry, however, as it is sold as a convertible note, in order to be exercised it will need to be paired with CDT.
By keeping each separate, it allows bonders to instantly hedge and monetize their convertible note. Conversely, they need to buy back debt in order to exercise the option which helps keep CDT stable. We expect the market to find equilibrium and correctly price long CDT accordingly.
These bonds have a long expiry (4.2 years), the time duration means the protocol can avoid the daily rebalance that kills returns on leverage tokens.
Bonders can convert into STRAT at any time up to expiry, as such, it’s economically rational to convert at expiry to STRAT as long as STRAT_PRICE is greater than BOND_PRICE, the lower bound for which requires the value / STRAT (ie, the total treasury value) to have increased. This will be true as long as the ETH price increases, and there is some level of continued bonding demand.
As bonds convert, the total debt burden of the protocol goes down, This in turn decreases the premium, which encourages more bonding. The premium (ie, price discovery) of STRAT is what drives bond demand.
However, it is possible a bonder takes their position to expiry, at which point, they get their MIN(1, protocol NAV) (that is, they get their debt back, or a share of treasury (ETH), whichever is smaller). In practice, this means the only situation where bonders get less than their initial capital is if ETH is down considerably from our weighted average purchase price after 4.2 years.
We take the view that the market participants of this protocol believe both of these are highly unlikely, and acceptable risk on capital for outsized beta exposure.
Furthermore, most early note holders will be ETH bulls, in the worst case, they get their ETH back (and in the most cases some outsized exposure).
Short Bonds
Like any rational economic actor, if the protocol’s debt is cheap enough (i.e. the price of CDT is low enough), it makes sense to buy it back. At any point below $1, the expected value of buying and burning debt may be higher than Long Bonds. We expect the short bond’s BCV to be adjusted to reflect the best use of capital.
These are managed via short bonds. Short bonds have a very short maturity (69 mins), and no option to take USD at expiry (only STRAT). We bond these assets over a short duration as we don’t want to ‘roll’ this debt (ie, issue more CDT in return). Short duration reduces timing risk in the market, allowing bonders to capture any premium quickly in exchange for assets the protocol needs.
Short bonds provide price support for CDT, and reduce the total debt burden (which again, reduces the implied margin on long bonds).
They’ll be priced similar to convertible debt, but with an inverted debt to market cap ratio, that is, the formula Price*BCV×(Market cap to Debt Ratio)
The intention is, when debt is high, we want the market to favour short bonds to reduce debt, as that’s the best use of capital.
The only asset the protocol accrues via this mechanism is CDT, which it burns. Short bond BCV (like all other bonds) will be managed via protocol governance.
STRAT Economics
STRAT is designed as a leveraged play on ETH, with no vol decay and no liquidation.
In order for STRAT to trade above NAV, (i.e. actually maintain leverage on raw ETH) it needs some form of revenue which the market can extrapolate growth on and discount to today (revenue or EBITDA multiples being the proxy most used for stocks).
STRAT’s revenue is the option premium. As we explored above, the convertible note is really 2 products wrapped into one
A loan to the protocol, for which the user receives a fungible debt token (CDT) in return that they can monetize.
A call option sold by the protocol (NFT Option)
The implied option premium on (2) is protocol revenue. As long as the protocol is able to generate and sell convertible notes, by having bonding demand, it’s booking revenue, which the market will price as a premium on NAV.
Is there fundamental (ie, non-speculative) demand for bonders? We believe so, there is a clear user persona who wants to "borrow" from their ETH without liquidation risk. These people will Bond their ETH for a convertible note, sell their CDT to access liquidity (like borrowing stablecoins against ETH in a CDP), and keep their option as a highly correlated claim on ETH in the future. Crucially these users are not speculators and will not be timing the market necessarily. Even if this is a relatively small number of total bonding demand, it’s enough to kick start overall demand and form a basis on which others will bond speculatively.
This play cannot be done on an individual basis - it needs co-ordination. The system design allows every actor to behave individually rationally, with the emergent property that all participants get better terms.
Market STRAT buyers get (at the very least) a leveraged position on ETH with an overall premium to NAV based on expected future demand for convertible notes.
Note buyers (bonders) get ETH exposure with downside protection.
Treasury Management
A portion of treasury ETH will be deposited into a morpho ETH/STRAT lending pool with a fixed oracle based on ETH per STRAT currently held.
This portion is time based. On launch 100% of bonded ETH will go into the morpho pool, this will decay linearly such that by year 4.2, 0% is deposited into the morpho pool.
This acts as a reflexive fixed leverage, allowing the market to quickly find the fair premium, giving extreme risk free leverage the closer STRAT is to its ETH risk free value.
It also ensures our ETH is deployed and earning yield at protocol launch, and as we get closer to expiry, we keep more ETH in reserve to support protocol debt. This mechanic is explicitly kept simple at launch as we expect the community to iterate and eventually automate treasury policy here.
The priority on launch was to keep the mechanic simple and directionally correct. We expect governance to decide over time where and how bonded assets are deployed.
Protocol Tokens
Protocol will have 3 outstanding tokens at all times
STRAT (erc20)
CDT (erc20)
Options (erc721s)
Tokenomics of CDT and STRAT are supply controlled based on bonding demand.
There will never be more STRAT than there is value in the treasury, as the only way STRAT is created is by exercising an option NFT, the only way you can exercise an option NFT is by burning CDT when the option is in the money, the only way you can acquire CDT is buy buying it via the LP or Bonding. The only way CDT is created is through bonding, meaning someone has to deposit assets in the treasury to be issued CDT.
Supply of the Options NFTs are different, these have been issued at protocol launch, for raise, for the DAO, for contributors, thus supply can far outpace outstanding CDT, this means that there will always be more buy demand pressure on CDT for those wanting to exercise the options (you need CDT to exercise at strike). Therefore it does not matter how many Options the protocol issues or sells, they can only be exercised limited by the outstanding CDT supply.
Convertible note buyers will always receive the option with CDT, so they will always be able to exercise the option if they hold the CDT they receive, if they decide to monetize their debt, they will need to acquire it back to exercise the option.
Every Option NFT is different, the Option NFT will capture
The time from which the option can be exercised (69 minutes after minting to avoid single block flash attacks)
The strike price in CDT
The expiry date of the option.
There will be no liquid options market at launch, however users can sell and trade and transfer the options as they are all NFTs.
MSTR Comparison
STRAT mechanics are designed to replicate MSTR, without any centralisation via pure DeFi mechanics.
The MSTR trade works as follows: Saylor issues convertible notes by borrowing money and attaching a 4-year option on MSTR shares, which carries an implied premium. The premium exists because the debt has little to no interest, effectively trading interest payments for the option premium. Saylor uses the borrowed funds to buy Bitcoin.
In 4 years, the debt must either be repaid or converted into MSTR shares. This creates leverage, as the debt amount exceeds the option premium. If Bitcoin's price rises, note holders will likely convert to MSTR shares since the company’s NAV will surpass the debt owed. In such cases, MicroStrategy avoids selling Bitcoin to repay the debt.
STRAT does exactly this. We believe it’s highly unlikely that ETH will be lower in 4.2 years, so it makes sense for us to use every cent of protocol revenue to take on non-liquidatable leverage and pack our ETH bags :)
Those who want high vol/high beta exposure will simply buy STRAT, those who want downside protection or long term borrow without liquidation risk will bond with convertible notes.
Protocol Bootstrap
At launch, the protocol needs a STRAT/ETH LP, a CDT/ETH LP and ETH in the Lending pool for STRAT collateral.
These will be funded by selling deep in-the-money options as a Presale. Details of the Presale will be crispened according to market demand as we move forward.
LP Incentives
We favour protocol owned liquidity for our STRAT pool, as we don’t want liquidity pulled at market tops when we need it the most.
We may open up incentives for the CDT/DAI (or similar) pool if needed. We have intentionally left this unspecified and will let the holders decide on an approach post launch based on if it’s required.
Governance and Alignment
The protocol is designed with minimal governance (The various BCV params, primarily), allocations of DAO Treasury and any extensions STRAT holders and the community feel are necessary to stay competitive.
We intend to decentralize the protocol from launch. As such, Post launch, these will be all controlled by STRAT holders.
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