Thanks for engaging with the prop @ExaGroup, we previously responded to Gauntlet’s comments here, and address your buyback comment further down in this post.
Over the past few months we’ve appreciated the thoughtful feedback from delegates, community members, and the ongoing forum discussions. Throughout this process, we have considered all recommendations and made key adjustments to align the strategy more closely with Compound DAO’s priorities.
As a last measure, we’re changing the initial usage and route of the USDC, removing the Enzyme vault out of the equation to instead support liquidity on Compound itself. Resulting cToken positions will be used for cash-secured puts for strategic COMP token buybacks when appropriate. More details below:
Key Updates to the Proposal since V1
Focusing Exclusively on the COMP Covered Call Strategy
In response to Gauntlet’s concern regarding the depletion of working ETH capital, we have removed the ETH strategy from this proposal and are focusing exclusively on the COMP treasury. We propose using a covered call strategy to generate sustainable USDC-denominated yield while maintaining strategic exposure to COMP.
Deploy Converted Stablecoins to Support Compound’s Liquidity
From our discussions so far, we found that the most value-aligned way to deploy stablecoin proceeds is within Compound’s own lending markets to support liquidity supply and foster borrowing activity on COMP.
While funneling stablecoins into external lending markets could potentially generate higher yields, the feedback we received indicates that deploying stables within Compound is strategically more aligned with the protocol’s long-term interests.
Using Yield-Bearing cStablecoins for Strategic Buybacks
Building on feedback from different delegates, we propose using the converted stablecoins from the options strategy to strategically defend the COMP price at key levels through cash-secured puts using Compound-deposited, yield-generating stablecoins, as deemed appropriate pending market conditions.
In other words, if a conversion from the covered call strategy occurs—say, for example, $1 million worth of COMP is sold at a 130% strike price for $1.3 million USDC—we deposit the USDC into Compound. If the COMP price needs to be defended (see the ‘Buyback Triggers’ section below), we use a portion of the yield-bearing Compound USDC as collateral to write cash-secured puts. This allows us to earn additional yield on yield while converting USDC back into COMP if the price falls below the put strike levels, thereby defending and acquiring COMP at favorable prices—eliminating any potential strategic overlap related to USDC accumulation. The bought-back COMP can then be used to rerun the covered call strategy, continuing the yield generation cycle for the Compound DAO.
To optimize execution, we will use technical market signals to help identify and trigger buyback opportunities systematically, see below for further elaboration.
Premium Proceeds to Pay for Delegate Program, Developers, or [insert growth initiative]
The DAO could draw on the USDC premiums and conversion amounts -if any- generated from the covered call strategy to cover ongoing operational costs, such as the delegate program, development work, or whatever it may be.
Execution Plan
1. Deploy COMP for Covered Calls
As outlined previously, we propose using COMP to write out-of-the-money call options that balance maximum upfront premium while keeping conversion probability reasonably low. Since the most recent feedback-based adjustments to the proposal means less focus on depositing USDC into a yield-generating vault and more so on rolling an “options wheel”, we will also adjust the strategy parameters to lower the conversion probability.
- We’ll still target an average 15% annualized option premium, with a +/-5% range caveat in the short term following the lowered conversion probability target.
- Expiry for covered calls will not exceed 180 days.
- If no suitable covered call opportunities meet these parameters, Avantgarde will wait rather than forcing suboptimal trades.
See yesterday’s quotes on a notional amount of $1,480,050, with premiums ranging between 13.2-19.4%:
2. Deploy Stablecoin Proceeds into Compound Lending Markets
- All stablecoin proceeds from option premiums and any COMP conversions will be deposited into Compound lending markets, earning additional yield via Compound-deposited stablecoins cTokens.
3. Cash-Secured Puts for Strategic Buybacks
- We propose continuously monitoring market conditions using technical indicators, as suggested by @ExaGroup.
- If an attractive buyback opportunity is identified, the cTokens will be used as collateral to sell put options on COMP with:
- Strike prices between 80-100% of the spot price.
- Expiries of up to 90 days to optimize for stablecoin liquidity.
Buyback Triggers
Incorporating ExaGroup’s feedback, we propose monitoring key indicators to objectively identify buyback opportunities:
- RSI-Based Trigger: If RSI (14-day) drops below 30, COMP is considered oversold, signaling a potential buyback opportunity.
- Moving Average Crossover (SMA-14 & SMA-50): A buyback signal is confirmed when SMA-14 crosses above SMA-50 after a downtrend.
- MACD Confirmation: If MACD crosses above its signal line, this reconfirms positive momentum and a potential buyback opportunity.
- Market & Earnings Multiples: Additional fundamental market dynamics and earnings multiples can be incorporated to refine buyback execution.
Below is an illustration of historical buyback signals based on these indicators:
Final Remarks
With the refinements outlined above, we believe this proposal strikes the right balance between:
- Activating idle COMP for yield generation.
- Ensuring treasury sustainability.
- Executing strategic, systematic buybacks using yield-bearing cTokens for cash-secured puts.
Given the positive feedback we’ve received from multiple delegates over the last few months, as we have recently stated in this thread, we believe the time is right to move forward with this proposal soon.
As a reminder:
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Liquidity for writing calls and cash secured puts has been validated; i.e. counterparty interest with institutional trading firms has been confirmed.
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If successful, the execution of this proposal will be managed through the same multisig structure as the recent Morpho proposal led by Gauntlet; which we hope will be a 3-out-of-5 multisig managed by Avantgarde, Myso, 2 signers from the Compound Governance Working Group, and 1 additional signer to be confirmed.
We look forward to continued engagement with the community and will prepare a Tally governance proposal for consideration shortly and as always welcome any additional feedback to ensure the best possible outcome for Compound DAO.