Convertible Bonds

This is the next lowest risk offering that FartStrategy has. Users may lock in a buy price for $FSTR (i.e. a free call option), loan FartStrategy their SOL for a fixed time, and if $FSTR goes up in value beyond the strike price of the option, their loaned SOL turns into freshly minted $FSTR at that price!

At initiation, management has chosen to offer bonds with convertible strike prices 45% above the current market price of $FSTR, with a fixed maturity of 45 days.

This "45-45" setting balances attractive upside (because $FSTR regularly sees weeks with 100%+ price movements) with strong incentive alignment between bondholders and tokenholders. If the call option were priced any lower, it would be heavily oversubscribed for the free upside.

Additionally, 45 days balances enough time to see the thesis of the Fartcoin Flywheel play out while offering flexibility to bondholders, who don't want to lock up capital for a long time in a fast-moving market.

Through governance, this model may give way to an auction mechanism that balances time and premium to best fit an ever-shifting market sentiment.

Example

Alice has 10 SOL and wants to be exposed to possible price appreciation of $FSTR and Fartcoin but wants to reduce the price exposure risk that comes with holding a volatile asset. She initiates a bond, depositing her 10 SOL into the vault. The vault records that if she had bought $FSTR today, she would be able to swap that 10 SOL for 20,000 $FSTR. Thus one $FSTR is worth 0.0005 SOL.

For the purposes of this example, let's say that the DAO has chosen to offer bonds with a strike price 20% above the current price of $FSTR. This would be a price of 1 $FSTR = 0.0006 SOL. (For comparison, some of MicroStrategy's recently issued convertible bonds have a call option with a strike at 55% above the current price).

The 10 SOL goes in the vault, and FartStrategy begins acquiring Fartcoin with it.

Three months pass. Fartcoin rises in price. $FSTR rises in price alongside it. Now $FSTR is twice as valuable, so the current market price is 0.001 SOL. Alice’s bond matures, and she redeems it. The vault calculates that the $FSTR is more valuable than the strike price, so it should mint her 10 SOL worth of $FSTR, at the strike price of 0.0006 SOL. That would be 10 / 0.0006 or exactly 16,666.67 $FSTR.

Now, her 16,666.67 $FSTR is worth 16.667 SOL. She has gained 67%, benefitting from the price appreciation of Fartcoin (and $FSTR) while being protected from downside.

But What If It Doesn't Go Up??

In the situation where Fartcoin stays the same or drops slightly in price, the bond redemption is owed as 10 SOL, so Alice will receive exactly what she put in.

Instead of minting any new $FSTR, the vault will begin a 24 hour unbonding period, at which point Alice may return to claim her 10 SOL.

Management maintains a view of how many bonds will mature at any given time, and reserves the right to maintain a cushion of some SOL in the vault in order to ensure that bondholders can have their SOL redeemed immediately. If there is a shortfall of SOL for redemption, then to source the 10 SOL, the vault may execute a loan to borrow the SOL against its Fartcoin holdings, using the save.finance permissionless pool.

Alice, as a bondholder, will always be prioritized over $FSTR tokenholders for the repayment of her bond. $FSTR could trade under the fair value of its vault-held Fartcoin, and Alice would still be repaid, even if it means diluting $FSTR holders. Her downside risk profile is different from $FSTR holders, because if the price of Fartcoin declines 10%, she will still be repaid. However, she is still able to participate in the upside of $FSTR and Fartcoin.

NOTE

Note that at launch time, these bonds are capped at 10 SOL per bond, and 100 SOL per day, to avoid single bond maturations having an outsized impact on the FartStrategy Vault.

Management reserves the right to pause, restrict, or uncap new bond issuance at any time in order to ensure an orderly movement of funds into the Vault. Management also reserves the right to change the maturity date or the strike price of the embedded call option within convertible bonds, from as low as 0% to as high as 300% higher than the $FSTR price on the date the bond is minted. (Modification of strike price will be communicated well in advance, and may be put to a DAO vote once the protocol is stable!)

There is still some exposure to Fartcoin price with these bonds. Because FartStrategy's vault is built to maximize its holdings of Fartcoin, if Fartcoin experiences a prolonged and extreme price decline, the bonds may suffer a haircut in redemption value. Before bonds suffer even a 1% haircut, though, FartStrategy would fully dilute $FSTR tokenholders and/or even sell Fartcoin (in an extreme case) in order to raise as much SOL as possible to repay these bonds.