Convertible Tokens

MegaStrategy's Convertible Tokens (CVs) are onchain debt instruments that blend yield characteristics with an embedded conversion option, allowing holders to convert their debt into treasury exposure (MGST). This design is modeled after traditional convertible notes and uses auction technology pioneered by Axis for issuance.

Below is a breakdown of how convertibles work, the benefits they provide to holders and the protocol, and the risks involved.

Design Principles

Cost-Effective Capital

Convertibles enable MegaStrategy to raise funds at potentially lower interest rates compared to standard lending models. By granting holders upside participation via conversion, the protocol can access cheaper capital for expanding its treasury or repurchasing existing debt. Convertibles also have longer time horizons than typical onchain debt markets.

Embedded Conversion

These tokens come with an embedded conversion option to exchange debt for exposure to the protocol's treasury (MGST tokens). This structure offers holders downside protection (the debt claim on treasury assets) plus strategy upside if the protocol's treasury grows significantly

Digital Volatility

MegaStrategy thrives on volatility. By leveraging ETH's volatility, convertible holders can see their conversion option become more valuable as volatility increases. This design complements the broader strategy, where leveraged treasury growth and amplified volatility intertwine to drive onchain capital formation.

Issuance

MegaStrategy issues CVs via sealed-bid batch auctions, a mechanism used heavily for offchain debt issuance (ex: US Treasury Auctions). In these auctions:

  1. Participants Submit Bids – Bidders submit private bids stating how much they're willing to pay for CVs, alongside the principal amount. Bid prices remain sealed until the auction concludes.
  2. Uniform Price Settlement – Once the auction concludes, all winning bids pay the same final price. This uniform price mechanism is similar to the one used by Treasury Direct to auction US government debt, ensuring fairness for all participants.
  3. Capital Injection – The protocol receives the proceeds in exchange for newly minted CVs. This capital is used to bolster the treasury's ETH holdings and fuel its adaptive leverage strategy.

By using sealed-bid auctions, MegaStrategy discourages bid sniping and promotes a more even playing field. The uniform clearing price simplifies expectations for participants, ensuring they only pay their maximum price. This auction mechanism fosters transparent price discovery and helps the protocol find competitive rates for debt issuance.

Redemption

There are two scenarios where redemption may occur:

  1. Maturity Redemption – At maturity, holders can redeem each CV 1-to-1 for the underlying stable asset (ex: USDC)
  2. Voluntary Conversion – Before maturity, holders can convert their CVs into MGST at a fixed conversion rate (ex: X MGST per CV)

MegaStrategy emphasizes volunatry redemption for its initial convertible design, allowing holders to choose if and when they redeem their convertibles. This approach:

  • Empowers CV Holders: By retaining full control over the timing of conversion, CV holders can respond to market conditions – redeeming for stables if MGST’s price is unattractive or converting to MGST if they see upside potential.
  • Minimizes Complexity: Traditional convertibles can include features like callable provisions or forced conversion, which can be advantageous to issuers but may complicate early-stage adoption. MegaStrategy’s design keeps things straightforward, ensuring a simpler user experience while the protocol gains initial traction.

Through this voluntary mechanism, CV holders effectively balance security and opportunity – they have the stability of a debt instrument while preserving the option to participate in MGST’s upside if they so choose.

Key Risks

  • Price Volatility – While convertibles offer some downside protection, the embedded conversion can lose value if the protocol’s treasury growth slows or if MGST underperforms
  • Market Liquidity – Liquidity for convertibles may be limited, though the protocol may choose to buy back debt under certain circumstances
  • Protocol Security – As with any DeFi project, smart contract risks and potential governance attacks may exist
  • Treasury Solvency – If the treasury suffers large losses, the protocol may struggle to honor redemptions – though debt obligations are prioritized above MGST holders