One option for the wNXM that we have purchased from the market would be for the Community Fund to stake it inside of Nexus, against specific protocols, yield tokens and custodians.
Open up additional capacity - While it’s true that our capital efficiency is poor, it’s also true that for certain protocols demand is higher than supply. Anchor for example has an estimated 30-40m of additional demand which we are unable to serve. Staking against Anchor would allow us to generate more premiums, both for the Community Fund via staking and for the treasury via the cover sales. There’s potentially other cases too, perhaps PoolTogether v4, where v3 has reasonable cover buys but v4 price is still 50%+.
Greater control over pricing and capacity - Longer term it would allow us to create partnerships more easily. I can imagine a case where a new protocol wants to have cover on their entire TVL. Or, say CREAM wants to launch a covered vault with us. These are cases where it’s important that we can have greater influence to ensure that capacity is available for our partners, at the agreed upon price range.
Obviously, there is risk here, and I’m not suggesting that we stake $30m against only a couple of protocols. We’d need to manage this quite carefully. It gives us a lot of optionality in terms of us still holding wNXM going forward. We could, at any point, unstake and use the wNXM for some other purpose that we see fit.
In terms of the partnership angle, we’re seeing this type of thing more with protocols like FRAX and TempleDAO, or Daniele’s protocols and SUSHI, where they are partnering with other protocols and creating flywheel effects inside of the new ecosystem. The second and third order effects in terms of cover buys could be beneficial there and there is demand from protocols for these types of relationships.
In a way, I think this is a similar argument to the one that Aleks is making (see option ‘Foundation’), whereby we are re-investing in ourselves and our growth. Both by opening up additional capacity and partnership optionality, but also by generating yield on the tokens.
Presuming that the current yields on staked NXM continue, we should expect to generate in the ballpark of $3-6m per year from this (roughly 10-20% let’s assume for argument’s sake, perhaps this is conservative). These tokens could be used to fund part of the team’s growth a la Aleks recommendation.
In the worst case scenario, there is an exploit and our stake gets slashed, those tokens would be burned, increasing the book value of the mutual. In my opinion, the downside isn’t bad, while the upside could be very high.
Likely the biggest drawback to this approach would be that allocation of the staking is time intensive. Doing this with the community fund, given the slow execution of the buyback, would be a non-starter.
Instead, my recommendation would be to assign the wNXM to the Investment Hub wallet and for us to allocate it and make changes on a bi-weekly basis.