Downside Protection
What “downside protection” means (in Exchequer)
Instead of paying emissions to tempt mercenary liquidity, Exchequer lets a project subsidize risk for buyers of its Downside-Protected Notes (D-Pros). The project posts on-chain collateral so that, at maturity, buyers have a capped worst-case outcome.
Partial protection only, up to 75% drawdown. The highest setting any issuer can choose is 75% protection.
Settlement asset is LP tokens. When protection pays, the buyer receives LP tokens from the collateral stack. These LP tokens are immediately sellable or holdable by the buyer.
In practice, this turns yield-spray PvP into an explicit, transparent risk-transfer contract between a project and its community.
How the protection is collateralized (trustless by construction)
Matched deposits form collateral.
Buyers bring stablecoins/ETH (the “cash leg”).
The project contributes its own tokens (the “token leg”).
Together they mint a project-owned, full-range LP position (plus any supplemental assets the issuer specifies).
LP tokens are escrowed as protection. The LP position is held on-chain to underwrite the protection.
At maturity, the note settles.
If the market performed well, buyers receive the upside payoff defined by the note type.
If the market fell, buyers receive LP tokens per the protection schedule, capping their loss up to the chosen level (max 75%).
This design is permissionless, auditable, and removes counterparty risk: the collateral is visible and bound to the note’s terms.
The 75% protection cap (the important bit)
“75% protection” means the note is structured so that if the token is down 75% at maturity, the buyer redeems LP tokens whose then-market value equals their original principal (i.e., full principal back, paid in LP).
If the drawdown is ≤ 75%. The buyer’s principal is fully protected. At maturity they redeem LP tokens worth their original principal.
If the drawdown is > 75%. Protection is capped at the 75% floor. The buyer begins to take losses beyond that point, but still redeems LP tokens per the schedule and is strictly better off than being unprotected over the same market move.
Protection never creates free money; it reassigns tail risk from the buyer to the issuer, with the cap clearly stated up front.
Walkthrough example (numbers you can sanity-check)
Initial:
Buyer deposits 100 USDC.
Project contributes 100 TOKEN at $1.00 each.
A full-range LP is minted with 100 USDC + 100 TOKEN (total $200).
Market at maturity: token price is $0.25 (a 75% drop).
Constant-product arbitrage rebalances the pool to about 200 TOKEN + 50 USDC.
Total LP value ≈ $100.
Protection outcome: With 75% protection, the buyer can redeem LP tokens worth $100, i.e., their full principal, paid in LP tokens. (If the drop were worse than 75%, the redeemed LP would be worth less than $100.
Choosing a protection level (issuer guidance)
Treasury capacity vs. acquisition goals. Higher protection (toward 75%) attracts more cautious users but consumes more treasury risk budget.
Token volatility. More volatile assets typically warrant higher protection to convert fence-sitters.
Target audience. Yield D-Pros appeals to yield seekers; Growth D-Pros appeals to newcomers wanting a simple “floor + upside” story.
Keep it explicit on your docs and launch post: protection percentage (≤75%), settlement in LP tokens, term, and payoff style (Yield vs. Growth). Clarity here is what converts strangers into holders.
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