coindesk.com
What do you do with millions of dollars ROOK tokens destined to become valueless in just over two months? If you’re Polychain Capital you’ve got two options: dump them on the open market or deploy them via crypto’s savviest arbitrage trade, where they may well net you millions of dollars more.
Polychain is preparing to forgo the gambler’s play – which in an ideal scenario could pay out $8.7 million, according to CoinDesk’s analysis of on-chain data – by seemingly liquidating its $6 million position via decentralized finance (DeFi) exchanges.
The crypto hedge fund moved 100,000 ROOK tokens to a fresh wallet on Wednesday, raising the possibility that it may soon cash in on its long-dormant trove of the erstwhile governance token. (ROOK recently shed its governing rights and became instead a sort of redemption voucher for holders to claim their share of the ROOK project’s treasury.) Hours ago it approved those tokens for sale on Uniswap.
The on-chain moves radically change the calculus driving one of the wildest arbitrage plays in today’s decentralized finance markets. While speculative traders are playing million-dollar musical chairs with intrinsically valueless meme tokens, another set of actors have been methodically draining a portion of ROOK’s treasury with redemption tokens set to become goose eggs on July 12.
Some of those activist investors had hoped Polychain would simply forget to redeem its tokens, leaving more pie for other holders to claim. “Hate to see it,” said one observer of Polychain’s emergence from hibernation this week.
Polychain did not immediately comment.
Polychain invests in Rook
Polychain acquired its ROOK bag for investing a “seven-figure sum” in the DeFi liquidations startup KeeperDAO during the heady days of DeFi summer 2020. The project has since changed its name and product, shed its governing DAO and neutered its governance token, which has rallied over 350% since late March because of activist investors who successfully lobbied for a “rage quit” that would return value to disenchanted holders.
ROOK is now trading for $59 a pop, making Polychain’s current trove – if sold on the open market – worth around $5.9 million. On Thursday Polychain geared up to sell, rather than redeem.
In doing so, Polychain, one of the oldest and richest crypto hedge funds, seemingly thumbed its nose at a slightly risky arbitrage trade that could end up paying millions of dollars more. It is forgoing the opportunity to redeem its ROOK tokens via the “rage quit” smart contract, where it could at most yield $8.7 million. That’s because those ROOK tokens give it the right to a guaranteed slice of ROOK’s treasury, plus the possibility of even more upside if other ROOK holders forget to do the same.
On the open market Polychain might sell its ROOK for more, but the token needs to keep rallying to $87. And it’s got only two months left to get there.
Highly profitable trading strategy
Until mid-July, holders of the ROOK token can exchange their former governance tokens with a smart contract that returns an equivalent number of pROOK tokens, plus $40.76 in USD coin (USDC) per ROOK. Once the date passes, the smart contract will divide up the unclaimed USDC proportionally across all holders of pROOK.
Speculators are putting a 50% premium on the price of ROOK – likely on the belief that a good number of holders will, for whatever reason, forget to redeem their tokens. If redemptions stopped today, each pROOK would be worth roughly $94.32, according to CoinDesk estimates. That’s a massive payout considering those holders already collected $40.76 per their tokens.
Polychain is the fourth-largest holder of ROOK tokens, however. Its whale-sized bag would blow a massive hole in pROOK’s upside and nearly halve its current projected payout. Still, $47.14 in extra cash on top of the $40.76 would still put ROOK’s redemption value well above current market rate.
Activist investoooors
Conceived by activist investors who control half ROOK’s treasury, the redemption method is the product of an agreement between Rook Labs and its community to end their right to govern the project, which builds tools to collect MEV – a trading strategy resembling a riskless arbitrage – on the Ethereum blockchain. The community’s ROOK governance tokens became tickets to a proportional share of $25 million of ROOK’s treasury.
ROOK’s redemption smart contract currently holds $17 million USDC after paying out $7.6 million to 78 different wallet addresses. The top current redeemer – an address with the ENS domain solanabeachresearch.eth – has converted nearly 26,000 ROOK tokens into $1.1 million in USDC. If redemptions stopped today (assuming Polychain does not redeem) that wallet would get $2.44 million for its pROOK. If Polychain acts, it would get $1.22 million.
Polychain’s own payout would be orders of magnitude bigger. If it redeems its ROOK tokens by July 12, it gets a base payout of $4.07 million of USDC from the redemption smart contract. It would later get an additional $4.7 million of USDC for its pROOK – assuming, of course, that no one else redeems.