Polychain Capital faces a difficult decision with millions of dollars worth of ROOK tokens set to become valueless in just over two months. The crypto hedge fund has two options: either sell the tokens on the open market or deploy them through crypto’s savviest arbitrage trade, which could yield millions of dollars more in profit. Polychain appears to be preparing to liquidate its $6 million position in ROOK via decentralized finance (DeFi) exchanges.
The hedge fund held 100,000 ROOK tokens in a new wallet on Wednesday, suggesting it may soon cash in on its long-dormant stake in the former governance token. Just hours ago, Polychain approved the tokens for sale on Uniswap. This move drastically changes the dynamics driving one of the wildest arbitrage plays in today’s decentralized finance markets.
Speculative traders have been playing million-dollar musical chairs with intrinsically valueless meme tokens while others have been methodically draining a portion of ROOK’s treasury with redemption tokens that are set to expire on July 12. Some activist investors had hoped that Polychain would simply forget to redeem its tokens, leaving more for other holders to claim. However, Polychain seems to have other plans.
Polychain originally acquired its ROOK tokens by investing a “seven-figure sum” in the DeFi liquidations startup KeeperDAO during the summer of 2020. The project has since changed its name and product, shed its governing DAO, and neutered its governance token. Despite these changes, the value of ROOK has increased over 350% since late March, thanks to activist investors who successfully lobbied for a “rage quit” that would return value to disenchanted holders.
Currently, ROOK is trading at $59 each, which would make Polychain’s stake worth around $5.9 million if sold on the open market. By choosing to sell rather than redeem, Polychain is seemingly turning down a riskier arbitrage trade that could end up paying millions of dollars more. If Polychain were to redeem its ROOK tokens via the “rage quit” smart contract, it could potentially earn a maximum payout of $8.7 million.
However, these tokens must maintain their value at $87 for the next two months. If they don’t, Polychain could lose out on potential profits. In the meantime, holders of ROOK tokens can exchange their former governance tokens with a smart contract that returns an equivalent number of pROOK tokens, as well as $40.76 in USD Coin (USDC) for each ROOK token. Once the deadline passes, the smart contract will divide up any unclaimed USDC proportionally among all pROOK holders.
Speculators are putting a 50% premium on the price of ROOK, likely due to the belief that many ROOK holders will forget to redeem their tokens. If redemptions were to stop today, with Polychain not redeeming its tokens, each pROOK would be worth roughly $94.32. This is a massive payout, considering that holders have already collected $40.76 per token.
However, if Polychain chooses to redeem its tokens, it will significantly impact pROOK’s upside potential and nearly halve the projected payout. Despite this, if Polychain were to redeem its ROOK tokens by July 12, it would receive a base payout of $4.07 million in USDC from the redemption smart contract. It would later receive an additional $4.7 million of USDC for its pROOK, assuming no one else redeems their tokens.
Ultimately, Polychain’s decision will significantly impact the DeFi markets and the outcomes for other ROOK token holders. As a major player in the crypto hedge fund space, its choice could serve as an indicator for trading strategies and the overall direction of decentralized finance investments.