DAT Mechanics Part 1 Some folks saying this the next LUNA (it’s not). Others are saying there’s nothing to unwind (there is). Think carefully about the mechanics. A lot of these DATs have no leverage so there won’t be any forced selling from getting called on debt. Still there is an incentive to sell the underlying and buy the stock back to capture the arb and push mNAV up. But how much of an incentive is there and how far up should mNAV be. This largely depends on the underlying asset. In the case of BTC, there is one very large player (MSTR) and many much smaller players. So you could say that MSTR alone as a DAT drives BTC price. Since mNAV here is healthy and since the leverage is controlled well, you probably won’t see much selling of the underlying here. As a side note, it makes sense that the debt is at a safe level since Saylor got such a great deal against the buyers of the early converts since he was the only game in town selling crypto upside to fixed income desks. Now imagine an underlying where the distribution of DAT holdings isn’t as extremely skewed toward one mega holder. If there is a small handful of major DATs for a single underlying, then this becomes a Prisoner Dilemma coordination game where the good outcome is possible to some extent. At .9 or .95 mNAV, it is conceivable that none of the players go for the arb. Even without outright coordination, they could all choose to (3,3). Now suppose mNAV drops to .5 as an extreme example. Now the arb profits are much bigger and could outweigh the negative consequences of underlying market cap compression, reflexive selling effects, and reputational considerations. So we can see that whether there is an underlying unwind is dependent on a whole host of factors including how many large players are running DATs on that underlying. In other words, the gain in arb value is individual while the compression of the underlying market cap and hence all DAT market caps for the same underlying is socialized. All else equal, more big DATs is worse than fewer big DATs for this game. As a tangent, I’m roughly assuming above that most DATs for the same underlying have similar mNAVs. If this wasn’t the case, we could see 1) different levels of incentives to do the arb and 2) one DAT buying another DATs equity. An exercise left to the reader. Now let’s introduce more complexity into this toy model. Each manager of a DAT for the same underlying has a different propensity to take the arb. It depends how crypto native vs tradfi native the manager is. Crypto natives don’t want the music to slow. For tradfi natives, well, whoever sells first sells best. Also there are reputational considerations. Whoever is more prominent has more personal considerations outside of managing the DAT. These considerations could push up or down the threshold for where arbs will be taken.