Convertible Debt

Convertible debt is a type of loan that can be turned into a predetermined amount of equity in the issuing company or protocol under specific circumstances. In the crypto domain, this often takes the form of tokens that can be exchanged for governance rights or underlying equity in a decentralized autonomous organization.

It provides the issuer with lower interest costs while offering the investor potential upside if the project succeeds. This hybrid nature makes it a complex instrument, as it combines the characteristics of fixed income with the volatility of equity.

Investors must weigh the interest payments against the probability of conversion, which is influenced by the project's growth metrics and token valuation. It is a popular mechanism for early-stage project funding, allowing for flexible capital structures that can adapt as the protocol matures and its utility expands.