Decentralized Platform for Volatility Derivatives


Divergence is a decentralized platform for hedging, trading DeFi-native asset volatility, with its flagship product being an AMM-based marketplace trading synthetic binary options.
Currently, there’s a lack of effective, easy-to-use, and versatile solutions for trading and hedging volatility of assets that exist on the different layers of DeFi applications, where users are simultaneously exposed to multiple sources of risk.
When it comes to managing price risk, existing decentralized futures and perpetual products offer linear risk exposures for a limited number of major assets. Options, on the other hand, as a less-developed product, can provide a non-linear risk-reward structure. This allows options traders to build leveraged positions in assets at a lower cost than making an outright transaction.
To fill this gap, Divergence is developing a range of decentralized volatility derivatives and volatility index products with the aim of becoming the go-to platform for:
    Risk-averse users seeking to hedge volatility risks
    Risk-tolerant users seeking to trade and gain leveraged exposure to volatility
    Risk-neutral users seeking to participate as liquidity providers and earning fees

Our Approach to the Problem

The extensive volatility derivative product suite in the Divergence roadmap contains financial instruments including binary options, index derivatives, and yield vaults incorporating volatility trading strategies. Our first step is to create a user-friendly, immediately-scalable product that directly addresses the needs of liquidity providers and traders in the DeFi ecosystem:
an AMM-based marketplace that trades synthetic derivative tokens with a binary pay-off structure on the volatility of any LP-defined asset class. (aka. binary options)
Key design features for this AMM marketplace include:
🔥Composability: Markets can be created at strike prices and expiration cycles of choice, using a variety of fungible tokens -- including DeFi assets issued by other protocols -- in a one-step seeding and minting process, meaning that you don't need to mint a derivative token first, then allocate funds on two sides to seed a pool.
🔥Capital Efficiency: Only one collateral is required to write a binary call and a binary put for a pool, with no need for over-collateralization. Once a pool is created, the same collateral is used when traders buy and sell options via this pool. At any given time, only one collateral is used per pool. The smart contract reserves max claims for collateral, providing LPs the flexibility of withdrawing capital prior to expiry.
🔥Continuity: By default, our binary option pools auto-exercise positions and roll over the liquidity automatically upon expiration using identical terms. LPs would not have to relocate capital to create new pools in order to manage option expiry cycles.
On the horizon, our next steps are:
1) To introduce and make available multiple yield vaults to asset allocators in the DeFi ecosystem. These vaults will utilize different volatility-based strategies that are implemented across Divergence's product suite. Passive income streams generated from the vaults will be distributed to both vault contributors as well as liquidity providers to further enhance their yields.
12) To develop volatility indices representing the market's real-time expectations for volatility -- implied volatility -- from price feeds of our binary option pools. Create volatility index derivatives giving users the ability to easily gain long and short exposure to tokenized volatility. These volatility index derivatives are also composable with other DeFi applications.

Use Cases

☔Hedging & Risk Transfer

Manage risks inherent in the decentralized financial markets, including price and interest rate risks. Suited for liquidity providers hedging impermanent loss and traders transferring asset price risk.

🥊Volatility Speculation

Profit from trading various volatility derivatives with binary pay-off structures on underlying asset movements from non-custodial wallets. Enter and exit trades at competitive spreads enabled by Divergence’s pricing mechanism.

👓Event Betting

Customizable betting pools offering fixed payouts on a wide range of on-chain/off-chain events.

🎨Volatility Tokenization

Mint, trade tokens whose values derive from the volatility of underlying assets and indices.
Last modified 8d ago