Decentralized Market for Volatility
We aim to be the decentralized market for volatility — A liquid and composable on-chain derivatives exchange for the DeFi primitive.
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 risk, existing decentralized futures and perpetual swaps offer linear risk exposures for only a limited number of major assets. Options, on the other hand, as a less-developed product, provide a non-linear risk-reward structure, allowing 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 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
And we're starting with options - binary ones to be specific.
The extensive volatility derivative product suite in the Divergence roadmap contains financial instruments including binary options, yield vaults incorporating volatility trading strategies, and index derivatives. 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 LP-defined asset prices. (aka. binary options)
Key design features for this AMM marketplace include:
🔥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. The smart contract reserves max claims for collateral, providing LPs the flexibility of withdrawing capital prior to expiry.
🔥Composability: Options can be minted and traded against via a variety of fungible tokens -- including yield-bearing assets issued by other protocols, meaning that LPs can access option premiums, trading fees without giving up the original yields elsewhere.
🔥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 capital allocators in the DeFi ecosystem. These vaults will utilize different volatility-based strategies that are implemented across Divergence's product suite and generate passive income streams on behalf of depositors.
2) To develop derivative tokens tracking DeFi asset volatility — "Tokenized Volatility", which gives users the ability to easily long or short price movements, regardless of price directions. These derivative tokens are also composable with other DeFi applications.