🔥Create Options Markets
In a one-step process, liquidity providers can commit collateral, mint synthetic options tokens, and make markets at strike prices and expirations of their choice.
An AMM mechanism is designed allowing for liquidity providers of any size to create binary options markets. Only one collateral is needed to provide liquidity and the collateral in use to fund these pools does not have to be the same as the underlying, which creates synthetic exposures. At expiration, options are auto-exercised & rolled over, using collateral remained after settlement.
The objective is to simplify the complex price discovery in options into a simple, straightforward, buy and sell experience. Divergence market participants can bet on the probable outcomes of price moves and market events that are native to the DeFi space.
In homage to ancient Rome, the Divergence smart contracts are designed as such:
- ABattle is a binary options market.⚔
- TheArena stages the "Battle" by handling its creation and performing administration.🏟
- ARound means expiration cycle. A "Battle" is continuously rolled over, contains multi rounds.🔄
- TheSpear andShield are synthetic, European-style binary options. They offer buyers the right to receive a fixed payout when the price of the underlying asset rises above or below the strike price at expiry.
To start, liquidity providers create options markets by supplying collateral to a pool. The marketplace is designed to support a variety of fungible ERC-20 tokens as collateral, including stable coins and DeFi assets issued by other protocols.
Once the collateral is seeded, the same amount of options tokens -- "Spear" and "Shield" -- will be minted and automatically funded to the pool.
For example, a liquidity provider committing 500 DAI can create a market of 500 Spear and 500 Shield. The liquidity provider will get LP tokens in return for funding liquidity.
Yes! Both minting and funding are integrated processes. You don't need to separately mint "Spear" and "Shield" in a contract and then fund them to liquidity pools to make a market. This helps reduce costs and increase the utilization of capital.
Spear and Shield are quoted in fractional units of 1 collateral. The value of Spear and Shield add up to 1 collateral, given the pricing mechanism of binary options.
Think of this as a warrior carrying a spear and a warrior carrying a shield in battle.
Divergence allows LPs to create markets that bet on underlying asset prices. And the Spear and Shield tokens represent European-style binary call and put options.
Typically, terms for "Spear" (binary call) and "Shield" (binary put) defined by LP are as follows:
1) "Spear" Token terms:
- Expiration: Jan 28, 2022, 08:00 UTC
- Worth 1 collateral if ETH-USD settles above $3500, worth 0 USDC if not.
2) "Shield" Token terms:
- Expiration: Jan 28, 2022, 08:00 UTC
- Worth 1 collateral if ETH-USD settles below $3500, worth 0 USDC if not.
It is important to note that the "Spear" and "Shield" are virtual tokens that provide buyers and sellers their respective derivative exposures. They are minted or burnt as functions of LPs' provided liquidity, and cannot be withdrawn from the pool and traded elsewhere.
The "Spear" and "Shield" tokens can be considered as cash-settled (also known as "cash-or-nothing" options) when liquidity is funded in stablecoin, or physically delivered (also known as "asset-or-nothing" options) when a non-stablecoin, is used as collateral.
Upon expiration, the smart contract will determine whether the strike price condition is met, and the tokens will be exercised automatically. The options markets will also be rolled over and unclaimed collateral that remained will be resupplied using identical terms.
Derivative tokens -- "Spear" and "Shield" -- can be created and traded using various fungible tokens as collateral. The underlying asset for these derivatives can be defined by the LP. This provides users the desired volatility exposure without the need to hold the underlying asset.
Strike prices are defined by the LP that creates the options market. Spears and Shields with strike prices that are either right at (or very close to) the current price are called “at-the-money” (ATM) options. These strikes become either more “in-the-money” (ITM) or “out-of-money” (OTM) as the price of the asset rises or falls. “In-the-money” options give you the right to buy or sell the asset at a better price than the current price. “Out-of-money” options are the opposite.
There are infinite possibilities of how "Spear" and "Shield" can be minted to structure binary pay-offs on specific options markets at specified terms. Here we present a few sample options pools to be launched once the platform goes live:
- Asset Prices
Users are exposed to a variety of price risks when providing liquidity, trading tokens or farming yields in DeFi. Divergence offers the flexibility to denominate options using assets of their choice to cover risks from a market-neutral position.
- Lending & Borrowing Rates
Currently, most lending and borrowing protocols are offering or charging flexible interest rates to users, meaning the cost of borrowing and the return of lending can be volatile. Divergence will offer the possibility to mint option tokens with pay-off structures on movements of supply rates and borrow rates, allowing DeFi users to hedge such interest rate risks.
- DeFi Yield
DeFi yields can also be volatile to some extent, especially for early-stage projects.
The Expiration Date is the time upon which the option tokens enter the settlement stage. In order to standardize market term structures, Divergence will initially support markets with daily, weekly, and monthly expirations with an on-chain settlement time that is the closest to 08:00 UTC.
- Weekly: Every Friday at 08:00 UTC
- Monthly: Last Friday of a calendar month at 08:00 UTC
During the very initial stages of the release, options markets can only be created against a number of whitelisted underlying, collateral tokens upon limited expiries. This whitelist is enacted to:
- Ensure that market creation occurs at an orderly pace at the platform's initial stage
- Concentrate liquidity across a number of options strikes and terms
- Avoid unnecessary over-burdening of front-end displays
This whitelist is not meant to be restrictive and can be removed upon governance. Once the liquidity status reaches a steady state, we will let the community decide whether we shall make the market creation process permissionless.