DIVERGENCE
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🔥Create Options Markets
In a one-step process, liquidity providers can commit collateral, mint synthetic option tokens, and make markets at strike levels and expirations of their choice.

🏟
The Arena for Battles

A unique AMM mechanism is designed allowing for liquidity providers of any size to create markets that trade synthetic derivative tokens with a binary pay-off structure on underlying asset volatility.
Only one type of collateral is needed to provide liquidity and make transactions in our binary options pools. The collateral in use to fund these derivative tokens does not have to be the same as the LP-defined underlying asset, 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 mechanism in options markets 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:
  • A
    Battle is a binary options market.
  • The
    🏟
    Arena stages the "Battle" by handling its creation and performing administration.
  • A
    🔄
    Round means expiration cycle. A "Battle" is continuously rolled over, contains multi rounds.
  • The
    Spear and
    Shield are synthetic, European-style binary options traded on Divergence. They give their buyer 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 can create options markets by supplying collateral to a pool. The Divergence DEX is designed to support a variety of fungible ERC-20 token as collateral, including stable coins and DeFi assets issued by other protocols.
Once the collateral is seeded, the same amount of derivative 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 an integrated process. 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.
To create a new market on Divergence, the LP needs to specify: 1) Underlying; 2) Expiration cycle; 3️) Strike price; ️4) Collateral; 5) Open price for spear/shield, the options tokens.

Introducing
Spear &
Shield

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 spear and a shield that are constantly in battle with each other. Only one can claim the prize.
Divergence allows LPs to create markets that bet on a single price direction or a price range.
Single Strike Battles — markets that have only one strike price.
The Spear and Shield tokens represent European-style binary call and put options.
Spear token
Shield token
  • Represents the right to claim 1 collateral from the liquidity pool if the price of the underlying rises to or above the strike price at expiration.
  • Represents the right to claim 1 collateral if the price of the underlying falls below the strike price at expiration.
For example, a trader who buys a Spear is expressing the following view:
The ETH/USD price will rise above $4000 by 31 Sept 2021 08:00 UTC
Range Strike Battles — markets that have a strike price range.
This type of market has a payoff structure of binary option strangles.
Spear token
Shield token
  • Gives its buyer the right to receive 1 collateral when the price of the underlying asset settles outside of the strike price range.
  • Gives its buyer the right to receive 1 collateral when the price of the underlying asset settles within the strike price range.
In this type of market, a trader who buys a Shield believes that:
The ETH/USD price will trade between $2000 and $4000 by 31 Sept 2021 08:00 UTC

👀
What are Binary Options?

Binary Calls Explained
Binary Puts Explained
Range Strike Spears Explained
Range Strike Shields Explained

Spear &
Shield Terms

Divergence uses the settlement price at 08:00 UTC as a reference for the base for strike price updates. And liquidity providers are able to specify how strike prices for the new expiration cycle shall be updated
  • Remain Unchanged: The strike price will remain at a certain level
  • Bullish Update: The strike price is set above settlement price by a certain percentage
  • Bearish Update: The strike price is set below settlement price by a certain percentage
  • Range Strike: The strike price is set around settlement price by a certain percentage
Using a Daily ETH-USD Market - 5% bearish update, created using USDC at UTC 10:00 on Sept 20 as an example, assuming ETH-USD price at UTC 8:00 on Sept 21 is $3300:
1) "Spear" Token terms:
  • Open time: Sept 20 2021 08:00 UTC
  • Expiration time: Sept 21 2021 08:00 UTC
  • Value is 1 USDC if the price is higher than $3465 (+5% compared to 1300) at the expiry
2) "Shield" Token terms:
  • Open time: Sept 20 2021 08:00 UTC
  • Expiration time: Sept 21 2021 08:00 UTC
  • Value is 1 USDC if the price is lower than $3465 (not reach +5% compared to 1300) at expiry
It is important to note that in the Divergence smart contract system, 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:

1️⃣Cash Settled or Physically Delivered

The "Spear" and "Shield" tokens can be considered as cash-settled when liquidity is funded in stablecoins, or physically delivered when a non-stablecoin, is used as collateral.

2️⃣Auto-Exercised & Rolled-Over

Upon expiration, the smart contract will determine whether the strike condition is met, and the tokens will be exercised automatically. The options markets will also be rolled over and unclaimed liquidity will be resupplied using identical terms.

3️⃣Offering Synthetic Volatility Exposures

Derivative tokens -- "Spear" and "Shield" -- can be created and traded using any 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 Price

There can be a number of strike prices, or strike price range for Spear and Shield. Spear and Shield with a strike price that is either right at (or very close to) the current price are called “at-the-money” options. These strikes become either more “in-the-money” or “out-of-money” 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.

💎
Underlying Assets

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:
  • Price Volatility
Existing centralized and decentralized derivative products often require users to take a discretionary view on the price direction of a single asset, whereas many DeFi users are exposed to two-sided risks when providing liquidity to an altcoin - ETH or altcoin-altcoin trading pair in AMM DEX pools. Divergence offers users more flexibility to denominate options using assets of their choice to cover two-sided risks from a market-neutral position.
  • Interest Rate Volatility
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.
  • Staking Reward Volatility
Validator staking rewards or DeFi farming rewards can also be volatile to some extent, especially for early-stage projects with a relatively unstable network stake ratio.

🕗
Expiration:

The Expiration Date is the time upon which the option tokens enter the settlement stage. In order to standardize market term structures, Divergence DEX will initially support markets with daily, weekly, and monthly expirations with an on-chain settlement time that is the closest to 08:00 UTC.
  • Daily: 08:00 UTC every day
  • Weekly: Every Friday at 08:00 UTC
  • Monthly: Last Friday of a month at 08:00 UTC
A daily market created on 20 Sept 2021 at 12:31 UTC will settle on 21 Sept 2021 at 08:00 UTC.

Whitelisting for Market Creation

During the very initial stages of the V1 release, options markets can only be created via a number of white-listed addresses using specified collateral tokens. This white list is enacted in order 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 white list is not meant to be restrictive and can be applied directly from the team. Once the liquidity status of V1 reaches a steady-state, this whitelist will be removed and market creation will be fully permissionless.

Liquidity Provision Strategies

A liquidity provider can also utilize different strategies when funding options markets:

Strategy One: Market-Neutral

This refers to a pure market maker that does not have any discretionary views on the underlying movements and will provide an equal amount of liquidity for "Spear" and "Shield" in the pool.

Strategy Two: "Spear" Biased

Refers to a market maker that believes in "Shield" tokens and provides more liquidity for "Spear" than "Shield". This is achieved by purchasing "Shield" tokens after funding the pool.

Strategy Three: "Shield" Biased

Refers to a market maker that believes in "Spear" tokens and provides more liquidity for "Shield" than "Spear". This is achieved by purchasing "Spear" tokens after funding the pool.
Last modified 3d ago