DIVERGENCE
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Binary Options
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🔁Settle & Roll Over Markets
The Divergence DEX enables the creation of continuous markets for synthetic volatility.
Settlement
The Divergence binary options pool uses price feeds from external oracles to settle options tokens. A 30-minute price average (using 07:30 UTC, 07:45 UTC, and 08:00 UTC) is computed and used as the settlement price. Claims to the pool collateral are processed in the order below.
1️⃣Spear & Shield Token Pay-Off
The smart contract first settles the pay-offs for Spear and Shield tokens held to expiry. The winning side will be eligible to claim 1 collateral for each token. The losing side has no claims.
2️⃣Collateral for Expiry Exit
Once "Expiry Exit" is confirmed, LPs will be able to withdraw collateral corresponding to their share of the pool at the current round expiry after spear & shield token pay-off has been facilitated. This part of pool liquidity will not get rolled over to the next round. The LPs can withdraw their proceeds at any time after settlement.
3️⃣Remaining Collateral
After the aforementioned claims are settled, the remaining collateral will stay with the pool and provide liquidity for options in the next round.
Roll Over Pool Liquidity:
Market continuity is critical for risk hedging and volatility trading. Managing liquidity continuity is tricky, however, for derivative tokens with a finite term for trading. In a smart contract environment, an LP has to withdraw liquidity from the contract in use (incurring gas fees), mint derivative tokens via a new contract (incurring gas fees) and then fund liquidity into a pool again (incurring gas fees and requiring additional capital) in order for the market to continue to function.
At Divergence, instead of creating a new pool for each option expiration cycle, only one pool is created for an options market of the same parameters. Liquidity will remain in use at the pool until it is withdrawn. After the expiry of a prior cycle, the remaining collateral is re-seeded to create new markets of the same daily, weekly, or monthly cycles.
When a new market is re-seeded, the terms will remain the same, whereas the strike price might be updated per the following rules:
Roll-over based on a 💲fixed strike price: This roll-over mechanism works for markets where asset prices don't move very much, and where liquidity stays focused at a fixed price level. Examples include wrapped asset pairs, stable coin pairs, and algorithmic stable coins.Roll-over based on updated strike price: At the creation of a pool, an LP is able to specify how strike prices shall update. 1) Bullish Update: The strike price is set above settlement price by a certain percentage; 2) Bearish Update: The strike price is set below settlement price by a certain percentage; 3) Range Strike: The strike price is always set around settlement price by a certain percentage.For example, a daily-settled option market created on 20 Sept 2021 at 15:00 UTC for ETH/USD (5% bullish update) is technically set to open on 20 Sept 2021 at 08:00 UTC. The strike price for this cycle is calculated at 5% above the technical open price on 20 Sept 2021 at 08: 00 UTC.
During a rollover, the smart contract will recalculate a new strike that is 5% above the settlement price reached on 21 Sept 2021 at 08:00 UTC. It is also possible to create range strike option markets whose strike price is set 5% around settlement price.
Next Open Price for Spear/Shield:
As an options market is rolled over to a new expiration cycle, by default, the open price for the binary calls and puts will be reset to the initial split of collateral of the prior cycle.
This means that at the opening of a new cycle, the split of collateral to make markets for the binary calls and puts will remain the same as that of the prior round. For example, if the binary option pool creator decides the spear to be priced at 0.3 collateral and shield to be priced at 0.7 collateral initially, the market will open at the same split of collateral when it is settled and rolled over.
In cases where LPs would like to reset this open price (the collateral split) for the next expiration cycle, it is possible to use the reset function, which can be called by any LP who is willing to lock up funds for a period of time (30 minutes by default) in the opening of a new cycle.
If there are multiple LPs who submitted the open price for the next expiration cycle, then the Spear/Shield will open at a weighted average of LPs' submitted prices.
If no open price reset is submitted by any LPs, the next round will simply open at the current round open price by default.
An LP can only make ONE submission for the new expiration, until 10 minutes before this expiry.
Last modified 1mo ago
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