The fundamental difference is that Divergence pools facilitate the automatic market-making and peer-to-pool swaps of binary options tokens. Each pool can be considered a specific binary options market with its own underlying, expiration, strike price, collateral, and rollover mechanisms. Only one type of collateral is used per pool.
LPs are sellers of binary options tokens. For every collateral LP creates a pool with, a Spear and a Shield is minted and automatically funded. LPs get to set the open price for the pool. Afterwards the Spear and Shield are traded via our specialized AMM mechanism.
Traders trade with the same pool using the same collateral. They can buy and sell Spear and Shield like they swap for a token with Uniswap.
As long as they are fungible tokens, YES. On Divergence, one type of fungible asset is used per pool. There’s no minimum threshold for liquidity providers to create a pool.
For example, you can utilize a yield-bearing asset issued by other Defi protocols to fund pools and earn rewards on Divergence. In this case, you're not giving up the rewards you already have access to on other venues, COMPOSABILITY matters!
No, you can only trade Spear and Shield on Divergence DEX. Spear and Shield are not designed to be withdrawable ERC-20 tokens, instead, they are “virtual tokens”, you won’t see them show up on your web3 wallet once you purchase them, you can check your Spear/Shield position via our dashboard and proceed to sell them or claim your payoff after expiration, if any.
After the binary option pool is created and starts trading, the price of Shield/Spear are determined by the market, based on a bonding curve we built.
The bonding curve is based upon the Uniswap model, however, the price of spear and the price of shield, will always add up to 1 collateral, and this is hard coded in the pricing curve. Thus, whoever buys Spear or Shield will push the price of onside up and the other side down, in order to continuously maintain the equation.
Spear and Shield are priced and traded using the collateral of the binary option pool. A trader only need to deposit collateral into the pool to buy Spear/Shield.
Yes. On Divergence, liquidity providers are sellers of binary options, and they are obligated to meet the claims from the sold options. Suppose the traders are net-long Spear and the underlying price moves in their favor, each Spear is able to claim 1 collateral from LPs. Conversely, if the underlying price does not move in the favor of traders, LPs get to keep the collected premiums.
There are different ways to mitigate the impact of impermanent loss, including buying Spear or Shield to hedge LP position, or having an offsetting position in other DEXs or CEXs.
In the beginning, the system will have weekly and monthly markets and they all have their own corresponding expirations cycles, which are:
Weekly market: starts and ends UTC 8 every Friday;
Monthly market: starts and ends UTC 8 on the last Friday of every month.
Selling a position prior to expiration is ALLOWED, and users get to exit anytime that he deems appropriate. For example, a user that bought a spear at 0.4 USDC can sell his spear back to the binary option pool if spear appreciates to 0.8 USDC after 30 minutes.
A LP can withdraw liquidity from a binary option pool anytime. If he wants to withdraw liquidity right away, there is an early withdrawal fee associated with this operation, instead, if he doesn’t feel the rush, he can choose “expiry exit”, which is a function that will allow him to remain as a LP until the market (the current expiration) expires, in this case, no fees are required.
Because the max payoff is capped at 1 collateral per option, and because Divergence reserves collateral for max claims from the sold options, the pools are able to maintain at 1x collateral for options sellers, with no liquidations required.