Comment on page
Unlike traditional markets, the protocol functions wholly on-chain and eliminates trusted intermediaries. Its design underscores self-custody, censorship resistance, and security. The protocol operates as a permissionless system, with open access to the public. Unhindered by discrimination or counter-party risk, anyone can interact with its smart contracts to:
- Create a market for digital options of a chosen underlying, strike, expiry, and collateral
- Swap for digital calls or puts
- Provide liquidity to sell digital calls or puts passively and earn premiums plus fees
The protocol design differs from a central limit order book, where buy and sell orders are organized by price level. These orders are matched with specific orders left by others.
Using the Divergence v1 AMM, one trades options directly with a liquidity pool. The pool acts as an options market with chosen specifications. At each price level, one buys options from aggregated liquidity positions. This order is distributed to sellers on a pro-rata basis.
A pool handles three assets: calls, puts, and an ERC-20 token that collateralizes and quotes the options. The calls and puts are minted as
Shield tokens, respectively. And the collateral token can differ from the underlying, allowing for synthetic exposures.
The options are fully collateralized before they are tokenized, swapped, and settled. Call and put options are valued relative to each other. Their relative prices change when collaterals are swapped for either calls or puts, and a new market rate for both options is found.
Using a web3 wallet, anyone can manage individual options exposures. They can long or short options anytime before expiry. Unlike standard options, digital options have limited risk. Protocol participants can decide their maximum gain or loss before a trade.