In addition, oTokens will be the first instruments that provide significant yield on ETH holdings in DeFi. In the paper, we take a particular focus on the insurance use case, which protects against both technical and financial risks that threaten users of DeFi.
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By depositing crypto-collateral (eg. ERC20s/ETH), option writers mint ERC20 options (oTokens). Writers can then sell those oTokens for a premium, thus earning revenue on their collateral, or they can deposit oTokens in liq. pools like Uniswap & earn fees on trading volume.
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Buyers can likewise buy these oToken ERC20s on an exchange or DEX of choice. The simplest of the oToken series are engineered to have no reliance on oracles at all, allowing buyers to exercise when they have determined that it is profitable for them to do so.
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In the Convexity paper, we examine two particularly exciting use cases for oTokens: DAI insurance & Compound deposit insurance. By buying protective oToken puts on DAI, users have the ability to exchange 1 DAI for 1 USDC even if the DAI peg breaks through a black swan or crisis.
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Likewise, by buying oToken puts on cTokens, users can exchange cTokens for their initial cash value, even if there is a hack or liq. crisis on Compound. Since users relinquish their cTokens upon exercising their puts, we don't need oracles to determine an adverse event occurred.
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A key feature of Convexity is that option writers can collateralize in a different token than the strike asset. A seller could thus provide oToken insurance for cUSDC deposits with ETH collateral. These oToken thus provide the first way to earn meaningful premiums on ETH in DeFi!
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Liquidity is key to the system's health, so we considered which strike prices, options styles, exercise, and underlying assets will contribute to liquidity. We also discuss liquidation, put-call parity, capital efficiency, oToken sets, collateral rehypothetication, and more.
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Stay tuned for more updates! We are exploring further research such as using Dutch auctions, designing the first perpetual options protocol in crypto, and using oTokens as oracles of volatility & risk which can be used in platforms that use multiple types of collateral like MCD.
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Using DeFi is a necessity for many. We think that a feeling of safety is a vital prerequisite to the widespread success of this open financial system that we are all building together.
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Therefore, we at
@opyn_ are excited to be building out the Convexity Protocol into a full-fledged insurance product offering, building off the work we started at the DeFi hackathon@SFBWofficial!Prikaži ovu nit -
DeFi is a massive group effort, and this paper is no exception: we especially appreciate the help we got from
@rleshner & the@compoundfinance team, as well as the help from@danrobinson. The paper was heavily inspired by@compoundfinance,@MakerDAO, & the Yield Protocol.Prikaži ovu nit -
I'd love to thank my cofounders
@AlexisGauba and@aparnalocked who were instrumental throughout the whole process! The paper could not have happened without them. Also much love to@nadirakhtar123 and@findalejandro who hacked with us on the protocol at@SFBWofficial!Prikaži ovu nit
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