Volatility Tokens - A New Way to Trade Volatility With The Crypto Volatility Index

cvi.finance

TLDR:

• Today we introduce a new functionality to enable trading of volatility tokens on DEXs (Uniswap, Sushiswap, Quickswap etc).
• The architecture is based on funding fee adjusted leveraged rebased volatility tokens. The token is adjusted by funding fees and is being rebased to keep it pegged to the index.
• Trading Volatility is essential for Defi, both as a trading instrument and as a hedging tool against impermanent loss, making CVI truly composable to the greater Defi ecosystem.
• The first token to be launched will be — ETHVOL, to be traded immediately on any Ethereum based DEXs, followed by the CVIVOL token, to be traded on any Polygon supported DEXs.
• The ecosystem of the platform is now extending beyond the CVI platform to include DEXs, Traders and Arbitrageurs.
• The unique AMM pool of the CVI platform allows a single liquidity pool to support leveraged tokens such as: ETHVOL-X2, ETHVOL-X3, CVIVOL-X2, CVIVOL-X3
• We strongly believe that volatility trading is the next big thing in Defi.

Volatility Tokens - A New Concept to Trade Volatility

Volatility tokens are a huge milestone developed by the COTI team that bring a new and innovative concept to trade volatility, while making CVI truly composable to the greater Defi ecosystem. The architecture is based on funding fee adjusted leveraged rebased volatility tokens. The token is adjusted by funding fees and is being rebased to keep it pegged to the index.

Volatility Tokens were very technically challenging to develop, but their usage is very easy to understand: BUY a Volatility Token (LONG) on a DEX if you think volatility will increase, or SELL a Volatility Token (SHORT) if you think volatility will decrease. You can even buy a token with leverage already built into it.

Other than speculating about volatility, a Volatility Token also serves as an impermanent-loss protection mechanism: given that most Defi constructs directly couple with Ethereum, the value of the Volatility Token will rise according to any imbalance between the related tokens during a volatile period.

Why Trading Volatility Is Important

Volatility trading instruments allow pure volatility exposure and have created an entirely new asset class. Active traders, big institutional investors and hedge fund managers use such products for portfolio diversification.

Cryptocurrencies have evolved into a new class of financial assets. The emergence of the derivative markets has signaled the need for solid pricing strategies as well as reliable risk measures. There is a growing need for a reliable decentralized volatility index that provides a proper estimation of the cryptocurrency components risk measurement, and a delivery of market status information to potential investors.

Volatility Trading provides a good hedge against impairment loss. It’s also a good trade in periods like the current market state, when market direction is uncertain while market volatility is quite certain.

According to Stansberry Research’s “Crypto Capital” report of April 2021, the crypto volatility market is recommended for investment, with potential gains of more than 400% in the next 12–24 months.

It is enough to look at some of the more recent examples in which the main tokens peaked, after which more than a third of their value dropped, both things happening in a short time span.

Ecosystem

Liquidity Providers

LPs will provide liquidity and in return receive ongoing fees from the shared pools of the traders (Volatility Long Tokens) and its value is directly affected by the value of the CVI and the ratio between the Volatility Long / Liquidity pool

Traders

Volatility Tokens are tradable on DEXs and secondary markets. For example: having a secondary market such as in a Uniswap pair of ETHVOL / USDC. What this entails is that a user will be able to buy and sell the Volatility Tokens both on the platform (via Mint / Burn operations) and on the Uniswap pair, which would open new opportunities for potential gains. On one hand the price of the Volatility Token on the platform directly depends on the value of the CVI Index, but on the other hand the price on the secondary market depends also on market demand, creating arbitrage opportunities.

One of the advantages of trading the Volatility Tokens directly on the DEX is that there is no need for paying the Open / Close position fees on the primary platform, which are still incurred during the Mint / Burn operations that will be used by the arbitrageurs. The above mentioned fees will continue to generate cash flow for GOVI stakers as before.

Traders can choose which of these options best suit their needs, as the tokens offer an easy UX (simply buying them on a secondary market) and composability, while traders can continue opening/closing individual positions directly on the platform. In a similar fashion, selling the Volatility Token can be made either via the platform or on the secondary market (DEX) according to where higher returns are expected.

Examples:

• Initial conditions for all scenarios:

-CVI is at 100, user1 mints 100 Volatility Tokens

-User1 adds liquidity to ETH Volatility-USDC on DEX (Uniswap \ Quick Swap etc)

• Scenario 1 User 1 expects volatility to increase:

-User 1 adds liquidity to the Volatility-USDC pool on DEX (Uniswap \ Quickswap etc).

-In case CVI jumps by 3% to 103, the increase in value is reflected on the DEX

-Then User 1 can sell the pair Volatility-USDC on DEX for a profit.

• Scenario 2 User 1 expects volatility to increase:

-User 1 mints Volatility Token on the main platform.

-In case CVI jumps by 3% to 103, the increase in value is reflected on DEX

-User 1 can burn his Volatility Token on the main platform for a profit.

• Scenario 3 User 1 expects volatility to decrease:

-User 1 reduces liquidity to Volatility-USDC on DEX (Uniswap \ Quick Swap etc)

-In case CVI drops by 3% to 97, the increase in value will be reflected on DEX.

-User 1 can add liquidity to Volatility-USDC on DEX (Uniswap \ Quick Swap etc).

Arbitrageurs
The arbitrageurs role is to close the temporary differences between the Volatility tokens’ values in the primary / secondary markets in order to profit by attaining tokens on one market and realizing it on the other.

In addition to the direct operations on the DEX there are opportunities to arbitrage when there is a difference in prices between the two markets:

• If the price of Volatility Token on the secondary market is lower than on the platform, the user can buy it on the former and sell (burn) it on the latter.
• If the price of a Volatility Token on the secondary market is higher than on the platform, the user can buy (mint) it on the latter and sell it on the former.

These arbitrage opportunities will ensure the price of the Volatility Token on the secondary market is closely tied with the one on the primary platform, thus reflecting the relevant CVI Index. In addition, arbitrage related operations on the main platform (mint \ burn) will result in an increase of collected fees (open \ close position).

Examples:

• Initial conditions for all scenarios:

-CVI is at 100, user1 mints 100 Volatility Tokens

-User1 adds liquidity to CVI-USDC pool on DEX (Uniswap \ Quickswap etc)

• Scenario 1 CVI Oracle rises:

-CVI jumps 3% to 103

-User 2 (an arbitrageur) buys Volatility Token on DEX and burns it for profit. Repeat this action until prices of Volatility Token on primary (platform) and secondary (DEX) are closely aligned.

• Scenario 2 CVI Oracle drops:

-CVI drops 3% to 97

-User 2 (an arbitrageur) mints Volatility Token on primary market and sells on DEX for profit. Repeat this action until prices of Volatility Token on primary (platform) and secondary (DEX) are closely aligned.

• Scenario 3 Increased demand on DEX:

-User 3 buys a lot of Volatility Tokens on DEX, which increases price to 103.

-User 2 (an arbitrageur) mints Volatility Token on primary market and sells on DEX for profit. Repeat this action until prices of Volatility Token on primary (platform) and secondary (DEX) are closely aligned.

• Scenario 4 Increased supply on DEX:

-User 3 sells a lot of Volatility Tokens on DEX, which decreases price to 97.

-User 2 (an arbitrageur) buys Volatility Token on DEX and burns it for profit. Repeat this action until prices of Volatility Token on primary (platform) and secondary (DEX) are closely aligned.

Underlying Technology

GitHub: https://github.com/coti-io/cvi-contracts

The pre-existing operations will remain available as before:

• Liquidity providers related operations:

-Deposit liquidity

-Withdraw liquidity

• Traders related operations:

-Open position

-Close position

On the liquidity side users received an LP token based on the shared pool value. In addition, all LPs share both the risk and the profit. On the other side, the traders each have a unique position independent of any other position. The above position was limited to the specific traders who could only close at an opportune time according to their discretion. The token of the liquidity providers was basically a “Short” token on CVI, but there was not any matching tradable “Long” token.

New functionalities

We are now introducing an option to buy a tradable mintable “LONG” token. By minting, the trader joins a specific shared pool where all opened positions are of the same margin. The amount of new tokens that the trader will receive is based on the value of the “LONG” token in the platform at the time the trader’s request is performed.

When a user joins a shared pool by minting new tokens there (this applies also if the user has previously minted tokens in the shared pool), the balance of a singular token is performed. The calculation consists of two stages:

• The first — calculation of the overall balance of the shared pool which differs according to type:

-For the Volatility Long token pool it is based on the value of the open position on the main platform according to the current value of the CVI and any pending debts (ongoing fees from the last time a mint operation was performed).

-For the Volatility Short token it is based on the difference between the sum of the overall amount of tokens added by minters of the Volatility Short token along with the ongoing fees from the open positions (including the various minting shared pools of the Volatility Long tokens) and the combined value of these open positions.

• The second — calculating the amount of tokens in the shared pool.

According to the above steps the value of a single token is dictated (since all tokens in a given shared pool are fungible) and the amount of new token to be minted is calculated accordingly (in similar fashion, the amount of tokens to be burnt can also be matched to value in tokens).

For example, if a shared pool with 100 Volatility tokens is worth 500$ tokens (USDT e.g.) a user intending to mint by giving 400$ will get 80 Volatility tokens.

The shared pool for the Volatility Long tokens is unique per Leverage value. This is done due to the fact that all tokens in each shared pool need to be fungible. As such, there will be different pools matching each introduced leverage as well as a pair on a secondary market such as Uniswap.

Each of the newly introduced requests is performed with two stages:

• Submitting the request according to type and expected time to perform it, making an initial deposit
• Fulfilling the (previously submitted) request after the chosen deadline.

The time difference between the two stages is meant to substitute the lock-up periods and affects the expected fees that will be charged. The longer the accepted delay, the lower the fees that will be incurred. However, fulfilling the request past its expected deadline will result in late fees and even loss of initial deposit.

New operations (requests) for traders:

• Submit Mint Request

-Fulfill Mint Request — Equivalent to Open position operation

• Submit Burn Request

-Fulfill Burn Request — Equivalent to Close position operation

• Submit Collateralized Mint Request

-Fulfill Collateralized Mint Request — Equivalent to Deposit liquidity + Open position

Support for the new operations is achieved by Defining a new kind position, which is a shared pool for the Volatility Tokens.

Submitting a Mint request Defines the trader’s intent to mint tokens for a specific amount and at an expected time. According to the above inputs, an initial deposit fee is collected and the request details are kept. Once the chosen delay is passed, the users can Fulfill their request. Fulfilling a Mint request involves calculating the amount of Long tokens to be minted based on the current value at the platform and at the shared pool in order to ensure all of the Volatility Tokens are fungible. Behind the scenes, an Open position operation is conducted the same way it was before, but now for the address of the shared pool. Should the trader fail to fulfill the request in the agreed upon window of time, the initial deposit will be lost.

Submitting a Burn request Defines the arbitrageur’s intent to burn Volatility Tokens of a specific amount and at an expected time. According to the above inputs, an initial deposit fee is calculated and the request details are kept. Once the chosen delay is passed, the users can Fulfill their request. Behind the scenes of fulfilling a Burn request, a Close position operation is done for an amount of tokens based on the current value of the Volatility (long) token at the platform and at the shared pool in order to ensure all of the Volatility Tokens are fungible. Should the trader fail to fulfill the request in the agreed upon window of time, the initial calculated deposit amount will be lost.

Collateralized mint is a combination of both Mint (Open position) and Deposit liquidity operations in such a way that the newly minted tokens are fully covered by the deposit operations.

Available tokens to trade at launch and roadmap

The first volatility token to launch will be ETHVOL, which expresses the implied volatility expectations for ETH. This token will be launched on Ethereum Mainnet and will list on all DEXs.

The next token to be released will be a CVI (Volatility long) token, which is equivalent to a long position on the crypto volatility index (a combination of BTC and ETH expected volatility).

This token will be released on Ethereum L2 (Polygon) and will list on Quickswap DEX and other polygon supported DEXs

We will then add a leverage to these two tokens, allowing users to trade with X2 and X3 leverage.

We invite you to take part in what is bound to be the next big thing in Defi, by providing liquidity, trading volatility and taking arbitrage opportunities.

Here are some useful links to get you started:

ETHVOL-USDC on Uniswap: https://v2.info.uniswap.org/token/0x36bab6b3b722f90475b8e681b4b0a4dc68ee5399

CVI Platform: https://cvi.finance

GitHub: https://github.com/coti-io/cvi-contracts

For all of our updates and to join the conversation, be sure to check out CVI channels:

Website: https://cvi.finance

Whitepaper: https://cvi.finance/files/cvi-white-paper.pdf

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