In October 2020, we announced the live launch of CVI, the world’s first crypto volatility index for the Decentralized Finance (DeFi) or also known as the “market fear” index. We’re excited to announce that we will integrate Chainlink to both decentralize how CVI is calculated and make CVI data available across other platforms. This integration helps CVI realize its ultimate vision of being a decentralized, stable, transparent, informative, and replicable benchmark for cryptocurrency volatility information.
We selected Chainlink as our go-to oracle solution because it’s the most secure, reliable, and flexible oracle network in the market. Not only has its decentralized oracle infrastructure proven its ability to secure billions of dollars in value live in production for leading DeFi applications, but its technology offers that extreme flexibility we require to access data from any premium data provider, perform custom calculations on aggregated dataset, and bridge that data to both the Crypto Volatility Index and its trading platform.
The Value of Using Chainlink to Power CVI
CVI is a full-scale decentralized ecosystem built by COTI that brings the sophisticated and very popular “Market Fear Index” to the crypto market. CVI is designed to determine the market’s expectation of future volatility over the next 30 days. It is created by computing a decentralized volatility index using cryptocurrency option prices, employing the popular Black-Scholes option pricing model while adapting it to the current crypto-market conditions.
Given the importance of decentralization in blockchain applications and crypto-assets as a means of creating highly levels of security and reliability, we set out from day 1 to decentralize how CVI is calculated. Doing so requires decentralizing the data sources supplying crypto market data and the calculation of the crypto volatility index from that data.
After reviewing various solutions on the market, we identified Chainlink as the most optimal way to decentralize CVI. CVI will use a Chainlink-powered decentralized oracle network to aggregate options market data from multiple off-chain sources and deliver it on-chain. Since Chainlink uses a decentralized network of independent, secure node operators, of which are run by leading blockchain DevOps teams, as well as numerous data sources, users can be assured that CVI is accurate, highly available, and resistant to various forms of data manipulation. This is essential to the CVI operating securely and efficiently, further advancing our vision of a global and completely decentralized index and trading platform.
Additionally, since the Chainlink Network is blockchain and off-chain API agnostic, meaning it can operate on any blockchain and connect to any external API. Thus, Chainlink oracles can be used as an abstraction layer used to post CVI data across a variety of blockchains, and to obtain a wide variety of data sources to build customized CVI derivatives products across. This allows CVI data to reach a wider audience and be incorporated in a number of unique use cases and applications.
Technical Integration Details
In order to ensure decentralization and transparency, Chainlink architecture uses multiple independent oracles, which use external adapters to retrieve trading options data from across the market in order to calculate the CVI. The calculated response from each individual oracle node is aggregated together to form a single price index that is broadcast on to the blockchain. Once on-chain, the data can be called by the requesting smart contract to trigger critical on-chain functions like settling a derivatives contract.
The combined CVI index is a weighted sum of CVI indices calculated for several cryptocurrencies (for example BTC and ETH), where weights are based on the cryptocurrencies’ market cap in relation to the total market cap.
CVI Chainlink External Adapter
In order for CVI to source data from premium off-chain APIs and perform custom calculations on that data, we need to make use of Chainlink External Adapters. The External Adapter allows smart contracts to connect to Chainlink nodes, send them a specific list of tasks to execute (called a Chainlink Job Spec), and identify a list of possible ways to schedule them (called an ‘initiator list’). The initiator allows us to trigger the job spec, and we will be using the Chainlink Cron initiator to schedule our external adapter to run specific time intervals.
Chainlink allows complete freedom with external adapters, as they can be written in any language and operate as serverless functions on AWS / GCP. We will be using a dockerized Node.js server to issue API calls to crypto derivative options exchanges such as Derbit, LedgerX, OkEX, and CBOE.
CVI Calculation + Data Aggregation
Due to the high cost of repeatedly dispatching and updating values on the Ethereum blockchain, the CVI calculation and data aggregation will be done off-chain inside the CVI External Adapter. The final result is then sent on-chain to the CVI Oracle Contract as a single value — the CVI index.
- At regular intervals, Chainlink oracle nodes fetch market data on cryptocurrency options contracts from multiple data provider APIs and aggregate the data off-chain (in the CVI external adapter) using the Black-Scholes option pricing model, weighting assets by market cap to create a single reference price point for the CVI.
- This reference price point is compared to the previous on-chain update and if it is beyond a specified deviation, the Chainlink oracle node performing the check initiates a round update for the Reference Price Feed by creating an on-chain transaction with their data.
- Once other oracle nodes in the oracle network see the initiation of a new round, they each perform the same data sourcing and aggregation process, responding with their CVI data on-chain.
- After a sufficient threshold of oracle nodes have responded on-chain, each node’s response is aggregated together to generate a single tamper-resistant reference data point. This refined CVI data point is then made available to external contracts which can be used for the settlement of derivatives contracts and other DeFi smart contracts.
- The process then repeats, with nodes checking if updates should occur on regular intervals and monitoring for round updates from other nodes. This ensures the on-chain CVI Reference Price Feed is always kept fresh with tamper-resistant and high quality market data reflective of real-time market conditions.
Integrating Chainlink with CVI allows us to offer a variety of new DeFi applications based around crypto market expected volatility, all in a completely decentralized manner. We are also introducing a fully decentralized and self-adjusting trading system that enables a permissionless way to enter long/short positions on CVI. We look forward to expanding upon those services in the future, as well as bridging this data into other trading environments to support a more robust DeFi market.
“We’re excited to empower Coti’s development of CVI through the provisioning of secure and reliable Chainlink oracle networks, allowing them to provide the crypto market with its own market fear index in a fully decentralized manner,” stated Johann Eid, Chainlink Product Manager. “Bringing an important and unique data set like CVI to the DeFi ecosystem helps facilitate novel DeFi products, further maturing the market and enhancing its ability to compete with traditional finance.”
“Chainlink plays a foundational role in decentralizing the CVI index calculation, providing the CVI trading platform and other services with a secure and reliable way to automate the offering and settlement of CVI derivatives contracts,” stated Shahaf Bar-Geffen. “Thanks to Chainlink provably secure oracle infrastructure and flexible approach to off-chain connectivity, traders can take long/short positions with full confidence that they are getting fair market prices in a manner resistant to any forms of external manipulation.”
About COTI / CVI
COTI is a fully encompassing “finance on the blockchain” ecosystem that is designed specifically to meet the challenges of both centralized finance (fees, latency, global inclusion and risk) and Decentralized Finance DeFi (fees, clogging and complexity) by introducing a new type of DAG based base protocol and infrastructure that is scalable, fast, private, inclusive, low cost and is optimized for finance.
CVI is created by computing a decentralized volatility index from cryptocurrency option prices together with analyzing the market’s expectation of future volatility.
We have created CVI so that traders can hedge themselves against volatility or lack thereof.
CVI is a full-scale decentralized ecosystem that brings the sophisticated and very popular “market fear index” to the crypto market and is created by computing a decentralized volatility index from cryptocurrency option prices together with analyzing the market’s expectation of future volatility.
Chainlink is the most widely used and secure way to power universal smart contracts. With Chainlink, developers can connect any blockchain with high-quality data sources from other blockchains as well as real-world data. Managed by a global, decentralized community of hundreds of thousands of people, Chainlink is introducing a fairer model for contracts. Its network currently secures billions of dollars in value for smart contracts across the decentralized finance (DeFi), insurance and gaming ecosystems, among others.
Chainlink is trusted by hundreds of organizations to deliver definitive truth via secure, reliable data feeds. To learn more, visit chain.link, subscribe to the Chainlink newsletter, and follow @chainlink on Twitter.