CVI v3 — The differences between swapping $CVOL on DEXs vs minting/burning $CVOL on the platform
In this article, we will be diving into the Theta Vault, a new liquidity vault launched by the CVI team as part of the CVI v3 release on November 16th. The Theta Vault is an innovative solution that provides a sustainable and scalable source of liquidity for CVI volatility tokens on any secondary market or decentralized exchange. We will be discussing how the Theta Vault utilizes the platform AMM (automated market maker), the two funnels to trade CVOL, and PVP arbitrage.
Theta vault mechanics:
The Theta Vault has a new mechanism that splits the vault’s liquidity between the platform AMM and specific DEX AMM (currently Sushiswap). To properly split the funds deposited into the Theta Vault between DEX liquidity and CVI AMM liquidity, the following requirements must be met:
- The CVI AMM liquidity must be P% higher than the liquidity needed as collateral backing them, in order to reserve liquidity for additional minting of CVOL tokens to be utilized by arbitrageurs (P to be a parameter, subject to change based on market needs).
- The vault may add liquidity to the DEX based on its spot price, only in situations where the intrinsic value of CVOL in the AMM is close enough to the CVOL price on the DEX, otherwise it opens up an arbitrage trade opportunity.
Trading $CVOL
There Are two funnels to trade $CVOL:
- Mint/Burn $CVOL from the platform AMM: Users can go directly to cvi.finance user interface where they can Mint/Burn $CVOL tokens, this action has no price impact, and is characterized by low slippage. When a user wants to Mint/Burn $CVOL tokens, the user will have to wait for the “Receive in” time to elapse.
- Buy/Sell $CVOL from a DEX: Users can also trade volatility through DEXs (currently available only on SushiSwap), trading $CVOL on a DEX AMM is characterized by regular slippage and price impact, while the fulfillment of the token is immediate.
The question is, Which funnel should be used and when?
- If a user is of the opinion that volatility will rise in the next few days and the index will spike at some point, the user can mint it on the platform and wait for the right moment to burn/swap. As well, if a user holds $CVOL tokens at a profit and believes that volatility won’t decrease significantly in the next hour, he can burn the $CVOL tokens at the platform’s AMM with no price impact.
- If a user predicts that there is going to be an immediate spike in volatility and doesn’t want to wait for the fulfillment time to elapse, the user can buy CVOL on the DEX and Burn/sell it at the right time.
- If a user plans to buy a large amount of CVOL but does not expect volatility to increase in the next hour, he can utilize the platform to Mint the tokens for low slippage and no price impact.
PvP Arbitrage:
If trades on the DEX cause a high price impact, An arbitrage opportunity is created. The Theta Vault and other arbitrageurs will compete to close the price difference. The arbitrage-related operations on the main platform (mint \ burn) will result in an increase of collected fees distributed to GOVI stakers in the platform.
If the price of the volatility token is higher on the CVI platform, an arbitrageur can purchase the volatility token with USDC at a lower price on Sushiswap, go to the CVI platform and burn the tokens to gain more USDC than the amount he had prior to the process.
If the price of the volatility token is lower on the CVI platform, an arbitrageur can mint the volatility tokens (by paying USDC), followed by selling the tokens on Sushiswap to gain more USDC than the amount he had prior to the process.
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.
For all of our updates and to join the conversation, be sure to check out CVI channels:
Website: https://cvi.finance
v3 Litepaper: https://cvi.finance/files/CVI.v3.Litepaper.pdf
GitBook: https://docs.cvi.finance/
Whitepaper: https://cvi.finance/cvi-white-paper.pdf
Twitter: https://twitter.com/official_CVI
Telegram (group): https://t.me/cviofficial
Telegram (channel): https://t.me/cvichannel
Discord: https://discord.gg/48K9EupjqY
