DeFi Volatility Index | DVIX
Last updated
Last updated
Crypto markets as a whole are an extremely volatile asset class. Until now, there have been few ways to broadly hedge specific asset classes within the broader tier of crypto. As such, Ethereal has assembled specific VIX equivalent trading tools to unconstrainedly hedge particular classes of assets. The first of which is our DeFi-specific VIX.
We've assembled our conglomerate of the top 100 DeFi projects based on market cap into a virtual holding index. Within that conglomerate, we have added a weekly rebalance to ensure accurate weightings - this virtual holding is equivalent to the S&P 500. However, given DeFi markets' dependency on mega-caps such as BTC ad ETH, we have added a small inverse correlation weighting to the index that cross-balances with the change in volatility in both BTC and ETH. This results in a purer DeFi index as some of the noise caused by mega-cap swings is removed. The resulting index consists of dynamically rebalanced DeFi projects with less dependency on broad market moves.
We then take this purer DeFi index and run it through our native option pricing model to co-align with traditional market VIX pricing. Strikes are populated in 1.0-2.50 increments and structured within three standard deviation moves of the underlying. The same leg expiry parameters (23-37 day expiry periods) used in the original white paper are used to price our DeFi VIX. We have also scrubbed the previously applied theta number on shorter-term options to have a non-conformed option pricing base to establish accurate, unbiased volatility pricing.
The resulting pricing model is then fed into an oracle to allow for minting, just like any other asset on our platform.
Like traditional markets, our DeFi VIX is inherently a decaying asset and should be used as a hedging tool rather than a continual long position. No smoothing is applied to the underlying index or the tradable asset - therefore, intraday moves can be larger than anticipated. The corresponding option chain for DVIX will have higher collateral requirements for naked shorts on the call side due to the higher implied volatility ranking. Using the same principles outlined above, we will also introduce different subsection VIX style assets to more broadly cover class volatility within crypto.
In direct asset shorting, like all collateralized products on our platform, sRho is used to secure the short position. DVIX utilizes a 2.5:1 collateral ratio to secure the position. A 3% mint fee is required to mint DVIX - with the minter receiving sDVIX in return as a receipt.
A 3% fee applies to swapping sDVIX. sDVIX can be bonded and sold to the Treasury. Short-sellers will also pay interest to the pooled long DVIX at a daily interest rate of 0.25% per day - which will be paid for in sRHO. This daily interest will be calculated at the time of establishing the short by entering the maximum number of days you will be short for. Once the time limit is up - the short contract will expire and the short closed. If DVIX is below the price when the short was initiated, the aggregated long pool of DVIX will pay the unit count worth of profit to the now closed short holder. The time interest the short paid to the collected pool of longs will then be distributed to the longs proportional to their positional unit count.
However, the interest will only be paid to the long holders that were in the pool at the time the short was established. If a short-seller chooses to close out their position at a loss, the collateral lost will be divided among all long sDVIX unit holders that were in the pool at the time the short was established. If the short-seller closes out their position at a profit, the percentage of the profit will be divided amongst all long-holders and the appropriate sDVIX units will be transferred to the short-seller as profit.
Shorting above the total float of DVIX in the lending pool is prohibited.
GET https://polarorchid.ai/dvix
Please note, requests are limited to ensure only tests are carried out. No data needs to be posted to receive the latest DVIX compute as the DeFi virtual index lives on the server itself. A successful request will return:
POST https://polarorchid.ai/vix
Please note, requests are limited to ensure only tests are carried out. We have also developed a method to derive custom VIX equivalent assests for specific tokens beyond broader asset classes. The creation of these custom derivatives can be tested utilizing the the following format:
| Name | Type | Description |
|---|---|---|
VIXtoken* | String | Example: “BTC-USD” “ETH-USD” OR “TOKEN-USD” |
