Jul 15, 2022
Why AlgoRai?
At large, we would share the following couple of reasons:
- AlgoRai is one of the most potent DeFi trading platforms;
- It adapts the Decentralised Options Vaults (DOVs) protocol;
- AlgoRai is built on the Algorand Blockchain;
- It simplifies the crypto investment process with automated options strategies.
But what is DeFi? Why DOVs? Why AlgoRai?
Let’s go through the following sections to understand better when investing with AlgoRai.
What is DeFi?
DeFi refers to decentralised applications (Dapps) that provide financial services on a blockchain settlement layer, including payments, lending, trading, investing, insurance, and asset management. Open protocols enable DeFi services to be combined programmatically. DeFi uses blockchain to create alternative service providers and market structures. It offers the potential for innovation and new services to improve financial market efficiency, building on FinTech and blockchain developments.
The Wharton Blockchain and Digital Asset Project has summarised 6 DeFi categories, including oracles* and wallets* (Table 1). “The lines between them are not always clear”, but the typology reflects DeFi market participant perspectives.
*Oracles — Data feeds allow information from sources off the blockchain, such as stock prices, to be integrated into DeFi services.
*Wallets — Blockchain-based asset management software. With a non-custodial wallet, the user has exclusive control of funds through their private keys. Service providers manage custodial wallets’ private keys.
In addition, the Wharton Blockchain and Digital Asset Project also listed the comparison of traditional finance to DeFi (Table 2), which gives more comprehensive ideas of the main characteristics of DeFi.
What are DOVs?
DOV refers to Decentralised Option Vaults. DOVs have become the dominating portion of the $700 million DeFi option TVL (Total Value of Cryptocurrency Locked in a Smart Contract), trading billions monthly. DOVs are designed to simplify investment accessibility. Investors “stake” their assets in vaults that employ options strategies. Before DOVs, option strategies were only available to accredited investors through over-the-counter trading or self-execution on options exchanges.
Vanilla (plain) covered calls and cash-covered puts give the best base yield in DeFi (average APY 15–50%). Token rewards are also distributed, increasing user yield. Sometimes, the vault collateral generates staking/governance yields, creating three yield streams. This triple layer of option premium, token rewards, and staking yield produce a highly sustainable yield in DeFi. On the other hand, market makers compete to purchase options from vaults. They pay the premium upfront, providing a high base return where impermanent loss does not exist (Kim et al., 2022).
Why DOVs?
1. High Yield Potential
DeFi’s principal source of revenue has been token awards. Money market protocols, Automated Market Makers (AMMs), and Protocol-Owned Liquidity (POL) protocols give some base yield, but high APYs rely on the token distribution. The problem with token awards is that the yields strongly rely on token price inflation and are primarily synthetic and circular. Foundational value economics and use cases continue to evolve as primary needs.
DOVs’ yield does NOT depend on token rewards at all. Instead, DOVs monetise the asset’s high volatility and inject the yield into DeFi via option premiums. The base yield is sourced from a large external options market, which addresses the problem of diminishing returns from larger LP pools. And this actual base yield is essential for DeFi’s long-term sustainability and scalability. Instead of the “Ponzinomic” token creation and distribution (layer, rinse, repeat), DOVs focus on underlying market structures and trading volatility.
DOVs democratise the aspect of the crypto world that financial institutions have favoured: implied volatility (IV), that is often significantly higher than TradFi instruments. Institutional players scramble to offer this to TradFi investors, constructing crypto asset solutions with substantially superior risk-adjusted returns.
More importantly, DOVs are making this alpha accessible to every individual.
2. Non-linear Instruments Trading
DeFi markets can effectively operate delta-1 or linear instruments. Spot trading, over-collateralised borrow/lend, and margined perpetual swap trading have effective liquidation mechanisms via smart contracts. However, non-linear instruments like options are a challenge for DeFi. Options trading on DeFi order books is not scalable. Non-linear liquidation is tricky. For large option portfolios, the delta (or spot risk) is managed by executing a perp/futures position. The intermediary systematically liquidates or manages the other greeks (non-linear risks associated with rates of change of price, time, or volatility).
While DOVs can simplify non-linear liquidation, they employ a hybrid DeFi model for investment, collateral management, price discovery, and settlement. This includes on-chain execution of all trustless aspects, upfront yield and notably, a transparent process. DOVs match DeFi investors with market makers who provide high base yields. All DOV option contracts are collateralised to avoid liquidation. Without a liquidation mechanism, options contracts may be tokenised and actively traded on DeFi via RFQ or order book.
DOVs are an innovation on DeFi with massive deployment potential. Whether individually or institutionally, using smart contracts to trade options on a large scale may transform the way financial products are structured and traded in global capital markets!
3. DeFi Option Markets
To attract traders, investors, and market makers, volatility markets require scalable venues and liquidity. A particular means of yield generation which harnesses the inherent volatility in cryptocurrency assets are through structured products. These can be facilitated by DOVs, which have vaults in Layer 1 protocols including ALGO, BTC, and ETH, and Layer 2 tokens like AAVE.
DOVs have a two-fold value proposition — they enhance and develop liquidity and function around Layer 1 protocols, like ALGO, BTC, and ETH, but also importantly create a tradable venue for risk management for Altcoins and Layer 2 tokens which do not have the same economics. For Layer 2s and Altcoins, DOV’s function as a primary exchange of risk for asset holders, enabling a virtuous cycle of two sided liquidity and functionality (it provides a way for long holders to hedge, and manage risk).
Exchanges are expected to list more Altcoin and DeFi Layer 1 vol books with growing demand, while OTC players tighten spreads and sell options products with DOV inventory. DeFi has become CeFi’s liquidity originator, not just a token-based layer.
DeFi protocols like DOVs provide a high-yield alternative to storing and stacking cryptocurrencies. Tokens are traded by various parties, including institutional investors, hedge funds, foundations, and projects. Vaults for cryptocurrencies will become more popular, growing in use and adoption with DeFi. In addition, as with other financial products, a healthy derivatives market will help to increase liquidity in the spot market. As a result, spot market liquidity will grow.
Why AlgoRai?
AlgoRai solves the following problems:
- It is a DeFi protocol that rewards you with the same token you deposit. No more impermanent loss. No more Ponzi tokenomics.
- It is a clear and understandable source of yield. Remember — if you don’t know where the yield comes from, you are the yield.
- It is run by an experienced team in the options industry and built by an experienced team in the Algorand ecosystem.
- Secure, robust, and fair process.
- Every part of the operating procedure is transparent and on the blockchain. Reliable, predictable, and consistent.
AlgoRai is secured by Kudelski Security Impulse. Security experts are involved in every development lifecycle and real-time protocol monitoring aspects.
The structured products on AlgoRai are for all risk and reward profiles. So, if you want to earn crypto, you can; if you want to earn stable coins, you can. The products cover a range for high, medium, and low risk takers.
AlgoRai — The future of finance (FutureFi) on the world’s leading financial network (Algorand). The DeFi you deserve!
References
https://www.investopedia.com/decentralized-finance-defi-5113835
https://wifpr.wharton.upenn.edu/wp-content/uploads/2021/05/DeFi-Beyond-the-Hype.pdf
Kim, Hyoung Joong; Choi, Soohyuk; Yoon, Yong Tae; Yoo, Shiyong (2022): Impermanent Loss and Gain of Automated Market Maker Smart Contracts. TechRxiv. Preprint. https://doi.org/10.36227/techrxiv.19196960.v1
https://qcpcapital.medium.com/an-explanation-of-defi-options-vaults-dovs-22d7f0d0c09f
About AlgoRai Finance
Your Leader in Algorand DeFi Structured Products! We are a group of highly experienced, talented and dedicated professionals with one mission — to create value for you, with secure DOVs helping your assets grow over time. AlgoRai creates robust and transparent DeFi structured products on Algorand’s ecosystem. We provide users with a means to separate and harvest inherent volatility on their underlying assets through our products. We currently offer option vault strategies for BTC, ETH, and ALGO. We are looking to implement new developments in the future. Follow us on our socials to stay updated!
