When launching a new and unique DeFi product, it’s useful to make a comparison to an existing one or even a similar TradFi product in some cases. No matter how good a financial tool is, nobody is going to make use of it if they can’t see why, when, and how to do so. However, it becomes equally important to differentiate between existing products and the new one being brought to the table.
For Passage, an apt comparison is the VIX volatility index and its crypto counterpart CVI (Crypto Volatility Index). Both Passage and VIX/CVI allow traders to take a position on volatility but are entirely different when it comes to the customization of those positions and their payouts, as well as the type of volatility in question. The point of this comparison is not to say one product is better than the other but rather to illustrate the distinct differences between the two and help DeFi users better understand volatility trading as a whole.
CVI and Implied vs. Realized Volatility
First up, how does CVI work? It operates on a scale from 0–200, that moves according to changes in 30 day implied volatility of BTC and ETH options markets. When the prices of options contracts being traded reflect higher volatility expectations, CVI goes up, and vice versa. Implied is the operative word here, which can and almost always does vary significantly from realized volatility. Taking a CVI position is making a bet on how the options market expects crypto prices to move in the near future, not exactly on how the prices themselves move. This makes CVI a second order derivative, as its price is underlied by another derivative, options. It’s certainly a useful tool for traders who are looking to speculate on or hedge against implied volatility, but it’s important to recognize the difference between that and realized volatility as there will be scenarios where the two behave differently.
Passage deals exclusively with realized volatility, so when BTC or ETH’s spot price exits the established range of a Passage contract, that constitutes a Breakout. If spot price remains within the bounds of the range, that constitutes a Stay In. Similar to CVI, the direction of the volatility doesn’t matter, but the measure of volatility is rooted in spot prices rather than options prices.
Payout Differences
Passages work on a time basis, with all contracts currently having a duration of 48 hours. For Breakout, the quicker that the underlying asset’s price exits the established range, the higher the payout multiplier will be. For example, if price breaks out 12 hours after a Breakout order is filled, then the payout will be 1.5x the initial investment. The multiplier decreases linearly over the 48 hour duration from 2x down to 0, making 24 hours the breakeven point. This process works in the opposite manner for Stay In contracts, with the multiplier starting at 0 and climbing to 2x over the 48 hour duration.
For CVI, payout is based on the change in (implied) volatility. For those familiar with perpetual futures, it functions quite similarly. Traders buy the CVI at its current level, and aim to sell at a higher level. For example, if you buy CVI when the index is at 50, and sell when it hits 100, your return will be 2x initial investment. If you sold at 25, then your loss would be 50%. Also similar to perps, CVI can be purchased with leverage, which introduces a liquidation level to the position. There are also small funding payments that are incurred over the lifetime of a position.
When To Use Each Product
The biggest advantage for CVI is the large amount of leverage that can be applied, up to 16x. Leverage is a double edged sword, but it’s certainly a nice option to have, especially if you’re highly confident in your volatility prediction. The only consideration to make with the product is that longing (implied) volatility is currently the only choice available to traders, so there are certain market scenarios where it’s going to be more difficult to use. Overall, the fact that it’s based on implied volatility lends itself to more experienced volatility traders who have knowledge of options market dynamics, but in general works well as a volatility hedge.
Passage’s strength is its simplicity and customizability, with the option to widen or tighten the range on contracts and payouts directly related to changes in asset spot prices.
It’s built for all market conditions, letting users go long volatility with Breakout contracts or short volatility with Stay Ins. Put simply, if you’re expecting price to move strongly in either direction, choose a Breakout Passage. If you’re expecting a price to stay in a certain range, choose a Stay in. Passage also allows traders to choose specific markets, either ETH or BTC (and more to come in the future), whereas CVI combines both markets into one index.
