Lien Version 2 Overview
We are excited to announce the launch of Lien Version 2. In the previous article, we talked about the release of the Lien Option Pool available on Lien V2. Today, we will discuss how you can actually get to use the feature following the launch of this new protocol.
It has been a long road until we reached this point — since last September , we have changed some features that were difficult to implement given the overall architecture of Lien V1, and made improvements on liquidity management which we determined were necessary after several months of managing liquidity on the platform. As a result of having spent enough time implementing those changes, we have been able to develop a much better platform that incorporates and leverages those updates.
There have been crucial important developments that occurred until the launch of Lien V2. We have developed a range of products including LBT Lite, Lien Put Option, and Lien Exotic Option, among others — all of them were created so that the Lien protocol could reemerge much stronger in the market. In fact, you will find various know-how and expertise we have learned and acquired up to this point fully incorporated in Lien V2. We have conducted deep research on what crypto users want and some of the best practices as they relate to the creation of option contracts, all of which are reflected in this new protocol.
In addition, the environment surrounding the ecosystem has changed in a material way since last year, with the price of ETH up significantly and the gas fees going through the roof, making small transactions on the Ethereum main chain almost impossible. To address this issue, we have made our option products available on the Binance Smart Chain (BSC) as well. Lien V2 will also be launched on the BSC to accommodate the needs for small transactions.
Incidentally, as we have announced several times before, we are now working on the implementation of the L2(Layer2) technology for our main protocol, although this is a separate project from the launch of Lien V2. The white paper is almost ready for release, and the test version should be live relatively soon. Adapting to the rapidly changing environment in the crypto space is a big challenge, but we will continue to leverage our resources to the best of our ability for the benefit of our users.
Let’s get back to the main topic of our discussion today.
The main features of Lien V2 are as follows:
- Receive liquidity from users. (available from Apr 19th)
- Automatically allocate liquidity to different tranches to create various option contracts. (from 23rd)
- Buy/Sell the options. (will be available from Apr 30th)
The actions a user needs to take to use the above features are quite straightforward:
- Provide liquidity in ETH.
- Trade options on Lien App.
We tried to make the UX as simple as possible. While option contracts may seem a bit daunting if you are new to finance, our products are designed in a way that is easy to understand for people with limited experience in the field so they can fully enjoy various benefits of financial engineering through option trading.
Receive liquidity from users
In Lien V2, we have pools of option contracts that mature in 3 weeks and are available in 3 different cycles, with one liquidity pool maturing every week according to the cycle it’s in. You can start providing liquidity to the first pool on April 19, and the corresponding option products will become available for trade on April 23 as shown below.
You will be able to select a liquidity pool from these 3 different pools and then provide liquidity. Here, you could choose to provide liquidity to Pool 2 or Pool 3 starting from April 19. However, given that option contracts in Pool 2 and Pool 3 will become only available for trade on April 30 and May 7, respectively, we would recommend that you provide liquidity to Pool 1 if you want to track how the ETH liquidity you have provided gets utilized on the protocol. That said, choosing Pool 2 or Pool 3 over Pool 1 will also make sense if you are a mid-to-long term investor. Our current focus is to provide Pool 1 first, but the alternatives for Pool 2 and 3 will be made available on Lien App from April 23 to April 30 until they become fully available for trade on the dates mentioned above.
Please note that the liquidity will be locked for 3 weeks once provided to the protocol, and you cannot withdraw the fund during that period. This is because the deposited fund will be used to create option contracts for sale, an important difference from the liquidity provision process for an Automated Market Maker (AMM) in a decentralized exchange (DEX) like Uniswap. With a new pool of option contracts scheduled to be sold every 3 weeks, you need to request withdrawal before each cycle begins.
To provide liquidity, you need to go to the “Add to Pool” screen and follow the below simple steps:
1) Launch Lien App
2) Select the “Add to Pool” tab on the liquidity provision section near the bottom of the screen.
3) Select a pool from Pool 1, Pool 2, and Pool 3. (From today April 19 to April 23, only Pool 1 will be available to ensure enough liquidity will be provided to Pool 1 first.)
4) Select the amount of ETH to be provided as liquidity and press the green “Add to Pool” button.
This completes the process of providing liquidity. Once the liquidity is provided, you will receive Lien Share Token as a proof that you have provided the liquidity to the Lien protocol just like in other protocols.
To withdraw the ETH which you provided as liquidity and has been managed by the protocol during the locking period, please submit a withdrawal request as follows:
- (Before maturity date) Select the “Remove from Pool” tab.
2. (After maturity date) Select the “Withdraw Token” tab.
That’s it. Once the withdrawal request is made, the ETH you provided will no longer be managed by the protocol after the maturity date, and the amount of ETH you get will be the same irrespective of the timing of withdrawal.
In addition, as a liquidity provider (LP) you can also get the Lien token as additional reward:
- Press the “Claim” button.
Simple, right? If you have been providing liquidity for a long period of time, all the cumulative LIEN rewards can be claimed in one fell swoop by pressing the “Claim Reward” button.
The reward will be allocated proportionally based on the amount of liquidity provided, with the total reward being the same for each cycle. This means that you could potentially see your reward increase by allocating liquidity to Pool 2 or Pool 3 described above when the liquidity for those pools is relatively low.
Allocate liquidity to different tranches to create various option contracts
The fund provided to a liquidity pool will be allocated to different tranches according to a set of rules defined on a contract level. The specific implementation leverages the method for creating LBT and SBT that we adopted for Lien V1, as well as some new methodologies we have developed since last September.
In Lien V2, the liquidity pool will be divided into 4 types of options: LBT (ATM call option), Butterfly Option, ETH 2x leverage token, and SBT (Deep In The Money Covered Call). Until now, the ETH 2x leverage token has not been supported for LBT Lite, but the feature will become available in Lien V2. While you are free to customize your option products with the BondMaker function, our research so far has shown that the option types mentioned above are the best ways to manage your asset, especially from the trading perspective.
Of course, we are not saying that the above 4 solutions will always remain the best ways moving forward, and some users might want to buy more customized, exotic option contracts. There could also be demand for entirely different types of options based on changing needs of our users. In that case, we might consider introducing new option products or different tranches to accommodate those needs, provided that there is enough, stable liquidity available on the platform. These can be achieved by replacing the “Bond Registrar” contract and “Strategy” contract on the protocol, which determine how the protocol slices liquidity into different tranches.
Also, options are reallocated to different tranches at least every 3 days — as the most optimal strike price will change based on the changes in the underlying ETH price, the protocol will take into account the price of ETH and its volatility in real time to create new tranches for any ETH that remains within a liquidity pool. The newly created options will then become available for trade on Lien App.
Specifically, the strike price of each option product will be adjusted to the following values, with maturity held constant:
LBT: The ATM price at the time of creating new tranches (the price rounded down to the nearest hundred when the ETH price is above $2000).
Butterfly Option: The lower break-even point (BEP) will be equal to half the ATM price. The higher end will be calculated by adding the difference between the ATM price and the lower end to the ATM price.
SBT: Same as the lower BEP of a Butterfly Option (i.e. half the ATM price).
ETH 2x leverage token: Cash flows that remain after the above 3 option contracts are created.
This way, even when the market condition changes and there have been no buyers for these options due to them becoming out of the money or in the money, they will have their strike prices properly adjusted and then put to efficient use again.
Buy/Sell the options
The option contracts are sold on Lien App. As with LBT Lite, the users will be able to buy LBT with ETH or BNB, and the inventory of each product is shown on the app as well.
Needless to say, ETH and BNB that they have deposited to buy options will not just sit idle within the protocol. The tokens will be used to create new option contracts, effectively creating new “credits” within the protocol and helping maximize the profits for LPs.
These newly created options will be added to the inventory to be available for future sale, which allows for all deposited ETH and BNB to be actively used within the protocol.
Profits for liquidity providers and option buyers
Profit allocation is also a very important factor to be considered. Upon maturity of a liquidity pool, the profit margins for LPs and option buyers will be adjusted based on the ETH price on the maturity date.
If the amount of ETH held by LPs ends up being less at the end of a given 3-week cycle than at the beginning of the cycle, the fee charged by LPs will be revised upward in the next cycle. Conversely, if LPs hold more ETH at the cycle’s end than the original amount, the fee will be decreased.
Specifically, the initial LP fee is set to 2.5%, and will be adjusted as follows, within the range of 2.5–10%:
- LPs making more money than option buyers: LP fee will be lowered by 0.5%.
- LPs making less money than option buyers: LP fee will be raised by 1%.
The fee adjustment will be conducted every 3 weeks for each pool.
While this may seem advantageous to LP, this is a necessary arrangement. In a traditional and centralized financial system, the financial institution that underwrites an option contract conducts thorough risk analysis and constantly adjusts its outlook when buying and selling options.
In the case of an option provided on a DEX, however, the LP will effectively function as an underwriter of the contract but cannot “cancel” the contract in most cases after the liquidity is provided. As a result, there is nothing he can do to limit his losses if the market goes sour once the option is created.
On the other hand, the option buyer has literally the option to buy or not buy an option, and can also choose the timing of buying it should she so choose, which allows her to avoid the purchase if she believes that the market may go down.
The asymmetric nature of the fee adjustment mechanism described above is based on these inherent advantages that the option buyer has over the LP.
Effective use of SBT
How about SBT created from the liquidity pool? Some of you might also be wondering about the iDOL token that existed in Lien V1. Let’s go over how SBT is going to be used in this new protocol and also discuss iDOL, a stable coin associated with SBT.
First, let us be clear that SBT will continue to be used to provide value to the protocol as a new form of iDOL.
If you have been using Lien since its early days, you may recall how SBT was being used in its original form — its value was stable but it was not suitable as a stable coin since it’s converted into ETH upon maturity. Instead, a basket of SBTs was used as collateral to back up the value of iDOL, which then circulated as a stable coin. Here, the initial protocol needed to continuously hold auctions to sell off SBTs that matured on a weekly basis, but the current high gas fees have made holding these weekly auctions practically impossible, at least with an L1 contract.
For this reason, in Lien V2 we have decided to implement SBT as a stable coin with an expiry date. While the token would be cumbersome to use outside of the Lien protocol as it “expires” within a certain time frame, it can be utilized as a stable coin within the protocol whose use doesn’t entail as much gas fees. You can get SBT when you sell tokens such as LBT before maturity within the protocol, and you can also use SBT to buy LBT before it matures. The current implementation of LBT Lite allows for selling option products to a Lien contract before they mature, and this feature will continue to be available in Lien V2. You can choose to receive SBT or ETH when selling an option. The value of all SBTs is roughly worth half the value of all the liquidity pools combined, so there should always be enough liquidity available when you want to sell them, except when the price of ETH is skyrocketing.
Some of you may now be wondering if we have abandoned the plan of creating a truly decentralized stable coin as initially envisioned in the form of iDOL.
The answer is no — the idea of creating a stable coin that is backed by derivative contracts and can be used anywhere in the world remains something that we want to make a reality. While our top priority in Lien V2 is to increase the user base of our option products, we are always looking for ways to implement a truly decentralized stable coin by using the liquidity provided to the protocol as collateral.
We first want to see increased liquidity within the protocol following the launch of Lien V2 before moving on to the next step in the protocol’s evolution. While the return of “iDOL 2.0” to Lien is always on our radar, we will focus on the next big milestone of our roadmap, which is to make the protocol L2 compatible. This will allow for small transactions to be sent through an Ethereum compatible network, further enhancing the protocol’s liquidity.
Our new journey has just begun, and we will continue to work hard to make positive contributions to the entire crypto and DeFi ecosystems — stay tuned for our latest updates!
