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Test Spin’s DeFi Option Vaults

So we have great news! Today we released DeFi Option Vaults on the NEAR Protocol testnet and we are again the FIRST to develop a product of this type in the NEAR ecosystem. How does it feel to be a part of a trend-setting fam, bruh? In this article, we will explain the idea behind DeFi Option Vaults (or DOVs) in dummy language and spice it up with some step-by-step guides. Let’s go!

What are DeFi Option Vaults?

DeFi Option Vaults or DOVs are the first product in the series of Automated Investment Products to be built on Spin. In short, they represent automated options trading strategies that are widely used in traditional markets but are usually too sophisticated for general people. In DeFi, we can make them accessible to any person who has ever invested in staking or farming pools because the logic is the same, but the yield is derived from real trading and not inflation.

Now let’s closer inspect the first DeFi Option Vault on Spin. It represents a NEAR Covered Call strategy. To understand the logic behind it, let’s first refresh our knowledge about options. They are different from futures in a way that they represent a right, not an obligation to buy or sell some asset in the future.

Say, you buy a NEAR Call Option that allows you to buy NEAR at $3 (option’s strike price) in a week. The week ends, and the NEAR Price is let’s say $2.5, so you obviously don’t want to settle your NEAR Option at $3. But if the NEAR price is $3.5, the deal becomes profitable because you get WNEAR at $3 and can sell it for $3.5.

More than that, considering Spin uses a Cash-Settlement method, Option sellers don’t have to deliver buyers the actual underlying asset and just transfer the difference between the strike price and the expiration price. That means, in the example above the option buyer doesn’t have to buy NEAR at $3 and sell it for $3.5, he will simply get $0.5 in NEAR for each Option purchased — as simple as that.

Obviously, it’s very nice to have a choice when you enter a trade and to have this privilege, Option buyers pay a Premium to Option sellers who actually write Option contracts with some exact strike prices. So now we know that there’re two parties in the Options game:

  • Option sellers create Options and earn Premiums from selling them;
  • Option buyers buy Options to limit their price risks and trade more efficiently.

How do DOVs automate this process? Instead of creating Options themselves, Option sellers (investors) deposit their money into a Vault that issues Options with strike prices that have a low risk of being reached during the Epoch (7 days). The more money is invested in the Vault, the more Options with an exact strike price are available during the auction.

For Call Option buyers, the reason to participate in an action is that they pay a small fee called a Premium to get exposure to potentially high returns in case the underlying asset price exceeds the strike price. For example, if you as an Options buyer are super bullish about the WNEAR and think that it will definitely increase by a certain percentage in the upcoming weeks, you can just buy Options weekly because the potential gains you get when the price increases will cover all the Premium expenses.

Hope this basic description helped to understand the logic behind DOVs and if something remains unclear or you want to learn more details, please check our detailed explanation on docs.spin.fi.

How to use DOVs?

Using DOVs is actually very native and straightforward. When you visit https://testnet.vault.spin.fi/, you just need to choose the Vault you want to invest in by analyzing the Vault details.

For testing, we’ve launched three vaults that have different epoch lengths: one hour, one day, and one week. That means you can test DOVs in real conditions (with a one-week Epoch) or choose a shorter Epoch length to better understand the entire process! The APY for all Vaults will appear gradually, so you can choose a Vault that has some projected APY at the moment or try a mystery box ;)

So you’ve chosen your perfect Vault and are ready to get started. What else do you need to know?

Users can apply to deposit or withdraw assets to/from the Vault at any time, but the assets will only be placed/withdrawn from the Vault at the beginning of the next epoch. When the user deposits some funds to the Vault, they receive the same amount of vtTokens as proof of their share in the Vault.

Shortly after the start of a new Epoch, auctions begin. Each auction is a way of selling options to buyers who bid on the options, and the winners buy the Options according to their bids. The number of options is equal to the amount of the underlying asset in the Vault. For example, if the NEAR Vault has 1,000 NEAR, then 1,000 NEAR Options will be available in the auction.

At the end of the auction, the highest bidders receive options and pay a Premium for them. This premium represents the return to the Vault investors.

At the end of an epoch, Options expire. The expiration price is defined as 30 min time-weighted average price of the underlying asset provided by the oracle. Depending on the expiration price, Option buyers either get nothing or receive a payout equal to the difference between the strike price and the expiration price multiplied by the number of options.

Note: In the testnet release of DOVs, the team’s goal is to test out various performance scenarios and examine various edge cases before the mainnet release. Thus, APY as well as Options setups are just indicative and are set to ensure that the team can cover maximum scenarios during the testnet phase.

Let’s sum it up

The flow may sound sophisticated, but in practice, it’s much simpler.

  • If you want to earn passive yield from Options, just deposit funds to the Vault you like and wait. You will get payouts from Premiums once a week and if the asset price doesn’t reach the strike price, you lose nothing. If it does, you will only lose funds in asset terms, and in dollar terms, your potential loss is zero (considering the asset became more expensive).
  • If you’re quite bullish and believe that NEAR’s price will definitely increase at some point in the near future, consider buying Options on an auction. In the case your forecast was wrong this week, your max loss will equal the Premium you pay to the options seller. But if it’s correct, you will just settle your Options and get a lot of profit.

Considering that now Options are available on the testnet, we invite you to give them a try and let us know your feedback! Feel free to ask us questions on Discord and share your first impressions in the #feedback channel. LFG!

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Spin is a 360° decentralized trading platform on NEAR Protocol that enables Spot, Perpetual contracts, and Options trading.