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Price Protection

Protection Token

A protection token is named as "<Strike Asset>_<Strike Price>_<Put>_<Round>".
For example, "AVAX_100.24_L_2203" means:
  • Strike Asset: AVAX
  • Stike Price: $100.24
  • Put (Triggers when price is lower than strike price)
  • Round: 2203 (Expired at March 22)
It is an ERC-20 token and can be transferred like other tokens.

Creator

The creator should stake 1 Shield(or USDC.e) in the policy pool to mint one protection token(1:1).These assets would be the backed assets for a future payoff. After doing this, each creator would have a "quota" in this round.
After creating, creators can hold, sell, and provide liquidity. During the trading period, creators can also redeem the staked Shield(USDC.e) by burning the minted protection tokens. The maximum redeem quota is the number of total protection tokens that were ever minted by the creator. (The time period can be referred here.)
There are two situations at the expiry date:
  1. 1.
    The event corresponding to the protection token does not happen
    Creators can claim back their deposits. The available amount is their "quota" in this round.
  2. 2.
    The event corresponding to the protection token happens
    Everyone that holds protection tokens can claim back payoff with a 1:1 ratio for their protection token balance.
    In this situation, it does not matter whether you have any "quota" in this round. The only claim proof is the protection token.

Trader (Buyer & Seller)

For those who do not want to provide backed assets to become a creator, they can just buy or sell protection tokens in the swap pool. It works like the normal AMM: "xy=k".

Buyer

For buyers, they can just use stablecoins to buy some protection tokens to hedge their position risks.
A protection token would entitle the holder to share in a portion of the discretionary mutual cover funds if the covered event occurs. For example, if the current price of AVAX is $60, a covered event for a protection token is that AVAX price drops below $60 at the expiry date. If the price of AVAX is below $60 at the expiry date, then the protection token holder can claim from the asset-backed policy pool, subject to the parameters and conditions set by mutual members.
Buyers can get buyer tokens depending on their stablecoin costs. Buyer tokens can be used for joining the buyer incentive reward.

Seller

The seller can sell protection tokens into the swap pool and get profit. If you are a creator or you bought some protection tokens from the pool before, you can be a seller to make the pool's price more reasonable.

Liquidity provider

Liquidity providers provide liquidity to the AMM pool, which means staking both Shield and protection tokens in the AMM pool. The transaction fee of the AMM pool is 5%. 3% is given to the liquidity providers, and 2% is given to the income sharing pool.
How to become a liquidity provider:
  • Create some protection tokens and provide these tokens with extra stable coins into the swap pool
  • Buy some protection tokens from the swap pool with your preferred price and provide liquidity into the swap pool
Liquidity providers will be able to have the $DEG farming reward.
Like all AMM pools, when the ratio of two tokens in the pool changes, liquidity providers will have impermanent loss. For example, if only A provides 100 Shield and 200 protection tokens into the pool. B uses 10 Shield to swap 18.18 protection tokens. Then A can withdraw 110 Shield and 181.82 protection tokens. The change of token amounts leads to impermanent loss. Liquidity providers can cover the loss by getting transaction fees. The more active the pool, the more liquidity providers earn.

Initial matching

Before the trading period, there will be a deposit period. Liquidity providers can freely deposit or withdraw stable coins into the pool and set the expected price for the protection token. The final price will be the weighted price of each LP according to the deposited amount. In this way, all LPs' decisions can push the price towards the fair price without a real transaction. After the deposit period, the pool will be settled at the final ratio. 1/(1+P) of the deposit stable coins will be used to create protection tokens, where P is the final price. The created protection tokens and left stable coins will be used to initially set the AMM pool.
After the deposit period, liquidity providers will get initial LP tokens according to their deposit amounts. The initial LP tokens are different from normal ones. There will be a mining pool dedicated to initial LP token holders, while the holders can also choose to mine in the normal mining pool.
Liquidity providers can get DEG tokens from the later LPs, and should also pay DEG to the earlier LPs. The DEG amount to be paid is 1% of the total amount of protection tokens and stable coins to deposit. The paid DEG will be shared by the earlier LPs and the liquidity provider according to their proportions in the pool.

Time cycle

The whole time cycle for one term protection is 16 days. The first day is the deposit period for initial matching. The following 14 days are the normal trading period. After the stop of the trading period, protection tokens can not be created, redeemed, bought, or sold. All protection tokens are locked to wait for the settlement at the expiry date. The LP token mining is still undergoing during the locking period.
TIme period for each round
Tips: Redeem Fee
  • During the trading period, creators can redeem their stablecoins back without any fees.
  • During the locking period, creators can not redeem assets back.
  • After settlement, whether you are redeeming as a creator or claiming as a normal protection token holder, there will be a 1% redeem fee. The income will be shared with DEG holders.

Uses Case

Check here for how Price Protection protect your crypto asset.