3/ Hedging can be hard! To hedge, there’s an opportunity cost for giving up a current/possible liquidity position. Sometimes there simply isn’t a compatible derivative anywhere for your positions either.
4/ This is where Divergence comes in. We aim to become your volatility yield harvesting & risk management Lego block. Pick an asset pair, a strike price, and an expiry, and in one step, you can create an AMM pool that trades binary options collateralized by any fungible ERC-20.
5/ Binary options are great as they expire into either 1 collateral or zero. Buyers have the right to buy 1 collateral at a fractional unit and LPs’ max obligation is 1 collateral per each sold option. On top of this, our options are written without over-collateralization!
6/ Here’s an example of how liquidity provision on Divergence works. Note: Binary option pools on Divergence are automatically rolled over upon each expiry once you create them.
7/ Fun fact: The collateral you use to create a pool with, and the options underlying, do not have to be the same! This allows you to access synthetic exposures using stable coins, wrapped assets, or even uncorrelated assets, making it highly composable with any DeFi protocol!
8/ What sets us apart is that we let the market decide! There is no centralized authority in our protocol that decides on options pricing. Buyers and sellers collectively arrive at a price via our bonding curve. Implied volatility is not directly input, but “implied”.