Divergence is a unique project that has taken the DeFi communities by storm in the past couple of months. This cryptocurrency options protocol allows DeFi users to trade binary options.
On its roadmap, it also expects to offer volatility derivatives and yield vaults deploying capital in volatility trading strategies.
The protocol is backed by some of the leading VCs in the blockchain industry such as KR1, Mechanism Capital, Arrington Capital, and P2P Capital. Its list of angel investors includes Do Kwon from Terra Labs, Diane Dai from DoDo, Sandeep Nailwal from Polygon, and Igor Barinov from xDai. It recently revealed strategic investments from Huobi Ventures and AscendEx.
‘’To us, we solidly believe Divergence Protocol would be one of the most important pieces in the Defi puzzle,’’ stated Alex Dong, Research Analyst of Huobi Ventures.
Why cryptocurrency options?
Options are popular financial derivatives in traditional stock and forex markets. Option holders have the right to buy or sell a specific asset at a predetermined price in the future. They are an excellent way to hedge financial risk against the volatility of cryptocurrencies. Divergence simplifies the process for anyone to create custom options markets in DeFi. The trading experience is as smooth as swapping tokens at a spot DEX.
Traders can buy and sell binary options or sometimes called digital options, using underlying cryptocurrency assets on Divergence. The platform creates abstractions of options positions in the form of Spear and Shield virtual tokens. Spear tokens are profitable when the price of a cryptocurrency asset settles at or above the strike price. Shield tokens are the opposite. Spear and Shield tokens are hardcoded to match a collateral asset.
Let’s say that you buy a Bitcoin Spear with a strike price of $50000 and a maturity of one month. The options premium you pay for a Spear is 0.5 USDC. Should the price of Bitcoin exceed the $50000 strike price, you receive a fixed reward of 1 USDC for your Spear. If the opposite occurs, your Spear token will expire and become worthless. At that point, you only lose the initial investment used to buy the option.
By definition, a binary options position is a limited-risk trade for both buyers and sellers. And yet it offers non-linear rewards for market participants.
What makes Divergence stand out?
Divergence cryptocurrency trading platform is designed to provide a unique experience for users. The trading platform has a simple user interface. It is built on the Ethereum mainnet, and will be compatible with L2 solutions. Users can use any ERC-20 token as collateral, including LP tokens from other DEX pools and lending protocols.
Divergence tokenizes options positions as virtual tokens. Its Spear and Shield tokens are abstractions within smart contracts rather than ERC-20 tokens. As a result, users don’t have to worry about incurring extra gas costs from transferring these tokens. In contrast, existing solutions typically require users to mint options as ERC-20 tokens, transfer these tokens to a DEX, and supply additional liquidity to make a market.
On Divergence, the collateral token does not have to match the underlying asset that options are written on. So, for example, you can trade AAVE/USD options by creating a pool using USDT or WETH.
There is also no over-collateralization required for writing options. A LP needs to deposit just one collateral to write a binary call and a binary put. This is because the maximum loss of a binary option can be pre-determined and reserved. A pool that has sold 2 Spear tokens and 3 Shield tokens will only need to reserve 3 collateral tokens for settlement.
Traders can also effortlessly manage their options expiries by utilizing Divergence’s automated rollover feature. At settlement, if LPs do not claim liquidity, Divergence automatically rolls over their capital on similar terms. This allows LPs to save gas on managing options expiries and ensures continuity of markets.
Liquidity provided on Divergence pools can be removed before the options expiry. The “early exits” will incur a small penalty of up to 1%, which will be rewarded and withdrawable by the LPs who remain at settlement. Such penalty can be avoided if a LP schedules an expiry exit in advance to withdraw capital at or after settlement.
DIVER token review
Divergence’s decentralized platform is powered by its native token, DIVER. Holders can stake the token for rewards. DIVER also allows holders to take part in governance activities including voting on protocol parameter changes.
Divergence has announced its DIVER token IDO will happen on September 20, 2021. The token sale will distribute 2% of the total supply of DIVER tokens through a Dutch auction on SushiSwap’s MISO launchpad.
The auction is scheduled to last for 24 hours with a Starting Bid of $0.1/DIVER which will reduce to a minimum bid of $0.05/DIVER towards the end of the IDO. Following the IDO sale, DIVER tokens will be available for trading on SushiSwap, which is expected to be a long-term liquidity venue for the token. Participants will be able to become early holders of the DIVER tokens and have the opportunity to claim from a pool of 256 non-fungible DIVER tokens, the first batch of NFTs ever released by Divergence.
Mainnet launch expected
Divergence roadmap also has a lot of activities in store in Q4 2021, including its highly anticipated mainnet launch. Divergence already has a fully functioning testnet with an intuitive user interface. Its mainnet is expected to have a faster-loading interface and add-on functionalities.
With the launch, traders will have access to decentralized options markets for a larger number of assets. They are able to create new options markets with DeFi-native coins. Much is to be expected of this new DeFi derivatives marketplace.
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