Introducing Buffer DDOV
Introducing Dynamic Decentralised Options Vaults
The buffer team is excited to introduce the first version of a DDOV (Dynamic Decentralised Option Vault). Before we get into the details of a DDOV and how it differs from a conventional DOV, it’s better to know what a DOV is and why we are building one.
What are DOVs?
Decentralized option vaults are on-chain structured products that generate organic yield through option strategies that typically involve covered call selling and cash-secured put selling. DOV, a term coined by QCP capital, has been the fastest-growing organic yield generation product in Defi since Q4 of 2021; more about them here.
The current state of DOVs
Currently, most DOVs, if not all, provide two strategies, namely covered call selling and Cash-secured put-selling. Automating both of these strategies involves four steps:
- Selecting an expiry date (weekly/bi-weekly) and an out-of-money strike price (delta between 0.1 & 0.15)
- Collection of collateral for writing options
- Selling options at a pre-announced date & time either via OTC deals or auctions
- After settling the previous position and all pending deposit and withdrawal requests, repeat the cycle with a new strike price and expiry.
This process has been working well to produce sustainable yield so far. But the static nature of the process has resulted in a few unexpected market inefficiencies like IV dampening for short-term options and front running by option sellers because the timing of auctions is known, resulting in lower yields for on-chain option sellers. You can find more details in this article by Zee prime capital here.
What about Buffer DOVs?
With Buffer’s upcoming DDOV, we have tried to solve some of these problems by introducing some dynamic features to the vaults.
- Users can deposit collateral anytime, and it will be immediately available for selling options.
- Tokenized deposits for option sellers
- On-chain pricing and auto-settlement for plain vanilla options
- Option buyer’s position will be minted as an NFT
These dynamic features add new degrees of freedom for option buyers and sellers, enabling more active participation from both sides.
- Option buyers can buy when IVs are low instead of a pre-defined time.
- Option sellers can deposit collateral closer to expiry to reduce exposure time.
- Option sellers can deposit when IVs are high to receive a higher premium.
- Option buyers can leverage NFT marketplaces to exit positions via auctions or OTC deals.
Added to current features, Buffer Finance’s DOVs are highly customizable and can support multiple option pay-offs and settlement, including binary options, barrier options, and other exotic options. The customisability of DDOVs will enable many unprecedented use-cases possible.
For example, any DAO can mint call option NFTs on their tokens and auction them via any NFT marketplace to raise funds without directly selling their tokens
- In-built staking — Buffer’s DDOVs will be able to offer additional returns by staking deposited collateral into yield earning pools.
- In-built delta-hedging — Certain percentage of the deposited funds in the DOV would be reserved to hedge the delta by going long/short in a perpetual future platform.
- Multiple strategies — Once DDOVs integrate with a perpetual futures trading platform, numerous synthetic options strategies like strangle, straddle, and covered puts would also become possible.
- Permissionless DDOVs — Using on-chain oracles for pricing, anyone can launch a DDOV for any token in a completely permissionless way.
We will be launching the first covered call DDOV pilot on our native token $iBFR on the BNB chain this week, followed by wNEAR covered call DDOV on the Aurora chain next week. If you want to launch a DDOV for your token, fill out this form.
That’s it, folks! We will be coming up with a more detailed article on the overall mechanics of the DDOVs the day we launch them. Have any questions, feel free to join our Telegram group or Discord server.
Buffer is a multi-asset option trading protocol. It allows anyone to buy options directly against a liquidity pool.