Instrument
Each instrument is created with a set of immutable parameters.
Parameters
| Parameter | Description |
|---|---|
| asset token address | The blockchain address of the asset token. |
| currency token address | The blockchain address of the currency token. |
| contract type | Call or Put. |
| expiry time | The expiry time of the instrument. |
| strike price | The strike price of the instrument. |
| threshold price | The threshold price of the instrument. |
| version | Version number of the instrument. Numbering starts from 1. (0 indicates an instrument that has never been created.) |
| price reference policy | The blockchain address of a smart contract determining the reference price for this instrument. |
Note: The following sections on this page are explained without including fees. Fees are explained in more detail here.
Minting
Minting, aka Depositing, is the process of depositing currency tokens and receiving LONG and SHORT position tokens in return. This happens atomically (within the same transaction).
LONG and SHORT tokens are minted in pairs and in equal amounts.
The deposit-mint ratio between currency tokens and position tokens is 1:1.
This means that for every 1.0 currency token deposited by the user, 1.0 LONG and 1.0 SHORT tokens are minted for the user.
Minting is prohibited if the instrument has been settled.
1:1 deposit-mint ratio. LONGs and SHORTs are minted in equal amounts.
The factory will create a new instrument if the instrument to be minted from does not exist.
Minting of 0 tokens is allowed. This would be a pure creation of an instrument.
Withdrawing
Withdrawing is the process of returning LONG and SHORT position tokens and receiving currency tokens in return. This happens atomically (within the same transaction).
To withdraw, the LONG and SHORT tokens must be returned in pairs and in equal amounts.
The withdrawal ratio between currency tokens and position tokens is 1:1.
This means that for every 1.0 LONG and 1.0 SHORT tokens returned by the user, 1.0 currency token is returned to the user.
The LONG and SHORT tokens returned in a withdrawal are destroyed. In other words, their total minted supplies are reduced by the amount returned. The destroying of position tokens happens in the same withdrawal transaction.
Withdrawing is prohibited if the instrument has been settled.
1:1 withdrawal ratio. LONGs and SHORTs are returned and destroyed in equal amounts.
Settlement
There are 4 settlement statuses:
Not Settled, Out-of-the-Money (OTM), In-the-Money (ITM), and Liquidated.
At creation, the initial settlement status of an instrument is Not Settled.
There are 2 scenarios where an instrument can be settled:
- The expiry time has passed.
- The reference price of the underlying asset has:
- gone above the threshold price (for Calls); or
- gone below the threshold price (for Puts).
Settlement can be triggered by any address on the blockchain. There are no restrictions on who can settle an instrument.
At settlement, the currency token deposited in the instrument is distributed to a LONG-payout pool and a SHORT-payout pool, according to the underlying asset's reference price at expiry.
OTM
If the reference price at expiry is below the strike price (for Calls) or above the strike price (for Puts), the instrument's settlement status is changed to OTM when settlement is triggered. In this case, the SHORT-payout pool is assigned the entire currency token deposit, and the LONG-payout pool is assigned 0 currency tokens.
ITM
If the reference price at expiry is between the strike price and the threshold price, the instrument's settlement status is changed to ITM when settlement is triggered. The distribution is as follows:
| Type | LONG-payout Pool distribution | SHORT-payout Pool distribution |
|---|---|---|
| Call | total currency token deposit × (expiry price - strike price) ÷ (threshold price - strike price) | total currency token deposit × (threshold price - expiry price) ÷ (threshold price - strike price) |
| Put | total currency token deposit × (strike price - expiry price) ÷ (strike price - threshold price) | total currency token deposit × (expiry price - threshold price) ÷ (strike price - threshold price) |
Payout distribution for Calls settled ITM.
Payout distribution for Puts settled ITM.
Liquidated
If the reference price of the underlying asset has:
- gone above the threshold price (for Calls); or
- gone below the threshold price (for Puts);
settlement can be triggered at any time.
The instrument's settlement status is changed to Liquidated when settlement is triggered.
In this case, the LONG-payout pool is assigned the entire currency token deposit, and the SHORT-payout pool is assigned 0 currency tokens.
Redemption
Redemption is the process of returning LONG and SHORT position tokens and receiving currency tokens in return. This happens atomically (within the same transaction).
The amount of currency tokens returned is as follows:
Amount of currency tokens returned to LONG token holder = LONG token amount × LONG-payout pool amount ÷ total LONG token supply
Amount of currency tokens returned to SHORT token holder = SHORT token amount × SHORT-payout pool amount ÷ total SHORT token supply
Unlike in the withdrawal process, returned position tokens are not destroyed so that their total minted supplies remain unchanged after settlement.
(They are simply returned to the Volorca Protocol.)
Redemption is prohibited if the instrument has not been settled.