GEM DIGGERS AMA with VOLATILITY PROTOCOL
By now we all know the level of volatility in the cryptosphere can be breath-taking and recent events are certainly no exception. Over several months we had euphoria as the likes of Tesla, MicroStrategy, PayPal and others announced their adoption of Bitcoin. Grayscale ‘amping’ up their offerings on crypto funds and piling into Ethereum like there is no tomorrow…and several banking institutions announcing their intentions to open funds to their clients for crypto related investments…
Then it all came crashing down in recent days with FUD from all angles, sending most if not all Crytpos into a downward tailspin. Tesla not accepting BTC as payment any longer, China banning crypto for the umpteenth time and debates on BTC mining environmental impacts with many calls for the bear market now having started. Never a dull moment…
It goes to show how young this marketplace is and that we are a long way off any reasonable level of stability. Which makes way for Volatility Protocol.
Ozzy recently held an AMA with Chris and Wade from Volatility Protocol, both Co-Founders with Chris in charge of Product Development and Wade leading on Mechanism Design.
In the crypto world what they are doing is pretty unique. They have developed a protocol to create volatility feeds for utility tokens. When combined with other protocols, like UMA, this makes volatility tradable.
We can probably all agree that recent events would have been a perfect opportunity to put Volatility Protocol through its paces but equally there will plenty of opportunity in this burgeoning marketplace for years to come.
Read on below to see the full Q&A Ozzy had with Chris and Wade…
Ozzy: Can you tell us more about your core team, their background and experience in the spaces of trading and blockchain, and what brought you together to create Volatility Protocol?
Chris: We’ve both been interested in Blockchain since 2013–2014. My (Chris) background is as an entrepreneur and software developer. I’ve worked a lot in traditional finance and do a good deal of options trading, so my interest was kind of both on the product development side and as an actual trader. Wade’s background is in game and systems design. Between the two of us we’ve consulted for a lot of governments, NGOs, and big companies.
Volatility Protocol actually started as an entry for an ETHGlobal Hackathon in January 2021. We’ve grown a bunch since then but we’ve tried to keep it pretty quiet. Our core team now includes several academics with backgrounds in mathematics, mechanism design, and economics, including one of the world’s leading researchers in the field of volatility modelling and forecasting. We’ve also enlisted professional derivatives traders with deep experience in TradFi. All of us are super excited to be working together on this series of crypto-native volatility measures, each of us for probably slightly different reasons.
Ozzy: Trading volatility, what gave you the idea for doing this and why do you think it will be successful?
Wade: We both trade the VIX-based products offered in TradFi markets. Volatility is a tool with a multitude of uses, but it’s mainly a hedge or insurance for your portfolio. It’s also often referred to as the Fear (and/or Greed) Index. When you look at DeFi, and really crypto in general, there is a huge need for this. There are some decentralized insurance protocols but they are very expensive and only protect users against specific types of events (i.e. bugs or hacks) and not market dynamics. Volatility is a great way to insure against something like a black swan event.
Ozzy: It would have been great to have this live over the last week or two, given market events lol
Chris: No doubt, this week is a great example of why we’re building crypto-native. Raise your hand if you were properly hedged for this type of action.
Ozzy: What has been the biggest challenge to date in developing Volatility Protocol, how have you overcome it?
Chris: We found that one of the biggest challenges to making a truly decentralized volatility protocol was finding a measure of volatility that can be calculated purely from on-chain data, or at least with little or no centralized components. Currently a VIX-style calculation cannot meet this goal as there are not robust enough options in DeFi (yet). That’s part of why we actually started looking at the problem differently and approaching it from another direction altogether. We’re pretty excited about what we’ve done so far.
Our first index feeds (volETH and volBTC) do still have this centralized reliance, but we’re very actively working to get fully away from centralized data. Our models currently under development are 100% decentralized and run on-chain.
Ozzy: Can you tell us how Volatility Protocol will accurately predict volatility of any given token?
Wade: As Chris just mentioned, for our initial launch we are using a model-free methodology to calculate volatility for ETH from Deribit options chains. A similar method has been used by the Cboe to calculate volatility of the S&P 500 since 2003. Looking at historical data on these, we’ve seen that doing this tracks volatility on ETH and BTC very well.
In terms of predicting volatility for any utility token, this is another reason we are working with one of the world’s leading economists who has developed several popular models and forecasting techniques for volatility. We’ll be sharing a lot more on this model works when we are ready to launch it.
Ozzy: What was the thought process behind having a 14-day rolling volatility forecast, are you planning to have different timeframe options?
Chris: The 14-day rolling average was chosen for two reasons. First is because Deribit only has weekly options 1 month out. So you really can’t get a good 30-day average from their options expirations. In some instances the average time would be up to 42 days which would lead to very noisy measures, especially around rollover. The second is that crypto assets are way more volatile than S&P equities, so a 14-day measure yields a more usable feed.
We are definitely open to different time frames. For the VIX-style measures we’d need more weekly options expirations. As we start releasing our new models, it will be much easier to have them be 14 or 30 days or etc. They’re flexible and configurable by design.
Ozzy: Can you explain the uniqueness of the protective model you’ve developed for LPs, how does it lower risk dramatically?
Wade: We have a medium post that people should read to dig into the details. We know that this model reduces risk greatly for arbitrageurs that need to put up collateral and we are still modelling the exact risk for LPs. Basically, through introducing an inverse token and using a three token pool, LPs take a hedged position instead of a long or short position.
Ozzy: There is a lot of debate on your discord channel about whether to do a whitelist event or use a Liquidity Bootstrap Pool to manage token distribution, where are you leaning to and why?
Chris: Haha, yeah, we asked the community for feedback on preferred launch models and the response was a lot more mixed than we expected! Ultimately we decided that we’re going to do an IDO. However, we are also going to do a few interesting things around that based on some of the comments community members made in our Discord. We’re just waiting on our legal team to give us the go ahead on our proposed token launch and we will be releasing news on it as soon as we get that.
Ozzy: Who are you partnering with for marketing, or planning to? What work are you doing on raising awareness about Volatility Protocol?
Chris: Serotonin (serotonin.co) is our main marketing partner, their team and background is incredible and we’re excited to work with them. We also have a bunch of other marketers/influencers/KOLs who are working with us. Beyond that we’ve partnered with several prominent DeFi protocols and will be doing joint announcements about our collaborations. We haven’t started marketing really at all yet, but the engines are getting warmed up as we speak.
Ozzy: I read on your discord channel that you are pushing a supermajority of governance power to those who use the platform the most, seems fair, but how do you avoid the effect of centralised control by a few heavily invested whales?
Wade: This is a general problem with governance in a decentralized space and we’re not proposing to have a solution to it. Typically, if a protocol becomes too centralized around whales and they vote to make the protocol less appealing to smaller users then users will leave the protocol making the governance tokens less valuable.
However, we will attempt to mitigate a few whales getting a majority of tokens by expanding the ways in which users earn governance tokens as rewards. We’ll be releasing more about this later but our idea rewards all users of the protocol, not just liquidity providers.
Ozzy: Is your contract audited, or in the process? What progress have you made on this front?
Chris: We are purposefully building on top of trusted, audited, and battle-tested DeFi protocols to make our volatility feeds tradable. Think of Volatility Protocol as a DeFi “Money Lego.” At a really high level, the core product is really our volatility models. When you combine that with other legos (e.g. UMA and Balancer) you can make volatility tradable. We’re creating a bunch of integrations that the community will then have the ability to fork and build on top of to create interesting things we haven’t even thought about internally.
In terms of our feeds, an audit is not necessary to make it safe as it doesn’t actually handle any funds or user data, and our code and methodologies are fully transparent. We’ve created simple tools (e.g. a spreadsheet) so that non-technical users can verify our volatility feeds with nothing more than screenshots of Deribit’s options chain. This means that if someone suspects that our team, code or feed has been compromised they can very easily prove it by taking a screenshot and inputting numbers. This is essential for things like UMA’s dispute mechanism.
With that said, do intend to have audits done on our volatility feeds as time goes on. But the methodology will always be fully transparent.
Ozzy: Is there anything else you would like to share with us today that we didn’t cover?
Wade: We’ll be launching directly to Mainnet. But we’re also currently working on an L2 integration.
Chris: I feel like volatility is kind of a mystical, or even confusing concept to many people. At a high level, volatility is best described as a measure of the degree and frequency of an asset’s value fluctuations over time. It can lead less experienced traders to make irrational decisions, but it’s also a key that savvy traders can use to unlock profits.
Whether you’re trading equities or crypto, or participating in a DeFi lending market, you undertake risk, and one of the most important categories of that risk exposure is volatility. A big part of why we do what we do is that we want to help people trade smarter. We love educating and just generally talking about volatility and trading, so please don’t hesitate to hop over to our Discord and ask us more after this session!
So that brings us to the end of the Q&A we had before audience questions (Winner below). The platform that Chris and Wade have built certainly seems like a great fit for the cryptocurrency market and a great way to manage your risk. Make sure to join them on the journey and learn more about this unique platform.
Our audience certainly found this AMA very interesting with many questions coming in for Chris and Wade. They managed to answer several of them but in the end there can only be 1 winner, below was the winning question:
From @zi_mal Do you plan to create indexes for specific Tokens as wells as perhaps a basket of tokens e.g. Defi, NFT?
Wade: Absolutely. We are going to start with ETH and BTC and then move to other Ethereum based utility tokens. Things like baskets and NFTs are on our radar but won’t be available at launch.
To learn more and follow activities on Volatility Protocol, feel free to use the resource links below:
For more great AMAs and discussion in an engaged community join https://t.me/gemdiggers