This is a weekly tutorial on the most compelling opportunities in yield farming, written by our friend DeFi Dad, an advisor to The Defiant. The goal is to expose more Defiant readers to new DeFi applications and their associated liquidity mining programs.
Background on Protocol: If there’s one word to describe crypto markets, it is volatile! Over the past month, we’ve experienced major price drawdowns across the crypto markets that’s even shook the confidence of crypto OGs.
Volatility can be simply summarized as how fast prices change. Investopedia defines it as: A statistical measure of the dispersion of returns for a given security or market index. In most cases, the higher the volatility, the riskier the security. Volatility is often measured as either the standard deviation or variance between returns from that same security or market index.
Volatility is also a way to gauge market sentiment, especially fear among investors. The most famous way we measure how fast prices change in the stock market is the Cboe (Chicago Board Options Exchange) Volatility Index (VIX). The VIX is a real-time index of volatility. Using the prices of SPX index options with near-term expiration dates, the VIX provides a 30-day forward projection of volatility.
What we haven’t managed to build in DeFi until recently is a volatility index natively built with smart contracts. volmex.finance is just that–a protocol for tokenized volatility, built on Ethereum. Volmex enables VIX-like indices for crypto assets and trading functionality.
The volatility money lego
This is yet another money lego that mirrors a popular product and concept in legacy finance, which is sure to draw the attention of even more investors interested to move assets to DeFi. The Volmex protocol has already been used to create volatility indexes and tradable tokens (tracking both implied volatility and realized volatility) for ETH and BTC.
Traders can now buy on a DEX or mint new volatility tokens (ETHV or BTCV) to express their view on market volatility. A few examples of how traders and DeFi builders might benefit from ETHV or BTCV are:
- Hedging out risks from other derivatives venues
- Arbitraging volatility opportunities between other derivatives venues and Volmex
- Integrating and referencing Volmex volatility indices in new DeFi applications
Volmex Finance only launched on Ethereum Mainnet a week ago. Now anyone outside the United States can access Volmex’s app, and with a minimum of 25 DAI, mint proportional amounts of volatility index tokens and inverse volatility index tokens (ie ETHV and iETHV).
The volatility index token (ETHV or BTCV) and inverse volatility index token (iETHV or iBTCV) are two parts of a whole, which together can be redeemed for proportional DAI collateral required to mint (less a 0.3% redemption fee).
The long volatility index token (ETHV or BTCV) aims to track the volatility index price. If the Ethereum Volatility Index is priced around ~110%, then the index token ETHV token should trade around $110. Conversely, the inverse volatility index token (iETHV) should trade around $140.
In light of the recent volatile and bloody markets after a year of bullish market structure, this is clearly a new tool for DeFi portfolios to hedge their positions. As with most protocols, Volmex is currently in need of liquidity providers who are willing to hold this market-neutral position minting the long and inverse volatility index tokens so that traders can start to trade these index tokens as ERC-20 tokens on DEXs and DEX aggregators.
Opportunity: Today, we’ll focus on how to mint ETHV and iETHV with DAI and then provide liquidity to 2 of the Uniswap v3 pools depending on which volatility index is minted:
- ETHV/USDC and iETHV/USDC
- BTCV/USDC and iBTCV/USDC
Neither of these volatility indexes currently provide for liquidity mining rewards, but one might speculate that Volmex will eventually launch a governance token and reward early LPs.
Time to Complete: 10-20 mins if paying the recommended FAST gas price on gasnow.org
Gas + Protocol Fees: Based on the FAST gas price on gasnow.org currently between 30-50 Gwei with ETH at $2000, I would estimate paying the following gas fees.
- Approve spending DAI = $5
- Minting ETHV + iETHV = $20-$50
- Approving USDC + volatility index = $10
- Depositing USDC + volatility index = $50-$75
Fees: Other than the usual Ethereum network fees you pay as gas to miners to confirm your transactions, there is an underlying 0.1% minting fee and a 0.3% redemption fee if one you ever redeems ETHV + iETHV or BTCV + iBTCV for the underlying DAI collateral.
Risks: As always, this is not financial advice and you should do your own research. The following are risks when participating in this opportunity. Uniswap v3 risks can be mitigated by purchasing Protocol Cover by Nexus Mutual here.
- Smart contract risk in Volmex and Uniswap v3
- Oracle failure
- Liquidity crisis
- Systemic risk in DeFi
- As an LP, you’re likely to experience some impermanent loss.
- First, go to the Volmex Finance app under Mint.
- Then specify whether to mint the ETHV + iETHV or BTCV + iBTCV indexes. Also, specify how much DAI to deposit.
- Next, you’ll have to complete 2 transactions on MetaMask: Approve to spend DAI and then Deposit/Mint to finish depositing the DAI collateral.
- Depending on whether you minted ETHV or BTCV, go to the Volmex Pools page and choose the 2 appropriate pools to provide liquidity. In my example, I’ll deposit into the ETHV/USDC and iETHV/USDC Uniswap v3 pools.
- Lastly, on each Uniswap v3 analytics page linked above, choose the Add Liquidity button. A few tips for easily adding liquidity with Uniswap v3:
- Choose the fee structure that already has LPs in it. For example below, you can see the LPs in this ETHV/USDC pool are charging 1% to traders.
- To decide the price range, if you have equal proportions of the index token and USDC, use the toggles on the Min Price to move in -2% increments and equally on the Max Price, move the increments upwards in +2% increments.
- Then, specify how much USDC or ETHV to deposit and it will autofill the other token.
- Follow the prompts to Approve both tokens and then Deposit. It will require 3 transactions in total.
- Repeat these steps for the iETHV/USDC Uniswap v3 Pool.