$GOVI - Monetize Market Fear and Earn 62% APY on USDC
New Primitive: Monetizing market fear
The most complex and only product made in crypto
A deep dive into $GOVI + 62% APR on USDC 🧵👇
In this thread, I will dive into the following:
Market Potential
About CVI
Ultra CVI
Theta vaults
Use cases
$GOVI
Future of CVI
Conclusion
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🔷 Market Potential 🔷
Defi TVL has been on a tear.
It has gone up by 50% from the bottom to $111B in TVL now
With the surge in liquidity, volatility trading would present a major opportunity.
We have the VIX tracking the volatility of US stock market, S&P 500 call and put options.
Widely used and closely monitored by many market participants.
However, in crypto traders use riskier strategies or lack proper tools to track crypto volatility.
With @official_CVI it will fill the market need for a more decentralized volatility benchmark that can provide risk measures and market information for investors.
I do see how this will play out well, given that:
First and only mover to decentralized VIX for crypto
People are moving away from CEXes and on-chain now
Allows for leveraged 3x play on volatilty
🔷 About CVI 🔷
The Crypto Volatility Index (CVI) is a decentralized version of the VIX designed for the cryptocurrency market. It allows traders to profit from volatility without taking on directional market risk.
Users can think of it to be similar to a "fear index" tool in crypto that
enables advanced volatility trading strategies
be used to hedge portfolios
helps market makers earn yields as liquidity providers
And recently @official_CVI announced its CVI v4 packed with the following features:
Ultra CVI and Leverage
Hedged Theta Vault
and more.
🔷 Ultra CVI 🔷
Ultra CVI and enhanced leverage exponentially expand CVI's capabilities for advanced volatility traders. But the high risk and complexity comes along with exceptional trading skills and volatility understanding to deploy effectively.
Ultra CVI (UCVI) is an enhanced version of the base CVI that provides 3x exposure to market volatility movements. This caters to traders seeking heightened volatility exposure and the ability to capitalize on larger market swings.
CVI now allows up to 16x leverage through borrowing from the Theta Vault. When combined with UCVI, this results in an effective leverage of around 48x relative to base CVI. Such high leverage massively amplifies potential profits and losses.
🔷 Theta Vault 🔷
Previous versions of CVI lacked native hedging. To limit risk, funding rates were kept high and caps on open interest were conservative. But high, uncompensated funding rates deterred traders.
CVI v4 release will include a new Hedging Vault feature to solve this.
This innovation provides major advantages for both the CVI protocol and traders by enabling improved risk management.
By allowing long and short positions to offset, the vault can accept far higher OI without increasing risks.
Traders benefit from lower funding rates as a result, making trades more competitive.
Its basically risk free yields that deposits are making at 62% APR
How it works?
The Hedging Vault changes the game by bridging longs and shorts within the protocol.
The vault holds balanced exposure, earning on the spread between funding rates. Traders enjoy lower, sustainable funding more in line with major derivatives exchanges.
First stage
When CVI v4 launches, the vault will only accept market makers at first. They can short CVI, profiting from decreases and receiving funding payments. As they hedge externally, the vault remains market-neutral.
Second stage
Later, shorts will open for all traders. Negative funding rates on shorts will turn on when CVI spikes. This ensures mean-reversion back towards average levels, where at CVI low values you know that at some point it will go up, when it's high you know it's going to go down
The Hedging Vault unlocks leverage, which is unavailable before. Now a trader can control a large position with a small margin, thanks to vault offsets.
An example
Bob opens a 10x leveraged long position on CVI for $5,000. Thanks to leverage, Bob's position controls $50,000 worth of CVI. (Leverage greatly improves capital efficiency, which was unavailable in CVI v3).
If needed to rebalance risk, the CVI vault automatically adjusts its liquidity pools via Chainlink Keepers. It makes more short position liquidity available to match Bob's $50,000 long.
Now there is $50,000 in long open interest (OI)
The funding rate increases so more gets paid to short positions based on the difference between long OI and short OI
Market makers take on $50,000 in leveraged short positions, profiting from the yield plus hedging strategy.
The vault's overall price exposure is now near net neutral. This allows far higher OI to be safely accepted. The vault earns from the spread between long and short funding rates, while taking less risk on direction.
🔷 Use cases 🔷
There is a wide range of trading strategies where users can use the CVI index.
Hedging Strategies
Black Swan Hedges
Long CVI to profit from large scale market downturn i.e. +260% gains hedging Feb 2020 crash
Overheated Market Hedges
Long CVI when volatility rising i.e. Hedging Sep. 2020 DeFi correction
Speculative Strategy
Back Slope Trades can be useful to take advantage of the mean reversion nature of CVI. Users can short CVI after sharp spikes
🔷 $GOVI 🔷
$GOVI aligns yield generation to overall protocol success with esGOVI emissions.
Utility
Platform Governance
Fee sharing
Distribution of $esGOVI
60%: GOVI Stakers
20%: Liquidity Providers
20%: Active Traders
With the new CVI v4 there will be a transition to to real yield in USDC for stakers: To ensure sustainability, real yields initiate upon reaching 2 of 4 milestones:
$10M+ in Theta Vault TVL
$500K+ monthly trading volume
Target ratio of yearly fees to staked GOVI
Successful leveraged token & hedging vault launch (already completed)
Upon Transition the Fee Allocation changes
15%: Platform growth & development
85%: Real yield rewards to GOVI stakers
🔷 Future of CVI 🔷
@official_CVI have also been active partnering with trading groups like @TheBirbNest to spread awareness as gain more traders for CVI.
There will be so much more use case and development runway for CVI because this space is still extremely unexplored.
Just looking at VIX, where they have VIX futures and options strategies, CVI could similarly emulate this and have something similar
🔷 Conclusion 🔷
@official_CVI represents a pioneering tool for advanced volatility trading in the cryptocurrency markets. By filling the void for a decentralized VIX equivalent, CVI brings institutional-grade volatility trading to DeFi. With the launch of CVI v4, the protocol makes major leaps forward in usability and potential.
The introduction of Ultra CVI and up to 16x leverage unlocks exponentially greater volatility exposure and profit opportunities. Meanwhile, the new Hedging Vault feature facilitates improved risk management through offsetting positions.
Twitter: https://twitter.com/arndxt_xo/status/1733116633076678937