Panoptic Overview
A basic overview of the Panoptic Protocol.
What are Options?
Options are one of the most traded instrument in traditional finance. They can be used to hedge a portfolio, speculate on the value of an asset, create synthetic positions in a capital-efficient manner, or as a way to create defined-risk positions.
Options are an agreement between two parties to buy (or sell) an asset for a fixed price at a pre-determined time. Hence, each option has a
- Strike: the agreed-upon price the asset has to be bought/sold
- Expiry: a time in the future when the transaction has to occur
- Premium: the value of the option, or how much does the buyer pays for the right to buy/sell the asset
(figure here)
The value of an option --called the premium-- used to be difficult to determine. Following the development of Nobel-prize winning mathematical models by Black, Scholes, and Merton, an optimal price can be derived in a way that buyers and sellers both agree on the option contract's price.
How do Panoptic Options differ from traditional options?
Options in Panoptic, however, are a little bit different than traditional options.. Behind the scenes, the Panoptic protocol utilizes Liquidity Provider (LP) positions in Uniswap v3 as a core primitive for trading long and short options. Concretely, this means that:
- Options are perpetual and never expire
- Anybody can deploy an options market on any asset in a permissionless manner
- Panoptic allows anyone to be a liquidity provider to lend their capital to options traders
- Options have unique properties: width, new concept of moneyness, user-defined numeraire, etc.
- Pricing does not involved counterparties (like market makers) and is path-dependent
- There is no concept of vega, which means premium for open positions will be affected by volatility expansion
- Collateralization requirements and buying power reduction respond to market activity
- Commissions are paid only once, when the position is created
- Users can delegate funds to another account
- Distressed accounts will be liquidated by external users
- Long positions that are far-the-money may be forced exercised by external users
(figure here)
Protocol Design
Manipulation Protections
Many flash-loan based attacks involve the borrowing of a large amount of fund (sometimes at zero cost!) with the goal of manipulate the price of an asset or token balance in a smart contract. Impartantly, flash-loan attacks require all funds to be paid back in the same block.
The Panoptic Protocol aims to prevent pool manipulation attacks by prevent funds to be withdrawn in the same block they were deposited.
Similarly, delegating funds to an account locks both the delegator and delegatee accounts for that particular block.
Computed quantities
Several computed quantities are derived from the token balance in the Panoptic and Uniswap v3 pools.
Total Balance
The totalBalance() value is the amount of tokens that 1) can be sold and moved to the Uniswap v3 pool or 2) have already moved to the Uniswap v3 pool.
This balance is computed using the total token balance inside the Panoptic pool, obtained by calling IERC20(token0).balanceOf(panopticPool), the amount of tokens moved into the Uniswap v3 pool and the amount of token collected.
This derived quantity is used to compute the collateral shares.
>pp = IPanopticPool
>univ3pool = IUniswapV3Pool
>token0 = ERC20 interface of collateral token | tolen0.balanceOf(pp) =
_--| amount of token0 owned
/ | by the Panoptic Pool
_----------------pp.totalBalance()---------------_ /
/ \ /
| _----pp.inAMM0()---_ _--------------token0.balanceOf(pp)---------------_
| / \ / | _---pp.collected0()--_ \
| | amount of token0 | | amount of `free` token | / \ |
| | moved from Panoptic | | that can be withdrawn || collected token0, | |
| | to UniswapV3 | | or used to sell || reserved to be | |
| | | | undercollateralized | \ paid to sellers / |
| \ / \ options | ¯--------------------¯ /
| ¯------------------¯ ¯-----------------------+-------------------------¯
\ /
¯------------------------------------------------¯
Pool Utilization
The pool utilization is a measure of the fraction of the totalBalance() which belongs to the Uniswap v3 pool.
This parameter is compute whenever a position is minted to set the collateralization ratio and commission rate of the position (calculations shown below).
poolUtilization = pp.inAMM0() / pp.totalBalance();
= pp.inAMM0() / (pp.inAMM0() + `free` token0)
= pp.inAMM0() / (pp.inAMM0)) + token0.balanceOf(pp) - pp.collected())
-Example 1: poolUtilization = 50% (targeted equilibrium)
_------pp.totalBalance()--+-------------------------_
/ | \ COMMISSION_RATE = 20bps
| pp.inAMM0() | `free` token0 | BUY_COLLATERAL_RATIO = 10%
\ | / SELL_COLLATERAL_RATIO = 20%
¯-------------------------+-------------------------¯
-Example 2: poolUtilization = 90% (favors buying)
_------pp.totalBalance()---------------------+------_
/ | \ COMMISSION_RATE = 20bps
| pp.inAMM0() | fT0 | BUY_COLLATERAL_RATIO = 5%
\ | / SELL_COLLATERAL_RATIO = 100%
¯--------------------------------------------+------¯
-Example 3: poolUtilization = 10% (favors selling)
_-----+-----pp.totalBalance()-----------------------_
/ | \ COMMISSION_RATE = 60bps
| inAMM0| `free` token0 | BUY_COLLATERAL_RATIO = 10%
\ | / SELL_COLLATERAL_RATIO = 20%
¯-----+---------------------------------------------¯
Commission and Collateral Requirements
The commission and the collateralization ratios are computed after all funds have moved in/out of the Panoptic pool.
Commission Fees
The commission rate is computed from the pool utilization and is paid whenever an option is minted.
The value of the commission to be paid is the notional value of the options multiplied by the commission rate.
The comission decreases to 20bps at >50% pool utilization and linearly increases to 60bps for pool utilization below 10%.
COMMISSION
_RATE ^
| max commission = 60bps
60bps _ |_____
| .¯¯---__
| . ¯¯---__ min commission = 20bps
20bps _ | . ¯¯---____________________________
| . . .
+----+-------------------+------------------------+---> POOL_UTILIZATION
10% 50% 100%
Collateralization ratio (buying)
The collateralization ratio for buying an option is set at a fixed 10% for pool utilization less than 50% and decrease to 5% at 90% or more.
BUY
_COLLATERAL
_RATIO ^
| max ratio = 10%
10% _ |_________________________
| ¯¯---__
| . ¯¯---__ min ratio = 5%
5% - | . ¯¯---________
| . . .
+------------------------+-------------------+----+---> POOL_UTILIZATION
50% 90% 100%
Collateralization ratio (selling)
The collateralization ratio for buying an option is set at a fixed 20% for pool utilization less than 50% and increases to 100% at 90% or more.
SELL
_COLLATERAL
_RATIO ^ max ratio = 100%
100% - | _________
| __-¯¯. .
| __-¯¯ . .
| min ratio = 20% __-¯¯ . .
20% _ |_________________________--¯¯ . .
| . . .
+------------------------+-------------------+----+---> POOL_UTILIZATION
50% 90% 100%
Buying Power Requirement (buying)
The buying power requirement for buying an option is simply: BPR = BUY_COLLATERAL_RATIO * NOTIONAL_VALUE + ACCUMULATED_LONG_PREMIUM
Buying Power Requirement (selling)
The buying power requirement (BPR) for selling an option is :
BPR for puts (with collateral denominated in numeraire):
.
BUYING .
_POWER <- ITM . OTM ->
_REQUIREMENT .
^ .
100% - |-__ BPR = 100% - (100% - SCR)*(price/strike)
| ¯¯--__ .
| ¯¯--__ .
| ¯¯--__ . min BRP = SELL_COLLATERAL_RATIO
SCR - | ¯¯--________________________________
| .
+-------------------------+---------------------------> current price
0 strike
BPR for calls (with collateral denominated in numeraire):
BUYING . __-- >100%
_POWER . __--¯¯
_REQUIREMENT <- OTM . ITM -> __--¯¯
^ . __--¯¯
100% - | - - - . - - - - - -__--¯¯ - - - - - - 100%
| . __--¯¯ .
| . __--¯¯ .
| min BRP . __--¯¯ BPR = SCR + (100% - SCR)*(price/strike - 1)
SELL_RATIO _ |_____________--¯¯ .
| . .
+------------+------------------------+---------------> current price
0 strike 2 * strike
The buying power requirement of a call can exceed the notional value of the minted option. However, users can deposit the asset as collateral in order to mitigate those risks.
BPR for calls (with collateral denominated in asset):
BUYING .
_POWER .
_REQUIREMENT <- OTM . ITM ->
^ .
100% - | - - - . - - - - - - - - - -___----- 100%
| . ______-------¯¯¯¯¯¯¯¯¯¯
| . ___----¯¯¯¯¯
| min BRP . -- BPR = 100% - (100% - SCR)*(strike/price)
SELL_RATIO _ |_____________¯
| .
+------------+----------------------------------------> current price
0 strike
Liquidation and forced exercise costs.
Liquidation Bonus
LIQUIDATION
_BONUS ^ max bonus = 100%
100% _ |___________
| .¯-_
| . ¯-_ no cost at 100% capitalization
| . ¯-_ /
| . ¯-_ /
| . ¯-_ /
0% - +----------+---------------+---------------+----------> MIN_CAPITAL_REQUIREMENT
| 50% 100% ¯-_ 150%
| ¯-_ .
| ¯-_ .
| ¯-_ . min bonus = -100%
-100% - | ¯-_______________
|
Force exercise cost
EXERCISE
_COST ^ max cost = 10.24%
1024bps _ |____
512bps _ | |____
256bps _ | . |____
128bps _ | . . |____
64bps _ | . . . |____
32bps _ | . . . . |____
16bps _ | . . . . . |____
8bps _ | . . . . . . |____
4bps _ | . . . . . . . |____
2bps _ | . . . . . . . . |____ min cost = 0.01%
1bps _ | . . . . . . . . . |____
+----+----+----+----+----+----+----+----+----+----+--->
1x 2x 3x 4x 5x 6x 7x 8x 9x 10x DISTANCE_FROM_STRIKE
(number of "widths")