CVI (Crypto Volatility Index)
CVI (Crypto Volatility Index) is a decentralized VIX designed to mitigate the effects of market volatility and impermanent loss within the cryptocurrency domain. It was built as a tool to track and leverage cryptocurrency market volatility, aiming to address this need by offering a pioneering decentralized volatility index, allowing traders and investors to hedge against market fluctuations. [1]
Overview
The Crypto Volatility Index (CVI) provides a decentralized approach to evaluate and manage market volatility. Developed by the COTI team in collaboration with Prof. Dan Galai, the original creator of the VIX, the US stock market's volatility index, the CVI index monitors the 30-day implied volatility of Bitcoin and Ethereum. This index, which derives its value from cryptocurrency option prices and market expectations regarding future volatility, operates on a scale from 0 to 200. Built on the principles of the Black-Scholes option pricing model, the CVI index empowers traders to identify profit opportunities in dynamic markets, irrespective of price trends. [2]
The CVI ecosystem encompasses various components to encourage widespread adoption, including the CVI Platform AMM, Volatility tokens, Theta vault, and the $GOVI token. Together, these elements establish a comprehensive infrastructure for engaging with the CVI index. This framework enables traders and liquidity providers to explore profitable prospects within the cryptocurrency market, aiming to eliminate the need to predict price movements. [3]
Key Components
Volatility tokens
Volatility tokens introduce offers ways to engage with the Crypto Volatility Index (CVI). These tokens enable traders to profitably trade volatility on both decentralized exchanges (DEXs) and centralized exchanges (CEXs), contributing to the broader accessibility and composability of the CVI within the DeFi ecosystem. [4]
Key Features
Peg to the Index via the CVI Platform
Volatility tokens are designed to peg to the CVI index, which is maintained by the CVI platform's Automatic Market Maker (AMM) mechanism. This ensures that the tokens' value remains closely aligned with the index's fluctuations, promoting accurate representation in the market. Whenever deviations occur, arbitrage opportunities incentivize quick corrections. [5]
Full Hedge and Delta Exposure
Volatility tokens function as a hedging tool, providing a counterparty-backed long position on the CVI index. This approach guarantees that the tokens can be fully redeemed regardless of the index's value, offering a reliable and consistent hedge. By having this risk coverage, traders can engage in strategies that capitalize on market volatility without predicting price movements. [5]
Rebase Mechanism and Funding Fees
To account for time decay and maintain peg, volatility tokens employ a rebase mechanism. This mechanism is executed daily through Chainlink keepers, automatically adjusting token supply to reflect changes in the CVI index. Additionally, funding fees are applied based on the CVI Index value over time, ensuring fair compensation for liquidity providers and risk takers. [6]
Usability and Arbitrage Opportunities
Volatility tokens offer dual trading funnels: via the CVI platform and DEXs. Traders can choose between immediate fulfillment on DEXs with regular slippage or utilizing the platform for lower slippage and no price impact. The presence of volatility tokens in both the CVI platform and DEXs creates a dynamic environment for arbitrageurs, allowing them to capitalize on price disparities between markets and maintain peg alignment. [7]
Theta Vault
The Theta Vault serves as a foundational element within CVI v3, providing a scalable solution for liquidity provisioning to the volatility tokens. As these tokens are subject to time decay and Theta exposure due to their nature, the Theta Vault is instrumental in addressing the challenges of pairing volatility tokens in a liquidity pool without considering time decay. [8]
Key Features
Time Decay Challenges
As volatility tokens inherently charge time decay fees and exhibit Theta exposure, holding them for prolonged periods is not feasible. However, for sustainable liquidity on DEXs, a mechanism is needed to enable liquidity pairing without being affected by time decay. This key requirement led to the creation of the Theta Vault in CVI v3, designed to eliminate the impact of Theta for DEX liquidity. [8]
Liquidity Provisioning
The Theta Vault plays a crucial role in managing liquidity by serving as the exclusive gateway for adding and removing liquidity within the CVI AMM. It achieves this by depositing liquidity as collateral into the CVI AMM through the process of minting and burning volatility tokens. This strategic mechanism facilitates the utilization of both AMM and DEX liquidity, positioning the vault as the sole beneficiary of time decay fees while preventing Theta exposure for DEX liquidity. [8]
Balancing AMM and DEX Liquidity
The Theta Vault addresses the challenge of optimally splitting liquidity between the CVI AMM and DEXs through a strategic equation system. To ensure an equilibrium between these two liquidity sources, the following considerations are integrated:
- The CVI AMM liquidity must exceed a predetermined percentage (P%) of collateral backing to accommodate potential minting of CVI tokens for arbitrage purposes.
- DEX liquidity is added when the intrinsic value of CVI in the AMM closely matches the CVI price on the DEX, promoting equilibrium and avoiding arbitrage opportunities.
Sustainable Liquidity and Benefits
The Theta Vault's strategic approach creates a sustainable source of liquidity for volatility tokens on DEXs, without being susceptible to time decay effects. By effectively managing liquidity provisioning, the vault enhances the functionality of the CVI platform, aligning its operation with the needs of traders seeking to navigate volatility effectively. In addition to offering a sophisticated trading experience, the Theta Vault contributes to the overall liquidity ecosystem and ensures consistent performance of volatility tokens within the DeFi landscape. [8]
$GOVI
$GOVI is the governance token for CVI's decentralized protocol and platform, allowing users to vote and participate in the decision-making process. It was distributed fairly through airdrops to COTI holders and liquidity providers, ensuring a level playing field. The platform's fees drive 85% $GOVI buybacks, reducing supply and benefiting traders, liquidity providers, and stakers. $GOVI is accessible on various DEXs and CEXs, fostering widespread participation. [9]
Staking
The $GOVI token supports auto-compounding staking on both Polygon and Arbitrum networks. This innovative approach enables users to maximize their rewards over time by automatically reinvesting earned tokens. Through this auto-compounding mechanism, users can experience amplified returns while minimizing the need for constant token management and gas fees. The longer $GOVI tokens are staked, the more pronounced the auto-compounding effect becomes, leading to increased rewards without the hassle of frequent interaction. Stakers can easily redeem their accumulated rewards by converting $xGOVI back to $GOVI at their convenience. [10]
Rewards
CVI V3 introduces a rewarding system designed to benefit long-term $GOVI holders and active platform users through Escrowed GOVI (esGOVI) tokens. General These rewards extend to Liquidity Providers on the CVI platform and GOVI token holders, recognizing their commitment to the CVI project. Escrowed GOVI Escrowed GOVI (esGOVI) tokens, which cannot be transferred, serve dual purposes:
- Staking for rewards akin to regular GOVI tokens.
- Vesting over one year to become actual GOVI tokens. Each staked Escrowed GOVI token earns rewards equivalent to a regular GOVI token.
Compounding vs Claiming
Compounding stakes Escrowed GOVI rewards, amplifying rewards received. Claiming transfers pending esGOVI rewards to wallets. Staked Escrowed GOVI can be unstaked for vesting as desired.
Vesting
Vesting transforms Escrowed GOVI (esGOVI) back to GOVI over time, available for staked GOVI or staked Theta Vault (T-CVI-LP) tokens. Vested tokens convert every block, becoming fully vested in 365 days as per Tokenomics page APY. Distribution Rate EsGOVI is distributed to staked GOVI and staked T-CVI-LP tokens based on a changeable schedule. Modifications are communicated 7 days prior and rewards are distributed every second.
Distribution Rate
EsGOVI is distributed to staked GOVI and staked T-CVI-LP tokens based on a changeable schedule. Modifications are communicated 7 days prior and rewards are distributed every second.
Tokenomics
During May of 2023, CVI rolled out their tokenomics as well as a modified tokenomics model designed to enhance the reward system and promote long-term commitment among its users. Live on Arbitrum, the CVI tokenomics model introduces "escrowed GOVI" (esGOVI) as a mechanism to incentivize long-term holding and reduce the emission of unlocked GOVI tokens, thereby increasing GOVI's scarcity. esGOVI is equally useful as GOVI and offers two options for holders: compounding with staked GOVI or vesting over 365 days, converting into GOVI. [14]
Earning esGOVI
There are three ways to earn esGOVI: [15]
- Staking GOVI: Similar to their previous system, users can stake/unstake GOVI at any time, with esGOVI rewards based on the size of their stake relative to the staking pool.
- Staking Theta Vault LP tokens: Staking LP tokens functions similarly to staking GOVI, with no lock-up period, and rewards are based on stake size relative to the pool.
- Traders: Users who mint, burn, and swap CVI will earn esGOVI proportional to their trading volume. Traders do not need to stake or reserve GOVI to vest their esGOVI.
Using esGOVI
Once earned, esGOVI can be either compounded or claimed. Compounding adds esGOVI to the staking pool, earning additional staking rewards like GOVI. Claiming allows users to vest esGOVI into GOVI over a year. Notably, esGOVI is not tradable and can only be used for staking or vesting. [14][15]
Vesting esGOVI
To vest esGOVI, users need to reserve the equivalent amount of GOVI or Theta Vault LP tokens used to earn esGOVI. During the vesting process, esGOVI tokens are gradually converted into GOVI over 365 days. The resulting GOVI tokens can be claimed immediately. Tokens reserved for vesting cannot be unstaked or sold during the vesting period. [14][15]
Updates
CVI v2
On July 29, 2021, CVI v2 was launched, bringing improvements and new features to the platform. [11]
Rebalancing Lockups and Rewards
As part of the platform upgrade, CVI V2 introduced a rebalanced fee mechanism and dynamic rewards for traders. Additionally, liquidity providers' lockup period was reduced from 72 hours to 48 hours, enhancing flexibility. [11]
USDC Platform and Margin Trading
The new version introduced a USDC platform, enabling users to open positions, provide liquidity, and stake CVI USDC liquidity tokens. Margin trading was also introduced, offering improved capital efficiency for traders. This allowed users to leverage their USDC positions on the Polygon network, enhancing trading strategies and risk management. [11]
Volatility Tokens and Composability
A notable milestone was the introduction of volatility tokens, a novel concept for trading volatility and enhancing CVI's compatibility with the broader DeFi ecosystem. These tokens were designed as funding fee adjusted leveraged rebased volatility tokens, allowing traders to maintain pegging to the index. The first Volatility token, ETHVOL, attracted attention for trading on Ethereum-based DEXs, facilitating arbitrage operations and reducing fees. [11]
Revamped Design and Enhanced User Experience
CVI V2 incorporated user feedback to revamp the platform's design, resulting in an improved UI/UX that made the Crypto Volatility Index platform smoother and more efficient for traders. [11]
CVI v3
On November 16, 2022, CVI v3 was launched, introducing the Theta Vault, a pioneering liquidity solution for volatility tokens. CVI v3 shifted the focus from early adopters to a more mature and comprehensive ecosystem. The highlight was the Theta Vault, designed to provide sustainable liquidity for volatility tokens on secondary markets and decentralized exchanges. This vault tackled challenges like time decay and Theta exposure, enabling traders to engage with volatility tokens more effectively. [12][13]
