This new protocol allows crypto traders to capture DeFi volatility 🚨 This article is 4 years old...
This new protocol allows crypto traders to capture DeFi volatility
How does one take advantage of volatility when liquidity is locked in a pool? A new protocol wants to solve that.
2 min read
Updated: Jun. 14, 2021 at 5:11 pm UTC
Cover art/illustration via CryptoSlate. Image includes combined content which may include AI-generated content.
Decentralized finance (DeFi) recently topped $100 Billion in total value locked (TVL), which has restarted a familiar conversation regarding volatility in this space, and how best to track it.
What’s new this time around is the introduction of the ability of DeFi traders to capitalize on volatility in the same capacity that traders on Wall Street do.
Trading volatility in crypto
Crypto markets are notoriously volatile, with prices of even large-caps like Bitcoin falling 20-25% in a few hours (mid-cap altcoins even fall by 50% some days). Such volatility makes it a traders’ playground, but for those looking to bet on additional aspects of the market rather than just prices, a volatility instrument plays a key role—or even helps hedge—a strategy.
Volatility measures are incredibly important for utility tokens, as it’s one of the best ways to assess and hedge risk for most DeFi protocols. It is straightforward to measure volatility from cryptocurrency trade data using conventional methods.
The transparent data structure is ideally suited for measuring and modeling key market variables, such as volatility and market liquidity.
However, for a volatility measure to fulfill a role similar to the VIX index, it will need to be carefully crafted to the particular features of cryptocurrencies and decentralized markets.
Volatility Protocol recently introduced its suite of decentralized volatility feeds which tracks the volatility of crypto assets. Using a similar methodology which underpins the VIX Index, the eminent volatility benchmark for the U.S. stock market, Volatility Protocol enables the development of tokenized volatility synthetics for any utility token in DeFi.
The dApp’s Volatility Index Feeds can be used to build synthetic assets, manage portfolio risk, and gauge market sentiment for popular tokenized assets.
Some features of the app include “volatility gauges,” which monitor market sentiment in real-time and provide insight into shifting market dynamics using live Volatility Feeds. Users can also hedge liquidity provider (LP) risk via swap pools and lending markets
Top researcher joins team
To lead the research and development of these volatility measures, Volatility Protocol has enlisted UNC Chapel Hill’s Distinguished Economic Professor Dr. Peter Reinhard Hansen to lead the team that is developing this forecasting and volatility modeling for DeFi.
Featured three times in Thomson Reuters’ list of the World’s Most Influential Scientific Minds out of 70 economists worldwide, Dr. Hansen’s research spans the fields of forecasting, volatility, cointegration, multiple testing, and econometrics.
Dr. Hansen brings his world-class knowledge of Economics and Econometrics to the Volatility Protocol team as it prepares for its June 14th VOL governance token sale through an IDO on MISO by SushiSwap.
