Option Vaults

Empowering Users with Flexible Risk Management Tools through Dutch Auctions

DeFund Finance introduces Option Vaults, an effective product that brings the power of customizable risk management to the decentralized finance space. Our Option Vaults provide users with a flexible and efficient way to manage risk, generate yields, and capitalize on market opportunities through the use of Dutch auction options.

At the core of our Option Vaults are the Dutch auction options, which are minted directly from the vaults. These options allow users to take long or short positions on various underlying assets, such as TIA or USDC, without the risk of liquidation faced in perpetual futures markets.

The option minting process begins with users depositing collateral into the Option Vaults. The collateral can be in the form of stablecoins (such as USDC) or the underlying asset itself (such as TIA). Once the collateral is deposited, the Option Vault initiates a Dutch Auction, where the option's price starts high and decreases over time.

Dutch Auction Mechanism

The Dutch Auction mechanism is designed to simplify the decision-making process for option buyers and lower the barrier to entry for retail investors. Option buyers do not know the exact number of option contracts available for purchase during the auction, as the final auction size is determined by the vault. As the auction progresses, the Bid Price (Option Price) decreases over time, and option buyers submit a Bid Size (Contract Size) for the options they wish to purchase at the current price. At the end of the auction, the latest bidding price that fills the last offer is used as the Clearing Price (Delivery Price). If the auction is not fully filled, options are delivered at the Lower Bound Premium. Bidders who placed higher bids receive a refund for the difference after the auction ends. The auction ends when either the allocated auction time expires, or all option contracts are sold.

Vault Life Cycle

Each Option Vault goes through a life cycle consisting of multiple periods. During the Warmup Period, Vault Depositors (Option Sellers) can deposit or withdraw funds from the Warmup Balance before the auction begins. When the first auction starts, the vault enters the Lockup Period, and Vault Bidders (Option Buyers) can participate in Dutch Auctions. Depositors can unsubscribe from the Vault before the next Dutch Auction begins but not during. After the auction ends, the Option Premium (Depositor's Reward) is delivered from Vault Bidders to Vault Depositors, and depositors compound their rewards until their deposit is removed. On the option expiration date, the vault is settled based on the Settlement Price (underlying asset price at expiration). Profit and loss for Vault Depositors are calculated using the Strike Price and Settlement Price. The vault then proceeds to the next round, with remaining depositor funds auto-reinvested.

DeFund Finance's Option Vaults offer a user-friendly interface for both option sellers and buyers. The platform ensures the security of user funds through rigorous smart contract audits and robust security measures.