Reserve Logic
IVX market operates as a reserve-based dynamic AMM that gurantees anytime entry and exit for traders with preserved token allocation for, retained for each position triggered.
The Implied Volatily Liquidity Pool (IVLP) consists of a collection of tokens acquired in the form of index, that will be counterpositioned against traders contracts
At any moment in time, the amount deposited in IVLP always surpass the amount reserved for opened positions.
The reserve amount for each position will be determined given the risk profile of each position, direction of the position, and the delta configuration at moment of open
Long positions (Buy Call, Buy Put)
For long positions, the maximum P&L of each contract is theoretically unlimited. To manage LP risk, a dynamic maximum P&L is introduced depending on delta positioning of each trade to ensure fair upside for traders while capping potential drawdowns for liquidity providers. Now that we have knowledge of the risk profile of long positions we can describe their reserved allocation as followed:
Where
and represent the long call/put reserve exaggeration factor, a maximum leverage the IVLP pool can be exposed to against long traders
By that
Short Positions (Sell Call, Sell Put)
For short positions, Sell Call and Sell Put, the maximum P&L of each contract is limited to the initial premium price received, eventhough the maximum liability is defined, this maximum liability will be realised significantly more often that the maximum liability of long positions. For this reason it is prudent to hold a multiple of the initial premium as reserve to protect the IVLP from taking a significant drawdown. Now that we have knowledge of the risk profile of Short positions we can describe their reserved allocation as followed:
Where
Over-collateralization of positions will reduce the LP exposure to traders’ profits, at the expense of capital efficiency and total open interest accepted, a dynamical system that will be expanded more as the system matures and more quantitative data are collected
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