Autonomint has a unique design where apart from minting USDA+ stablecoin, we also hedge user’s token price fall.
At Autonomint, a user minting USDA+ against their token collateral is offered a 20% hedge on their token for 1 month at a time.
Let’s assume ETH is the asset being hedged
Users start by depositing token and borrowing $USDA+ stablecoin at 80% LTV. The user’s position will be attached with a synthetic put option giving user the right but not the obligation to sell the collateral at the deposited price.
User deposited ETH at $3000 to borrow $USDA+ at 80% LTV i.e. 2400 $USDA+ User position is attached with a put option giving the user the right but not the obligation to sell ETH at the deposited price i.e $3000 when the user repays back the loan.
This put option has an expiry of 1 month currently so user will be able to execute on this position anytime within a month. Initially the option fees is deducted from the LTV itself i.e the borrowed funds so nothing upfront is going out from user’s pocket. For user, it looks like that they are just getting 3%-4% less LTV i.e around 76% LTV.
After deducting the option fees from 2400 USDA+, the user finally gets 2304 USDA+
A month passes by and suppose the price decreases by 15%, the user doesn’t want to renew it’s position and instead want to repay back the loan.
Assuming negligible interest charged for 1 month, The loan to be repaid back is ( 2304 USDA+ ) - 450 USDA+ = 1854 USDA+
The thing to note here is that this synthetic put option comes without any tail risk for protocol because the user is only allowed to sell this put option at deposited price till the market price is within the 20% price fall range and till 1 month time.
After 1 month, even if the position is user’s favour, the user won’t be able to claim the hedge unlike typical put options where user can get the payoff even after expiry.
Also, as soon as the price has decreased by 20%, the protocol will initiate the liquidation process. The user can always renew their position within 20% price range at anytime within 1 month but if the user fails to renew and ETH price falls to >20% then the position will be liquidated.
This liquidation can be treated as user selling a call option to the protocol to buy the collateral at ( -20% of the deposited price). So, inspite of the user getting liquidated at 80% LTV, the user is still hedged from any downside ETH price fall due to USDA+ stablecoin being held which is pegged to $1.
So, the user is protected for any ETH price decrease over & above 20% with the earlier borrowed stablecoins.
So, a cheap hedging cost is achieved by a combination of buying a ATM put option offering 20% downside protection with no tail risk and selling a call option at 80% strike price on the deposited price and using the earlier borrowed/minted USDA+ stablecoin to execute on this call option. As user is getting 80% of the liquidity back in USDA+ initially itself, so the token collateral requirement are also on par with the margins taken on existing derivative protocols. There is no excess collateral requirement at Autonomint.
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Here, high Option premiums are paid because the entire ETH price loss is covered. These premiums are paid upfront and the option premium price is currently at $160+ for 1 ETH ATM (At the money) with 1 month expiry.
The option fees fo
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No upfront Option Premiums as the amount is deducted from the LTV itself. So, a user borrowing stablecoin USDA+ at 80% LTV would need to give away 3%-4% of that LTV to be put up for option premium. This Option premium is not paid from user’s pocket so no cost to user initially. The option premiums are < 50% in comparison to the option premium of a typical put option payoff diagram. This is primarily because the user hedge of ETH is split into 2 components
20% ETH price hedge facilitated by dCDS protection 80% ETH price hedge through stablecoin borrowed
So, user is paying for a put option premium for only the 20% downside price risk and the rest 80% is covered through stablecoin minted. User is required to pay a borrowing interest rate on stablecoin debt over time as long as the position is opened. This borrowing interest rate is paid at the closing of debt.
Now, let’s look at the payoff diagram comparison of users participating in dCDS
Option seller receives high Option premiums for covering the entire downside price risk. So, the profits are limited to option premiums and losses are limited to 100% of ETH price.