More Research on Real Yield Protocols: Buffer Finance | TKX Weekly
Part I. Buffer Finance
As GMX gains traction, Arbitrum transactions and liquidity have been growing significantly. Buffer Finance, as an option DEX, is taking its position in the Arbitrum ecosystem. Traders can create, buy, and settle options against protocol-owned liquidity (POL).
Buffer Finance started as V1: a general option platform on BSC, Avalanche and Aurora. It is a peer-to-pool options trading that works like AMM, with an expiry date ranging from 1 to 90 days.
The recent release of V2 changes the game. Relaunched first on Arbitrum, V2 solely focuses on binary options with no custom strike prices, and the expiry range is changed to 5 mins — 24 hours. Also, V2 adopts a new tokenomics which is very similar to GMX’s model — GLP + esGMX + multiplier points. However, during beta testing the team discontinued the model due to the high volatility of the BLP pool (similar to the GLP pool, the counterparty of traders).
What is Binary Option
Before going deep into details let’s talk about what is binary option. The binary option is easy to understand — the gain/loss outcomes simply depend on whether the asset’s price will be above or below a specific price at a particular time. When you buy in, you need to set a strike price with an expiry date. If the asset’s price is above/below the strike price (for call/put options) at expiry, you win your stake plus profit. Otherwise, you get nothing.
How V2 Works
Initially, Buffer Finance followed GMX’s design to have $BFR for users to stake. $BFR is the protocol token which shares part of protocol revenue. Staking reward is in the form of $BFR, $esBFR, and USDC (“real yield”). BLP is the liquidity pool for users to provide liquidity and is the counterparty of traders. However, the Buffer Finance team has replaced BLP with the POL (Protocol Owned Liquidity) model due to significant volatility in BLP after 12 days of its launch. As of the time of writing, BLP is closed and users are not able to provide liquidity to the USDC vault.
In V2, there are two key roles:
- Options Traders: traders set strike price, expiry and options size to purchase a call or put option.
- $BFR Token Holders: $BFR token holders can stake their tokens to earn a share of protocol revenue and participate in protocol governance.
When traders purchase a binary option, they are betting on the trading direction of the underlying asset (up/down). If a position is in the money (price is higher/lower than the strike price for call/put) at expiry, then traders earn the payout (a percentage of the initial investment, > 100%). Whereas if a position is out of the money (price is lower/higher than the strike price for call/put) at expiry, then traders lose their initial investment. Unlike other derivatives, the loss is limited to nothing more than the initial investment. BLP/POL is the counterparty of traders, traders’ profit is paid from the pool, and vice versa.
The payout ratio is a percentage that determines traders’ payout. The current payout ratio is 70%, which means if a trader wins, the payout of a $1,000 size option is $1,700, $1000 initial investment + $700 rewards.
The protocol’s revenue comes from the payout ratio. Assuming the probability of the price of an asset going up or down from the current price is 50%, the given payout ratio is 70%, and the average fee per trade would be 15%. At the moment, 40% of the fee goes into $BFR stakes while 60% fee goes into POL. Total cumulative fees are $87k.
Although given a short expiry timeframe (5 mins to 24 hours) the probability of an asset’s price going up or down is notionally 50%, it still has the potential risk of a long-tail event.
Buffer Finance has set up a couple of features to manage risks:
- Trade Size Limit: Max trade size can be 0.3% of the available POL
- Max Utilization of Vault: Max vault utilization at a time is capped at 10% of the total available liquidity
- Pause trading: In highly volatile times, trading will be paused at the team’s discretion
*Note that this is the version after changing to POL.
- Buffer Finance found its niche to differentiate itself from other perps through binary options — easy to understand, solving the problem of complexity for traders.
- Launching on Arbitrum can further enrich the Arbitrum DeFi landscape. Having GMX, Gains Network and other DeFi protocols can give users more room in their trading strategy.
- Buffer Finance team showed competence in handling BLP failure. They shifted quickly from BLP to POL when they saw high volatility in the BLP exchange rate.
- The payout ratio is relatively low compares with other traditional binary options platforms, which are ranging from 65% to 90%.
- The size of Protocol Owned Liquidity significantly limited the development of Buffer Finance. Due to risk management, the team implemented a maximum trade size limit. With current available liquidity from POL, the maximum size per trade is ~$350, this is not enough for sophisticated traders for their strategy
- Since liquidity is owned by protocol, the scalability of the protocol is limited. I believe BLP will be relaunched soon to boost its growth.
Part II. Market Updates
FTX Files for Bankruptcy Protection in US; CEO Bankman-Fried Resigns
Crypto exchange FTX filed for bankruptcy protection in the U.S. CEO and founder Sam Bankman-Fried also resigned his role, but will “assist in an orderly transition.” John Ray III is the new CEO.
SEC Commissioner Hester Peirce: FTX’s Collapse Could Finally Be ‘Catalyst’ for Regulation
Hester M. Peirce, a commissioner at the SEC, said that despite the dark moment for the industry, FTX’s downfall could be the “catalyst” government agencies needed to “sit down” and create clear regulations.
Cosmos Blockchain Founder Jae Kwon Opposes Proposed Changes to ATOM Token
Jae Kwon, founder of the Cosmos blockchain, said he is against proposed changes that would introduce liquid staking to the system. Kwon said in an interview with CoinDesk. Passing what’s known as Proposition 82 would create a dangerous precedent of minting a “scandalous” number of new tokens — ATOM2.0 — to a treasury that is controlled by select insiders.
White House Says FTX Crash ‘Underscores’ Crypto Concerns
The Biden administration is keeping an eye on Bahamas-based crypto exchange FTX’s rapidly unfolding liquidity crisis. White House Press Secretary Karine Jean-Pierre told reporters during a press briefing on Thursday that the Biden administration is “aware of the recent developments on [FTX] and will continue to monitor the situation.”
Binance Releases Wallet Addresses of $69B Crypto Reserve
Binance released a list of its cold wallets and reserves a day after backing out of a deal to buy troubled crypto exchange FTX. The crypto exchange says its holds around 475,000 bitcoin (US$7.8 billion), 4.8 million ether ($5.57 billion), 17.6 billion USDT ($17.4 billion), 601 million USDC ($607 million), as well as close to 21.7 billion of its own stablecoin BUSD (worth $21.9 billion) and 58 million of its BNB tokens (worth $16 billion). In total, the reserves listed had a total market value of around $69 billion, based on current market prices.
Part III. Fundraising News
TRM Labs — Blockchain intelligence firm
Raised $70M in a Series B funding round led by Thoma Bravo. Other investors include Goldman Sachs, PayPal Ventures, Amex Ventures and Citi Ventures.
Fordefi — DeFi-focused wallet
Raised $18M in a seed funding round led by Lightspeed Venture Partners. Other investors include Alameda Research, Jump Capital, Castle Island, Electric Capital and others.
Notifi — Web3 communication infrastructure platform
Raised $10M in a seed funding round led by Hashed and Race Capital. Other investors include Struck Capital, HRT Capital, Wintermute, Superscrypt, Long Hash Ventures, NFT Bank, Protocol Labs, Cherubic, Metaweb Ventures, Alumni Ventures and others.
Elusiv — Zero-Knowledge-based compliant privacy protocol
Raised $3.5M in a seed funding round led by LongHash Ventures and Staking Facilities Ventures. Other investors include Jump Crypto, NGC Ventures, Big Brain Holdings, Anagram, Cogitent Ventures, Equilibrium, Marin Ventures, Token Ventures and others.
Archax — Digital assets exchange
Raised $28.5M in a Series A funding round led by Abrdn. Other investors include Bitrock Capital, Blockchain Coinvestors, The Tezos Foundation, Lingfeng Capital and others.
About TKX Capital
Note: TKX Capital do not offer any financial advice for retail investors and we have no affiliation with projects in this research.