Pricing Mechanism

Pricing is one of the most critical components of any derivative protocol. To achieve our vision, we have implemented additional measures to ensure fair, transparent and tamper-proof pricing for all the end-users irrespective of role: Liquidity Provider or Traders.

The protocol adapts intent-based design to compute, validate and submit prices on-chain for intent execution. Upon user's request submission to the smart contract, a series of on-chain and off-chain events occur to submit the pricing required for executing the request.

General Pricing Formula

The final price ‘ $P_{f}$’ of an asset at time ‘t’ on the protocol can be represented as

$$P_{f} = \Phi * \left[ \frac{\gamma P_{c} + \delta P_{d}}{\gamma + \delta} \right]$$

where $P_{d}$ can be defined as the price of the asset from $n$ decentralized sources, $P_{i}, W_{i}$ represents the respective pricing and weight of the decentralized sources while $\Phi$ is a black box function to ensure tamper-proof pseudo-deterministic price for fair trade execution,

$$P_{d} = \sum_{i=1}^{i=n} {\frac{P_{i}W_{i}}{W_{i}}} = {\frac{P_{1}W_{1}+P_{2}W_{2}+...+P_{n}W_{n}}{W_{1}+W_{2}+...+W_{n}}}$$

and $P_{c}$ can be defined as the price of the asset from $m$ real-world sources and $P_{j},W_{j}$represents the respective pricing and weight of the real-world sources in form of a time-series function as

$$P_{c} = \sum_{i=0}^{i=n} C_{i}P_{t-i} = C_{0}P_{t} + C_{1}P_{t-1} +...+ C_{n}P_{t-n}$$

For simulation, we will plug in $i=2$ and define $C_{0} = 0.80, C_{1}=0.15, C_{2}=0.05$then

$$P_{c} = 0.80P_{t} + 0.15P_{t-1} + 0.05P_{t-2}$$

where

$$P_{t} = \sum_{j=1}^{j=m} {\frac{P_{j}W_{j}}{W_{j}}} = {\frac{P_{1}W_{1}+P_{2}W_{2}+...+P_{m}W_{m}}{W_{1}+W_{2}+...+W_{m}}}$$

Liquidation Price

The liquidation price for an asset for all active positions will differ, but considering rest of the parameters constant, it can be defined as

$$P_{L} = \frac{P_{TWAP}W_{1}+P_{VWAP}W_{2}}{W_{1}+W_{2}}$$

The liquidation price of the position is not computed as general pricing formula to ensure fair and transparent liquidation, especially in the event of volatile market conditions.

Hence, at any given time $t$,

$$P_{L} \ne P_{f}$$

Spread Factor

Based on the volatility of the market and asset, the protocol deploys additional parameters to safeguard LPs and prevent systematic risk to the protocol. One such factor is Spread Factor. If Spread Factor, $S_{f}$ is defined for an asset in a market by market creator, the final price to open/execute a trade in any direction will be

$$P_{open} = P_{f} \pm S_{f}$$

Depending on direction,

$$P_{L} = P_{f} + S_{f} , P_{S} = P_{f} - S_{f}$$

And the final price to close such positions can be defined as

$$P_{close} = P_{f} \mp S_{f}$$

Depending on direction,

$$P_{L} = P_{f} - S_{f} , P_{S} = P_{f} + S_{f}$$