Open Auctions
Other than the Algorithmic Strike Selection, the second most significant change in Ribbon V2 is the way options are sold off. In V1, the options that the vault minted on a weekly basis were sold off to whitelisted market makers. While this worked well, one of the most common questions we received was whether people could buy the options from the vault directly. In V2, the answer is yes — option sales are permissionless, and anyone can purchase options from the vault.
Current Status Quo
In the current version of Ribbon Vaults, every week, the vaults mint a bunch of options using the collateral in it. The vault manager, a.k.a the Ribbon Team, then has administrative rights to sellOptions on behalf of the vault by swapping the options via an Airswap order with another counterparty.
This requires high levels of trust, because users need to trust that the managers are going to sell the options for a good price. In fact, it is possible for the manager to sell the options to themselves at a very low price — effectively screwing over the vault depositors for financial gain. Today, this is not a huge issue because the Ribbon Team is incentivized to be honest so that the vaults are useful and sustainable financial products long-term. But we need to move away from this trust model as quickly as possible, and hence it is one of the key focuses on Ribbon V2.
Auctions Solve This
The most elegant solution is to have the vaults auction off all the options 100% on-chain — this achieves two important properties: being transparent and open for participation.
- Transparent
Previously, vault managers and market-makers decided on the pricing behind closed doors. Regular users have zero transparency into how the pricing was determined. Auctions allow the entire bidding process to be on-chain, and hence everyone can see how the final pricing was determined. - Open
Currently, vault managers only deal with whitelisted market-makers. However, by having the auction on-chain, anyone with an Ethereum address can participate in this process.
We have opted to go with Gnosis Auctions as the auction mechanism of choice. In this model, buyers bid on the auction with the price and quantity of their choice, and the auction system settles them at the end at a single final price. To learn exactly how the Gnosis Auctions work, please read this first.
Participating in the Auctions
As a vault depositor, the experience should be identical to the V1 Vault experience — you deposit your assets and generate yield over time.
On the other hand, now anyone can participate in the auctions by buying options from the vaults. Buyers can go to Gnosis website to participate directly. The V2 Vaults will be minting options on a weekly basis and kicking off auctions at 1130am UTC every Friday, which currently last one hour long.
Due to the experimental nature of using auctions to sell options, we are rolling our V2 gradually and experimenting on auction parameters in production. In the meantime, stay tuned and join our Discord if you have any questions!
