In the last few months, Ribbon vaults have shown significant growth. Currently, the vaults are sitting at over $300m+ of TVL, which is an all-time-high in both USD terms and ETH terms. While keeping up with the vault growth, our team has also been quietly executing and shipping a fresh new set of features that will cement our place as the #1 DOV protocol in the industry. Most of these features are centered around 4 main pieces: leverage, composability, improved vault execution, and wider asset support.
Our current vault offerings are fully collateralized — meaning to sell 1 call option, users need to deposit 1 whole unit of collateral (e.g 1 ETH or 1 WBTC). We have seen a lot of demand from users to reduce that collateralization requirement, for example being able to sell 1 call option with only 0.5 units of collateral — effectively being 2x leveraged. While this is a way to juice yield by 2x, this also carries twice the amount of risk. Ribbon will be rolling this out to users, but it should be used with great caution.
Secondly, Ribbon will be the first DOV project to build and use Spread Vaults. Instead of the vault selling calls and puts, it will also be buying further out of the money calls and puts. In essence, this caps the downside risk to mitigate huge potential losses in the vaults, in exchange for lower yield. However, if we combine Levered Vaults and Spread Vaults, we can create a high-yield product that also has downside risk protection. We think Spread Vaults will be tremendously popular with DAOs or other Treasury customers because of the downside protection from selling options.
Auction Flow Reservation
Ribbon Auctions have become the biggest ongoing on-chain derivatives auction in DeFi, auctioning over $1b of notional option volume every month. Currently, all auction participants bid on-chain every Friday during a 2-hour window. We have been working on a very powerful new feature, which is what we’re calling “Auction Flow Reservation”.
Auction Flow Reservation is the idea that people can “call dibs” on the auction flow, even before it happens. This is an extremely powerful primitive — it turns the Ribbon auctions from a synchronous process to an asynchronous one, which makes it 100x more composable with other smart contracts. For example, if another structured product protocol wants to buy puts or calls from Ribbon, their smart contracts can “reserve” some of the auction flow in advance, and their protocol does not need a human bidding during the auction window every Friday. With this, anyone can build products that take either the long or short side of the Ribbon Vaults.
Perhaps more interestingly, this starts to resemble something that looks like Payment for Order Flow. There may arise a market for reserving Ribbon Auction Flow, where someone may pay extra to be guaranteed a fill from the Ribbon Auction. One could imagine a world where these users may have to stake RBN to have a priority queue in the reservation system, or maybe a second pre-auction auction, where the proceeds from this auction end up as additional yield to vault depositors. There is a huge design space in this Auction Flow Reservation system, and we are just scratching the surface.
Better Vault Execution
As Ribbon Vaults march to $1b TVL and beyond, we must ensure that vault execution does not degrade. Currently, Ribbon Vaults auction off 100% of the puts or calls that it is trying to sell during a 10-minute window, once a week. This creates a situation where the vault execution is extremely predictable, and market makers may try to front-run the Ribbon Vaults’ sell-pressure.
In V3, Ribbon Vaults will now be able to perform multiple, random size, random time auctions. For example, Ribbon Vault may be configured to sell the entire flow over 10 different auctions from Friday-Sunday at random times and in random sizes. This makes it tremendously more difficult to front-run, and should be able to significantly improve execution. We are also integrating our vaults with Paradigm.co, which will open up the Ribbon Auctions to their 800+ institutional customers.
One key requirement for enabling permissionless vaults is wider oracle support. Currently, Ribbon Vaults use Opyn for minting options positions, which in turn uses Chainlink for settlement under the hood. However, newer or long tail assets may not have Chainlink support from the get-go, making it difficult for people to spin up permissionless vaults for these assets. We’ve extended the protocol to support more types of oracles, starting with the Uniswap V3 oracle — this lets us create Option Vaults on almost any asset.
We demonstrated a proof-of-concept here with our $APE vault. We were able to spin up an $APE Option Vault only 3 days after $APE was released, making it the first venue in the world to trade $APE options. We will soon open this up to anyone.
New UX Features
As part of this new version, we’ve also built a bunch of new features that have solved the biggest pain points of many of our users. Firstly, we’ve built a new feature which we call Intervault Transfers, which lets users switch between vaults of the same base asset in a single transaction. For example, instead of withdrawing from the ETH Covered Call vault and depositing into the stETH vault, users can do it with one-click, without missing a week of yield.
Secondly, we’ve built the ability for users to Pause & Resume their funds’ utilization by the vault to sell options. This means that if you want to stop selling calls for a week because of an upcoming event, you do not need to withdraw your funds and redeposit them after — you can simply put your funds on pause within our vaults, and they will not be charged any fees.
Ribbon V3 is a much more powerful piece of infrastructure than Ribbon V2, and opens up the design space for many new types of strategies, both on the product side as well as on the vault execution side. We will be rolling out these features gradually over the coming months as they get audited and tested.