Introducing Ribbon V2
Since launching the first Theta Vault on April 12, Ribbon has made significant progress:
- Launched 4 products (ETH Covered Call, WBTC Covered Call, ETH Put Selling, Yearn ETH Put Selling)
- Scaled vaults to $100m+ TVL
- Cumulative >$800m of notional volume of options traded, generate the majority of on-chain options volume
- Over $4m in yield paid out to depositors since April
Today, we are excited to announce Ribbon’s V2 protocol. This new release focuses on 3 main components:
- Decentralization of the vaults
- Rebuilding the vault accounting system
- Governable vault parameters
Decentralizing the Vaults
One of the biggest issues with Ribbon V1 Vaults was the fact that they were, for the most part, managed products. The Ribbon team would need to select strike prices for the vaults and execute option sales to market makers on a weekly basis. While this worked well for bootstrapping the vaults and evaluating market demand for these products, it is not a scalable model at all. Firstly, users would need to trust the manager of these vaults to do their job honestly — this was fine for Ribbon V1 because users trusted the Ribbon team to execute the vault strategy correctly, but will become an ever-increasing risk in the long term as the vaults scale to $1B+ of assets. Secondly, having human-managed vaults limits the number of vaults that can be supported by the platform. It is extremely difficult to scale to 50+ vaults if humans are still managing each one individually. Furthermore, we do not want to be in the business of Asset Management — we want to build autonomous financial strategies on-chain because that is tremendously more scalable.
There are 2 main components necessary to decentralize the vaults:
- Strike selection: instead of having a human decide the strike prices for the options that the vault sells, a smart contract should be able to do it instead.
- Option sales: instead of working with whitelisted market makers to sell the options that the vault creates, we can use an on-chain auction mechanism that allows anyone to participate on the opposite side of the vaults.
We have built new features into Ribbon V2 that allow these two components to be fully decentralized — Algorithmic Strike Selection and Open Auctions. We will be posting blog posts that do a deep dive into each of these features in the following weeks.
Rebuilding the Vault Accounting System
Another common pain point in Ribbon V1 vaults was the accounting system. The vaults allocated 90% of its funds every week to sell options, and kept the remaining 10% as “exit liquidity” for users who wanted to withdraw immediately. This created an unfair dynamic where users could withdraw immediately if it looked like the vault would lose money that week. Furthermore, users that deposited into the vaults mid-week would share in the potential losses of the vault from the prior week, even though their funds were not used to write options. These quirks with the vault accounting system created significant confusion around the best time to deposit or withdraw into Ribbon Vaults.
In Ribbon V2, we rebuilt the accounting system from scratch to avoid these issues from happening. Some of the benefits of the new accounting system include:
- Depositors do not suffer the loss of previous week’s short position
- 100% utilization of vault funds instead of 90%, increasing yields
- No early withdrawals, all withdrawals can only happen after option expiry, making it fair for all vault depositors
We also revamped the fee model of the Ribbon Vaults. In V1, all vaults charged an exit fee, which is a flat fee when users withdraw from the vaults. In V2, vaults have both management fee and performance fee parameters, allowing a more fine-tuned fee model based on the type of strategy that each vault runs.
Governable Vault Parameters
With the new fee model in place, one of the main parameters that RBN holders would be able to govern is the fee model for the Ribbon vaults. Vaults that run a “dumb” systematic strategy may enforce a flat management fee, whereas other vaults that run more complicated strategies may enforce both management and performance fees. These parameters will be controlled by RBN holders.
Secondly, and more importantly, the actual strategy that a vault runs can also be governed by RBN holders. Since the strategies that vaults run are now defined as smart contracts instead of human-driven, anyone can now propose a smart contract that defines a new strategy — and swapping strategies can be decided by RBN governance. For example, in times of high volatility, RBN governance may decide that they want the vault to run a more conservative strategy by selling further out of the money calls. In times of low volatility, RBN governance can vote to switch this strategy to a more aggressive one to maximize yields.
Through these parameters, Ribbon Vaults can become significantly more community owned than the current status quo. We expect that the gigabrains in the Ribbon community will be able to make better long-term decisions on what kinds of strategies each vault should run.
Migration to V2
Since a lot of features in Ribbon V2 are highly experimental, we are initially going to run a gradual migration from V1 → V2. This means that we will enforce a conservative vault caps on V2 vaults, and test the system in production for a few weeks before we open the floodgates for everyone to migrate over. Once we have strong confidence in the V2 vaults working as expected, we will run a hard migration, where we permanently pause the option strategies in the V1 vaults, and create an easy (and free!) way for users to migrate to V2.
Over the next few weeks, we will be releasing more blog posts that dive deep into the features of V2, as well as announce a date for the first V2 vault to launch. In the meantime, stay tuned and join our Discord if you have any questions!
