Summary
With the imminent launch of Aevo, this is a proposal for the Ribbon DAO to lend $1m to the Aevo Insurance Fund to bootstrap it.
Intro
All derivative exchanges require an insurance fund. The insurance fund acts as backstop capital for the exchange to maintain solvency if an account on the platform has a negative balance. This could happen if a liquidation is not performed quickly enough — the position may be sold for less than the value of the account’s collateral, making the account “underwater”.
This insurance fund acts as a buffer so that all traders can have their positions closed fairly — which in turn builds confidence for large traders to trade on Aevo.
Proposal
We propose that the Ribbon DAO lends $1m of assets to bootstrap the Aevo Insurance Fund, with the following conditions:
- $1m of assets will be lent, in USDC*
- At a rate of 10% APR, payable after 12 months
- Will be repaid in 1 year, with the option to extend (requires another governance vote)
- DAO can vote to rollover the loan
Bootstrapping $1m in the Aevo Insurance fund puts Aevo in a stronger position to attract larger traders on day 1. Over time, the trading fees accrued from Aevo will create a bigger and bigger insurance fund, and Aevo will be able to fully repay the DAO loan. Longer-term, this will create a stronger tie-in between the Aevo/Ribbon tokenomics (“Ribbonomics 2.0”).
Assuming an average fee of 3bps and 20% of trading fees being sent to the insurance fund, and we conservatively estimate 5m in notional daily volume (1.8b cumulative over one year), the exchange would have generated ~$550,000 in revenue and will have sufficient liquidity to repay the loan and interest.
| Average Fee | 0.03% |
|---|---|
| Daily Volume | $5,000,000 |
| Cumulative Volume (1y) | $1,825,000,000 |
| Cumulative Fees | $547,500 |
| Insurance Fund Contribution | $109,500 |
Other Considerations
To manage risk well, the size of the insurance fund should scale with the open interest of all derivative contracts on the platform. If the insurance fund is too small compared to the size of the exchange OI, large positions may not be able to get liquidated by the insurance fund.
Using those exchanges as benchmarks, $1m in the Aevo Insurance Fund should be able to support up to $50-100m of OI without too much risk for the exchange.
| Exchange | OI Futures | OI Options | Insurance Fund | IF as a % of OI |
|---|---|---|---|---|
| Deribit (Options Only) | $11,500,000,000 | $40,000,000 | 0.35% | |
| OKX (Options Only) | $450,000,000 | $5,990,500 | 1.33% | |
| Bybit (Options + Futures) | $3,520,000,000 | $325,000,000 | $250,000,000 | 6.50% |
| Bit.com (Options + Futures) | $30,000,000 | $8,000,000 | $875,000 | 2.30% |
Additional notes:
- Deribit’s insurance fund is the most relevant, since they are primarily an options exchange and the insurance fund backs the liquidations of options directly. Other exchanges like Bybit may have an inflated number because the insurance fund is shared across perps and options.
- During the extreme price events in the past 3 years, Deribit’s Insurance Fund as a % of their OI has fluctuated between 0.17% to 1.11%
- Using a projection of Aevo’s Open Interest as a percentage of Deribit Open Interest, a $1m insurance fund should be able to comfortably support Aevo as it grows from 5-10% of Deribit’s OI
| Deribit | 14/3/2023 | 08/11/2022 | 09/05/2022 | 18/05/2021 | 04/05/2021 | 09/03/2020 |
|---|---|---|---|---|---|---|
| Spot Price (ETH) | $1,663 | $1,250 | $2,128 | $2,450 | $3,107 | $168 |
| OI (contracts) | 3,760,799.00 | 4,742,333.00 | 1,995,743.00 | 1,625,281.00 | 1,509,729.00 | 216,538.00 |
| OI (USD) | $6,254,000,000 | $5,928,000,000 | $4,247,000,000 | $3,982,000,000 | $4,691,000,000 | $36,000,000 |
| IF (ETH) | 8,407.00 | 8,055.00 | 6,988.00 | 4,952.00 | 4,856.00 | 2,566.00 |
| IF (USD) | $14,000,000 | $10,100,000 | $14,900,000 | $12,100,000 | $15,100,000 | $400,000 |
| IF as a % of OI | 0.22% | 0.17% | 0.35% | 0.30% | 0.32% | 1.11% |
| Aevo Projection | Conservative | Aggressive |
|---|---|---|
| OI as a % of Deribit OI | 5.00% | 10% |
| OI (USD) | $750,000,000 | $1,500,000,000 |
| Insurance fund (USD) | $1,000,000 | $1,000,000 |
| IF as a % of OI | 0.13% | 0.07% |
*The DAO currently has ~$3.5m of non-RBN assets sitting idle in the treasury, comprised of ETH, USDC, and a few other tokens. If this proposal passes, there will be a second proposal to figure out which assets to liquidate to get $1m USDC.
Timing
Proposal will be live on forum for the next 7 days voting will then be open for 5 days. Voters will be able to vote Yes, let’s do it or No, let’s not do it.
Over the next week, we invite community feedback for the terms and specifications before creating a Snapshot vote.
