Frequently Asked Questions

Here are some brief answers to questions we get a lot. Keep in mind that Volatility Protocol is still in beta, so some of these things may change over time. Can't find the answer you're looking for? Reach out on Discord and we'll help clear things up.

What is Volatility Protocol?

Volatility Protocol publishes real-time index feeds that track the volatility of crypto assets. These feeds can be combined with other decentralized protocols like UMA and Balancer to make crypto-volatility tradable.

What is the volETH index?

volETH is a model-free, real-time measure of the price volatility implied by the ETH options market. This generates a 14-day expected volatility of ETH. It offers traders a way to take long positions on ETH volatility.

What is the ivolETH index?

ivolETH is the inverse of volETH. It offers traders a way to take short positions on ETH volatility. When volETH moves up ivolETH moves down by an equivalent percentage, and vice versa.

ivolETH not only makes taking a short position easier, it also offers numerous affordances for other DeFi participants. Minting equal USDC values of volETH and ivolETH is a great way for liquidity providers and arbitrageurs to take near delta-neutral positions.

How are the volETH and ivolETH indexes calculated?

We calculate volETH using a similar methodology to that which underpins the VIX® Index*, the premier volatility benchmark for the U.S. stock market.

Currently volETH is calculated by using out-of-the-money (OTM) call and put options from Deribit. As DeFi options protocols continue to become more robust, we will pivot to calculating all Volatility Feeds from fully decentralized sources.

You can learn more about the methodology used to compute volETH and its inverse in the volETH Methodology paper .

The inverse index, ivolETH, is derived from the volETH using the formula 1/volETH * 100

How does trading volatility work?

Using UMA's synthetic contracts, ERC-20 tokens are created for both volETH and ivolETH. These are weekly contracts. They are launched after and expire before rollovers every Thursday at 08:00 UTC. After expiration anyone that holds volETH and/or ivolETH can redeem those tokens for an amount of USDC equal to their respective index prices at expiration. This is called the settlement price.

As ERC-20 tokens, volETH and ivolETH can be traded on any DEX/CEX that supports them. Currently a Balancer automated market maker pool is set up for trading volETH and ivolETH.

When are rollovers and how do they affect price?

In order to track a rolling 14-day expected volatility of ETH, the data used for volETH and ivolETH rolls from one options expiration date to another. This happens twice weekly.

  • The Near Term contract (expiring 6-12 days from current time) rolls from one expiration to another every Sunday at 08:00 UTC.
  • The Next Term contract (expiring 16-22 days from current time) rolls from one expiration to another every Thursday at 08:00 UTC.
Rollovers can significantly affect the price of the index. To mitigate the price effect of the next rollover, volETH and ivolETH are launched as weekly contracts that start one hour after Thursday's rollover and expire one hour before the following Thursday's rollover.

How do I mint volETH or ivolETH?

volETH and ivolETH are synthetic futures built with UMA's contracts. To mint the tokens you must put up collateral. Minting volETH means that you will be short volatility, while minting ivolETH means you will be long volatility. You can mint both in equal USDC values to get a near-neutral position (this position could still take a loss in certain scenarios). Minting is primarily intended for liquidity providers and arbitrageurs, not typical traders.

While there is a minimum collateralization ratio of 150% it is suggested that you collateralize well beyond that. If you mint at the minimum collateralization ratio ANY price movement against you may lead to liquidation.

Minters should note that most weeks the indexes move less than 50%, however during the "Crypto Black Thursday" black swan event on March 12-13th 2020 volETH/ivolETH would have moved over 300%.