Ribbon Finance (RBN) is an Ethereum token that administers Ribbon Finance, a decentralized finance protocol that aims to optimize a portfolio’s risk-return profile by mixing options, futures, and fixed income.RBN is the protocol’s governance token, and it may be used to make proposals and cast votes on the platform’s future.
From the beginning, the ribbon was platform-neutral. Although we first launched Ribbon on Ethereum, we had always intended to make it available on all chains and to allow any community to utilize it.
Ribbon uses financial engineering to create structured products with long-term returns. Ribbon’s first product is a yield-focused automated options strategy. Developers may also utilize the protocol to combine multiple DeFi derivatives to create arbitrarily structured goods. Structured products are packaged financial instruments that use a range of derivatives to achieve a certain risk-return aim, such as betting on volatility, improving returns, or adhering to risk-management guidelines.
Theta Vault is a brand-new product that automates a covered call strategy for high ETH yield. The vault employs a covered call strategy, in which it sells out-of-the-money call options on a weekly basis in order to generate income.
The main danger of pursuing this method is that depositors may be willing to forego upside in exchange for a guaranteed return. Users who sell call options are essentially pledging to sell the asset at the strike price, even if it rises above it (a.k.a selling early). As a result, if the price of the asset rises dramatically in a short period of time, depositors may receive a “negative yield” on their ETH.
This will only happen if the ETH/USD exchange rate rises sufficiently, so depositors will still be in the black in USD terms. The vault also offers call options that are very far out of the money, implying that the options are unlikely to be exercised.
Long term high yield sources in the process of DeFi
New investing methods that combine the TradFi and DeFi worlds. Tokenization of real-world assets (RWAs) like account receivables, consumer loans in poor countries, non-collateralized loans, and the packaging of complicated trading methods into structured products are just a few examples of use cases. These are the DeFi’s of the future.
Investors were originally exposed to structured products in the 1990s as a way to have quick and low-risk access to stocks. Today, this usually entails combining numerous investing methods and assets into a single package. Ribbon, which has been quite successful in TradFi (Structured products market size), has just found its way into DeFi.
The ribbon has developed a series of automated option selling tactics that retail consumers may utilise to participate in and receive weekly payouts if they are successful. Ribbon presently provides customers with four alternative trading techniques, which are represented by so-called Theta Vaults. From the premiums it gets on selling weekly call or put options, each theta vault earns yearly returns ranging from 19% to 35%. Since April, Ribbon has gathered over $100 million in user money and paid out over $4 million in dividends.
Before we tell you about Ribbons theta vaults, we first want you to understand how options work to explain their source of yields.
How Ribbon makes money.
A financial option is a contract that offers the buyer the right but not the obligation to buy or sell an asset at a fixed price. Unlike buying an item at the moment, options contracts allow investors to speculate on the price of an asset with defined risk and a high potential gain (particularly for volatile assets) without actually acquiring it. Investors purchase CALL options to bet on an asset’s price increases, and PUT options to gamble on the asset’s price decreases. To comprehend how options function, you must first comprehend the three major components of an option. You pay a premium for an option contract that gives the holder the right to purchase or sell an asset at a certain strike price until the contract expires.
An option’s strike price is the predefined price at which you have the right to buy an asset. The duration of your options contract is determined by the expiry date. This provides a term in which you have the right to buy the asset at the strike price until a certain date. The premium is the amount you pay for a certain choice.
What does a call option entail, and how does it work?
Let’s look at an example of a call option in action. As an investor, I predict the price of an Amazon ($AMZN) share will soon grow from $50 to $100. I can take a chance and buy a call option using the components indicated below. The strike price is $60, the option expires in a week, and the premium is $5 (premium = cost to obtain the option).
Depending on if my prognosis is true, I’ve already spent $5, allowing me to buy $AMZN for $60 in a week. My option is worthless at the current price of $50. My option to buy a share at $60 grows more valuable as the price of $AMZN rises, as seen in the graph below.
Once $AMZN rises above $65 (the options premium ($5) plus the strike price ($60), I break even (I’m “in the money”). As long as the price of $AMZN rises, my upside increases since I can acquire a share at a bargain.
So, for $50, why not buy a share in $AMZN? What if the price drops to $10 by the following week? By purchasing an option, I may acquire exposure to rising prices while limiting my losses on the downside. Rather than spending $50 to buy one share at the moment and losing $40, the call option limits my risk to the premium I pay ($5).
How does a put option operate and what is it?
Put options are similar to call options in that they allow you to wager against the price of something. The same elements are present here as before: The strike price, the expiration date, and the premium are all factors to consider. However, instead of being able to BUY an asset at the strike price, you may now SELL another person’s asset at the strike price. Owners of puts have the option to sell a stock at a predetermined “strike price” before a set of expiration dates. If the stock prices of the firms fall below the applicable strike prices before the options expire, the owner can profitably sell the shares. In this case, I’d want to wager that the price of Bitcoin will drop from $40’000 to $35’000 in one week.
So, at a premium (the price of the option) of $100, I buy a put option with a strike price of $39’000 and an expiry date of 1 week from today.
Scenario A: Bitcoin reaches a price of $39’000 or higher by next week. At expiration, my option is worthless, and I’ve lost $100. Nobody respects my right to sell BTC at a lower price than it is now.
Scenario B: As projected, the Bitcoin price drops to $35’000, and my option to sell bitcoin at 39’00 begins to appreciate in value. At this price, I can exercise your right to sell bitcoin for $39,00, giving me a profit of $3900 (39,00-(35,00+$100).
Ribbon Finance uses options contracts in its vaults in a unique way.
What we just described was the viewpoint of someone who buys a call and puts options. Ribbon finance takes the opposite side of the transaction, utilizing user funds to sell (or underwrite) calls and put options to other market players in the hopes of profiting from the options premium.
When an option stays “out of the money,” an option seller gains money on the premium paid on the option (OTM). If the price of a call option is below the strike price at expiry, the option is out of the money. When the price of a put option expires above the strike price, it is considered out-of-the-money. Ribbon writes options on a weekly basis using Opyn with a carefully determined strike price that tries to maximize the option’s sale price while reducing the danger of the option being “in the money” utilizing the funds’ users’ deposits in Theta vaults. Each time they do, the vaults’ premium is returned to the vault’s investors, compounded, and reinvested the following week.
What is the benefit of this?
Although it is feasible to develop and write (sell) option contracts on your own, the procedure is complicated for the average investor due to the numerous factors involved. You must weigh the risk/reward of the price you may sell an option at versus the likelihood of your option being exercised (being “in the money”), in addition to the expense of generating these contracts.
What are the potential risks?
The major risk associated with depositing cash with Ribbon is that options will expire in the money. This implies that depending on the price of the asset, customers might lose money on an option traded any given week. The ribbon has done extensive backtests using options strategies to maximize the risk-return ratio of its vaults in order to reduce this risk. More information may be found here.
Smart contract risk – As with every DeFi project that uses smart contracts, smart contract risk will arise. While DeFi is commonly referred to as “trustless,” a DeFi platform user must have faith in the smart contract with which they are dealing. A smart contract may be opaque to a non-technical user, implying that the user trusts the contract code in the same way that he or she trusts the code of a standard web service.
Ribbon token, the DAO, and the Ribbon Ribbon team have a token called $RBN that is presently non-transferable but is used to vote on governance ideas in the ribbon community. more information
Airdrops for early community members and Liquidity mining incentives for vault members have been given out in the form of Ribbon’s token $RBN.
The ribbon has stated that he intends to launch more liquidity mining schemes in the future, as well as sell $RBN via an LBP or Miso auction.
What are the minimum and maximum withdrawal amounts?
Coinbase has implemented safeguards to ensure a healthy and efficient network both on-chain and through our platform.
These safeguards include both minimum and maximum amounts for each cryptocurrency we allow customers to send through the blockchain. These amounts vary by asset and are subject to change.
Thank you for reading. I hope you found this article helpful. Share it with your friends and families, and let me know your views about ribbon financing in the comment section below.