Example of Illustration

Assuming 3 players A, B, and C. Player A is a liquidity provider aiming to stake 3 BTC, Player B is also a liquidity provider aiming to stake 1 BTC, while Player C is an option trader looking to gain some exposure with a 2 BTC face value.

When Player A stakes 3 BTC into the liquidity pool, he will receive, let’s say, 1,500 writeBTC as the receipt token of its staking in the pool, like a deposit receipt from a bank to prove their ownership of such assets. When player B stakes its 1 BTC into the liquidity Pool, he will receive 500 writeBTC calculated using M*DP/P where M stands for the total number of BTC receipt token in-circulation and DP stands for the number of the underlying asset player B wants to stake.

Let consider two situations:

Scenario 1

Player C purchases 2 BTC call options. Let’s assume the current BTC price is $50,000, the strike price is also $50,000, and duration of the call option is 30 days, and premium of such call is $10,000, and the trading fees is 2% of principal namely $1,000. When Player C makes such a purchase and paid $11,000 in total to, Player A and B —— all liquidity providers will enter such position pro-rata to their position available. In our case, 1.5 BTC of Player A and 0.5 BTC of Player B will be locked against Player C’s call position. $10,000 option premium paid by Player C will be immediately distributed to Player A and B by portion, while the $1,000 trading fee will be accrued on the platform payable to Pots(SWF token holders).

If the option expires/pre-exercise in the money, for example, the market price is $60,000 at the time of the settlement. A cash settlement would be applied. The payoff of Player C 2 BTC call @$50,000 would be $20,000 positive. Therefore 0.333 BTC staked by Player A and B will be settled and transferred to Player C,

Player A will get:

$3-0.333*0.75=2.75025 BTC$

Player B will get:

$1-0.333*0.25=0.91675 BTC$

If the option finished out of the money, Player A and B's BTC will be released back to their pledged amount waiting to be collateralized against the next option position.

Scenario 2

Player C purchases 2 BTC of put option. Let’s assume the current BTC price is $50,000, the strike price is also $50,000 and duration of the put option is 30 days and premium of such put is $10,000, and the trading fees is 2% of principal namely $1,000.
Most of the processes will be identical to the above call option example.
At the time of the settlement, if the option finishes in the money, for example, the market price is $40,000 while the strike is $50,000. The put option would then have a $20,000 payoff. Thus 0.5 BTC will be transferred from Player A and B to Player C. As a result,

Player A would have:

$3-0.5*0.75=2.625 BTC$

Player B would have:

$1-0.5*0.25=0.875BTC$

Last modified 6mo ago

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