Zaps: February 12, 2022

Welcome to Zaps — Friktion’s DAO Contributor driven Market Insights covering auction performance, DeFi derivatives, and volatility.

Interested in contributing to Zaps? Drop us a message on Discord or Twitter!

Review of last week

Check out last week’s Zap for context.

  • Protocol Premium Generated: $225,726
  • Protocol Return Realized: $102,777

The protocol generated lower than usual premiums last epoch due to a conservative stance taken on the upside. We were ITM on the BTC covered call Volt, realizing a -0.50% loss for the Volt.

Friktion’s strikes were set the most conservatively out of all options protocols in BTC, preserving the most capital for its users.

Strike selection on Friktion minimized downside during ITM week vs other DOVs.

One bad week can erase up to 8 weeks worth of yield, as exemplified in the BTC covered call.

DOV Return on Capital for BTC

Friktion’s strikes for SOL were arguably set too conservatively last week, with the high of 122 being far away from the strike of 145. There’s been a systemic underperformance of Solana relative to the rest of crypto recently, with the SOL/BTC relationship falling under previous lows in September.

Implied vols got crushed going into the auction, with BTC 10-delta falling over 12 points and ETH falling 11 points from highs six hours before the auction.

BTC Implied Vol Crush into the auction — 12 points from high
ETH Implied Vol Crush into the auction — 11 points from high

In our research done on auction execution, historically the best thing to do in these situations is to delay the auction and wait for the recovery in implied volatility . Participants anticipate the DOV flow and front-run the market ahead of the vault auctions.

Friktion did precisely that this week, moving back the BTC/ETH auctions 12 hours and getting filled at higher vols, giving users better risk-reward.

Friktion Auction Results

This was the first week Friktion had its alts schedule at 230 UTC and it went very smoothly, with LUNA (74% APY) and RAY (265% APY)call yields being one of the highlights of the week.

Friktion had two cash secured SOL put option auctions this week, one backed by tsUSDC — check out Tulip’s strategy vault, which aggregates across lending platforms to provide users the best rate, currently at ~4.5% on USDC.

Tulip tsUSDC vault -> Boost returns by depositing tsUSDC into Friktion’s Volt#02

The first auction for SOL puts for the tulip held at 230 UTC realized 15 vol points higher than the SOL put vault at 800 UTC. This is strong evidence that Friktion should hold its SOL auctions at 230 UTC instead of with BTC/ETH to avoid getting caught in the middle of the vol oppression of the commons. Next week, we will begin our transition for SOL auctions to 6 hours earlier.

Friktion’s strikes were set relatively conservatively again this week. Solana losing its support relative to the rest of the market prompted 3–5 delta puts to be sold this week compared to the normal 7–12.

  • On global macro conditions
  • Another thread on macro from Options Insights
  • On crypto options trends from Deribit Insights
  • On historical implied volatility vs. current from Genesis Volatility

Interested in contributing to the Friktion quantitative research, trading, and strategy effort? Join one of our Taskforces and let’s build the future of finance together.

Website: app.friktion.fi
Twitter: twitter.com/friktion_labs
Discord: discord.gg/beCbA5VpJu
Medium: friktionlabs.medium.com
Documentation: docs.friktion.fi

Lightning OG NFT holders check out the grape verified #first-genesis-wielders chat in Discord!

Originally published at https://medium.com on February 12, 2022.

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Friktion brings high quality portfolio construction and dynamic risk management to DeFi.

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Friktion

Friktion

Friktion brings high quality portfolio construction and dynamic risk management to DeFi.

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