What Is The Crypto Volatility Index (CVI)?
The Crypto Volatility Index (CVI) is a decentralized solution used as a benchmark to track the volatility from cryptocurrency option prices and the overall crypto market.
- The Index allows DeFi users to either hedge against or profit from volatility in the crypto market.
- The index functions as a crypto version of the VIX (The S&P 500 Volatility Index), a real-time market index representing the market's expectations for volatility over the coming 30 days.
- COTI is the project behind the development and deployment of the CVI, which has also launched a decentralized trading system that enables a permissionless way to enter long/short positions on the index.
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CVI was developed and launched on the Ethereum MainNet on January 20th, 2021 by the COTI team in collaboration with Professor Dan Galai, creator of the VIX and part of the CVI board of advisors.
The Crypto Volatility Index (CVI) is a Decentralized VIX for Crypto that Allows Users to Hedge Themselves Against Market Volatility and Impermanent Loss.
For those who are not familiar with the term, the VIX is an index that measures volatility in the stock market based on the implied volatility of S&P 500 Index options; it’s also referred to as the “Market Fear Index.”
In a similar way, the CVI helps users track and trade the 30-day implied volatility of Ether (ETH) and Bitcoin (BTC) by using the Black-Scholes options pricing model to foster an index that fluctuates between 0 and 200. Black-Scholes is a pricing model used to determine the fair price or theoretical value for a call or a put option based on six variables: volatility, type of option, underlying stock price, time, strike price, and risk-free rate.
The CVI is created by computing a decentralized volatility index from cryptocurrency option prices together with analyzing the market’s expectation of future volatility. Traders are able to use the index as a tool to either speculate or hedge on their portfolio if they think the volatility in crypto is going to increase.
As previously mentioned, the index can fluctuate between two numbers: 0 and 200. 200 will indicate the maximum level of volatility in the market whilst 0 is indicative of low volatility. Whenever we see the prices of BTC and ETH drop substantially the index will spike in the opposite direction.
Users can open a position on the CVI platform by simply connecting to their MetaMask browser extension and either selecting the buy or sell option depending on which side of the volatility they want to trade. Positions can be taken using USDC, ETH, and COTI.
Besides trading the index, users can also participate by providing liquidity to the platform. Liquidity provision is currently available in CVI/USDC and CVI/ETH and LP providers receive rewards in the form of $GOVI tokens. An interesting feature is that liquidity providers on CVI play the role of the counterpart for every trade made on the platform. In other words, if a trader bought insurance against volatility or against stagnation, the liquidity providers play the role of the insurance company. This is a great position to be in as it is much more lucrative than simply providing liquidity for a small fee and being at risk of impermanent loss.
The CVI project is governed by the $GOVI token and holders of the token are able to vote on matters such as leverage use, platform fees, deposit use, and tradable assets.
GOVI allows its holders to collect platform fees by staking the token. Initially, the $GOVI token was airdropped to $COTI holders and can only be claimed by using the CVI platform.
Since the CVI was developed entirely by the COTI team, at the beginning, COTI holders were the main gainers from the GOVI airdrop, but now every GOVI holder can earn from staking GOVI in the platform.
In order to avoid high gas fees from using the platform on the Ethereum blockchain, the team has managed to release a contract optimization model to cut down gas costs by about 40%. In addition, users can also benefit from a more cost friendly and almost instant experience by using the platform on the Polygon sidechain.
CVI uses a Chainlink-powered decentralized oracle network to aggregate options market data from multiple off-chain sources and deliver it on-chain.
In order to ensure decentralization and transparency, Chainlink architecture uses multiple independent oracles that use external adapters to retrieve trading options data from across the market in order to calculate the CVI. CVI uses Deribit exchange as its main data source for the index calculations as it is the most advanced and widely adopted platform for derivatives and options.
What Does the Platform Hold for the Future?
Along with the recent migration from USDT to USDC and a recent integration with investing.com, the founders of CVI have announced the implementation of new and exciting features for the protocol.
The first, is the launch of volatility tokens via CVOL (Crypto volatility token) and ETHVOL (Ethereum Volatility token). These tokens can be understood as being a wrapper for opening a long position on CVI and are tradable on Ethereum compatible DEXs. The tokens maintain their peg to the value of the underlying asset by following a rebase mechanism with a similar architecture to that of tokens like Ampleforth. The volatility tokens can be used to benefit from arbitrage trading strategies on other compatible DEXs.
Along with that comes the implementation of leveraged volatility tokens (ETHVOL-X2 and ETHVOL-X3) which will be supported within the same available liquidity pools and tradable in different DEX environments.
In an effort to make the user experience more affordable without sacrificing the underlying security features of the Ethereum mainchain, the team is also planning to deploy CVI on to the Optimistic Rollup chain Arbitrum. Finally, the project’s roadmap also plans to increase cooperation and integration with additional on-chain data oracles other than Chainlink, create the GOVI DAO to give the GOVI token holders the opportunity to decide on the direction of the CVI platform, and implement an impermanent-loss protection system for DEX users.