October 14, 2022 Buffer Finance launched their V2 protocol in the main network Arbitrum. At the time of writing, the protocol is still in the beta testing stage, and the documentation and audits have not yet been issued. Therefore, in this article, for analysis, we will take articles from the media and a conversation with a team member.
What is Buffer Finance?
Buffer Finance is a decentralized protocol of binary options trading, which allows traders to create, buy and repay options due to liquidity belonging to the protocol (Pol). Buffer Finance was first launched on Binance Smart Chain in December 2021, and then transferred to Arbitrum in October 2022.
The success of the GMX inspired a number of protocols, and Buffer Finance including. They branch their stakeing architecture, allowing the BFR, the protocol token, to obtain a share of income from the BFR, ESBFR (ESCROU-BFR) and USDC protocol. Unlike GMX, which use GLP to stimulate users to provide liquidity to the protocol, Buffer Finance has introduced the POL model to replace BLP (according to GLP) after it showed significant volatility.
How Buffer Finance works
In version V2, the protocol has two key participants:
- Options traders-traders set up a striking, valid and the amount of options for buying options or-cell. Traiders pay a premium for an option (commission for a strik + commission for an option) and a commission for the calculation and can implement the option at any time before the expiration of the validity of the Pol pool.
- BFR tokens holders – they can steak their tokens to receive a share of income from the protocol and participate in management.
A trader buying binary options, in fact, relies on the direction of trade in the basic asset. If the positions expire or close “in money” (ITM), then the trader receives payment (percentage of initial investments). If the duration of the positions expires or they are closed “outside of money” (OTM), then the trader loses his original investment. Since the transaction counterpart is POL pool, if the trader wins, POL pool pays profit. And vice versa, if the trader loses the deal, Pol Pol Pole takes the trader investment.
Let’s look at the example.
In Buffer Finance, the current payment is 70% when using USDC (BFR trade will begin soon), and the maximum period of time is four hours. The BTC price is at $ 15,793, but Henry believes that the price of BTC will continue to fall in the next four hours. Henry opens a position for $ 1,000 and selects “down”. If the price of BTC continues to fall within the specified period of time and the option of the option expires or Henry closes the position, Henry earns $ 700 from the POL pool, which is 70% of the payment. If instead the price of BTC increases and the validity period of the option will expire, then Henry will lose his deposit of $ 1,000.
At the time of writing, the maximum bidding is set at 0.2% of the available liquidity in the POL pool, while the maximum use is set at 10% of the total affordable liquidity in the POL pool. This is done to protect the protocol and reduce the volatility of the pool. Soon, users will be able to choose either the exact price or the range, and not just determine the direction of the transaction (“up” or “down”).
Revenues from the protocol
One of the main reasons why GMX has gained significant popularity is that tokens and liquidity suppliers can receive a share of income from the protocol. Similarly, Buffer Finance allows BFR tokens owners to receive a share of their income.
Commissions are formed from:
- Strike-price-internal value of the option. For the option-cell, it is equal to Max (0, the price of execution is the current price), while for the option it is equal to Max (0, the current price-the price of execution).
- Options fees – calculated by the price of price -based price using the current asset price and implied volatility (IV) as key source data.
- Cost for calculations – 4% of the total asset for the option
At the time of writing, the protocol uses the POL USDC pool (Pol BFR pool will be launched in the near future). 40% of the generated commission are sent to the BFR participants, while the remaining 60% – back to Pol pool.
On October 25, 2022, the protocol stopped trade just 12 days after the launch of the beta version of V2. Despite success, a number of large winning transactions caused significant volatility of BLP prices, causing panic among liquidity suppliers. To avoid bankruptcy, the team suspended trade and quickly filled the USDC POL pool by 75 thousand. US dollars and resumed trade. Since then, the pool has increased by almost 60% to ~ 119 thousand dollars, and the commission amounted to more than 15 thousand dollars.
On November 8, 2022, the team launched OTC trading ESBFR, indescribable token, which is turned into liquid BFR for one year to replenish the POL pool. At the time of writing this article, more than 90 thousand dollars were raised.
Comparison of protocols
|Annual https://gagarin.news/news/the-capitulation-of-bitcoin-miners-is-over/ fees||$ 2 977 738||$ 129 120 000||$ 13 110 000|
|Annual volume||$ 19 851 552||$ 88 450 000 000||$ 25,460,000,000|
|FDV||$ 24 920,000||$ 468 210 000||$ 100,000,000|
Source: by links
Let’s compare the Buffer Finance with two protocols that have recently been in the trend #realyjich – with GMX, a decentralized spare and unlimited exchange and Gains Network, a synthetic trading platform with the credit shoulder.
Although some compared the ratio of commissions to volume on Buffer Finance with two other protocols, this is not a reliable indicator, since GMX and Gains Network offer trade using borrowed funds, which increases the indicator of the volume of trading. Therefore, we turn to a familiar indicator – the ratio of price and profit. Having divided the FDV of each protocol with annual fees, we received that Buffer Finance is currently trading at 8x p/e, and GMX and Gains Network – at the level of 3.63 x p/e and 7.63x p/e, respectively.
At the time of writing, BFR participants earn 15.53% per annum, and GMX and GNS participants – 17.76% and 8%, respectively. Buffer Finance differs from two other protocols with a liquidity model. Since the transition to Pol, Buffer Finance does not have any liquidity pools where users could provide liquidity. Therefore, users who want to receive profitability by providing liquidity can cover GLP on GMX or provide DAI liquidity in the Gains network.
Despite the abandonment of its BLP stake model (created on the GMX GLP model), Buffer Finance still provides “real profitability”, which significantly exceeds its profitable model. Since the launch of the V2 Buffer Finance version has accumulated more than 130 thousand dollars in the form of a protocol commissions. It is also important to note that Buffer Finance, GMX and Gains Network work in various fields, so users have a wide selection of strategies. Given the fact that the Defi market on Arbitrum continues to gain momentum, Buffer Finance offers a decent product to users looking for the possibility of profiting both options and bfr staying.
Although the recent FTX collapse led to a decrease in crypto settings and prices, the Buffer Finance team continues to release updates as it moves to the full launch of its protocol V2. In addition, the team also demonstrated its commitment and competence, managing the BLP failure. Therefore, we look forward to continuing Buffer Finance growth and winning our place in Arbitrum and beyond.
Warning: Bybit employees can be involved in some or all tokens and projects mentioned in the article. This statement prevents any conflict of interests and is not a recommendation to purchase any token or participate in any of the mentioned ecosystems. This content is intended exclusively for introductory purposes and should not be accepted as an investment council. Please study this issue well and be careful if you plan to participate in any of these projects. The opinion expressed in this article belongs to the author (am) and does not reflect the views of Bybit.