Divergence Integrates Chainlink Price Feeds To Settle Binary Options
Divergence is excited to announce our live integration of Chainlink Price Feeds on the Ethereum Mainnet. Divergence is using Chainlink Price Feeds to help ensure that all binary option contracts are referencing the most accurate and up-to-date asset values on crypto assets during settlement, as well as have robust protections against potential downtime, flash crashes, or data manipulation.
Divergence V1 offers AMM-based markets for binary options — sometimes called digital options. Binary options offer a fixed payout of fungible tokens to options buyers based on their terms. As is the case with any options contract, the buyers of such options are not obligated to exercise their right to buy or sell the underlying assets. These contracts are settled in the European style, which means that they are exercised at the time of expiration.
In centralized options markets, brokers and dealers facilitate trades and execute contracts. To complete an options trade, it is critical to deriving the fair value of an underlying asset, a group of assets, or benchmarks. Market participants have to accept the pricing of the options, typically quoted in implied volatility and calculated using the Black-Scholes model. In exchange for trusted execution, market participants pay a commission and price spread to their intermediary.
In contrast, our decentralized markets remove the need for traditional intermediaries. Options trades are facilitated and executed by a set of logic specified in our smart contracts. This set of logic is executed by the virtual machine of the underlying blockchain, which is secured by its consensus mechanism.
One major design objective of our protocol is the prevention of single points of failure — including the team behind Divergence — from affecting these markets. With a large number of funds at stake, it is also essential that our smart contract logic works as intended and remains free of exploits.
The pricing of our options contracts is facilitated by buyers and sellers participating in the Divergence AMM pools. This price discovery process differs from the traditional order book-based model — at a given time the price of our binary calls and puts are derived from their ratio of the collateral balance, which is shaped by market transactions. This AMM price discovery process does not use the underlying price as a direct input and calculates options prices via the Black-Scholes model. Instead, it relies on market arbitrage to maintain the fair value of options.
Settling these options contracts, however, requires access to real-time, tamper-proof, high-quality data price feeds. Our smart contract application has to retrieve the fair price of an asset at an option’s expiry and use this to settle contracts. It is therefore necessary to use an oracle that links updated market information with our application. This is where Chainlink Price Feeds come in.
We chose to integrate Chainlink Price Feed oracles for their robustness, historical reliability, and the high quality of data they provide. As the industry leader in oracle services, Chainlink updates prices via its decentralized network of nodes with proven security and accuracy. Importantly, Chainlink Price Feeds were able to provide a customizable solution that is compatible with our offerings. Our oracle bridge is able to retrieve prices around our specific settlement time (8:00 UTC). Upon settlement, our smart contracts check with Chainlink Price Feeds to calculate a 30-minute TWAP for the underlying assets.
Some of the notable optimizations of Chainlink Price Feeds that make them an ideal solution for Divergence include:
- High-Quality Data — Chainlink Price Feeds source data from numerous premium data aggregators, leading to price data that’s aggregated from hundreds of exchanges, weighted by volume, and cleaned from outliers and suspicious volumes.
- Secure Node Operators — Chainlink Price Feeds are secured by independent, security-reviewed, and Sybil-resistant oracle nodes run by leading blockchain DevOps with a strong track record for reliability during high gas prices and network congestion.
- Decentralized Network — Chainlink Price Feeds are decentralized at the data source, oracle node, and oracle network levels, generating strong protections against downtime and tampering by either the data provider or the oracle network.
- Reputation — Chainlink provides a robust reputation framework and set of on-chain monitoring tools that allow users to independently verify the historical performance of node operators and oracle networks, as well as check the real-time prices being offered.
Chainlink’s BTC-USD and ETH-USD feeds are currently up and running on the Divergence V1 public beta on the Ethereum Kovan Testnet. Once Divergence launches its V1 Mainnet, a number of additional price feeds will be supplied by Chainlink.
By integrating Chainlink, we are working to provide the infrastructure for decentralized options and volatility instruments that is highly reliable, precise, and secure. While our current focus is DeFi-native assets, with the wide variety of assets and event data already available on Chainlink, we foresee a much bigger universe — one which encompasses everything tradable on-chain.
Chainlink is the industry standard oracle network for powering hybrid smart contracts. Chainlink Decentralized Oracle Networks provide developers with the largest collection of high-quality data sources and secure off-chain computations to expand the capabilities of smart contracts on any blockchain. Managed by a global, decentralized community, Chainlink currently secures billions of dollars in value for smart contracts across decentralized finance (DeFi), insurance, gaming, and other major industries.
Chainlink is trusted by hundreds of organizations, from global enterprises to projects at the forefront of the blockchain economy, to deliver definitive truth via secure, reliable oracle networks. To learn more about Chainlink, visit chain.link and subscribe to the Chainlink newsletter. To understand the full vision of the Chainlink Network, read the Chainlink 2.0 whitepaper. Want to discuss an integration? Talk to an expert.
Divergence is a decentralized platform for hedging, trading DeFi-native asset volatility, with its flagship product being an AMM-based marketplace trading synthetic binary options.