Pods’ Options AMM integrates with Chainlink
Algorithmically priced options
Pods is pleased to announce our integration of Chainlink Price Feeds as a critical input that powers our Options-Specific Automated Market Maker (AMM) algorithm. By relying on price reference data from Chainlink Price Feeds, our AMM can generate accurate prices on options contracts in a highly secure and reliable manner. Most notably, Chainlink Price Feeds have strong market coverage across all trading environments, mitigating exploits like exchange downtime and data manipulation attacks from flash loans.
Our initial integration of Chainlink Price Feeds is now live on both the Ethereum and Polygon (Matic) mainnets. Our AMM references the Chainlink Price Feeds for underlying assets (ETH, BTC and others) natively on both blockchains to continuously price options contracts, creating a greater amount of liquidity for all types of options markets.
Using Chainlink’s Tamper-Proof Price Data For Secure Hedging
Pods’ main goal is to deliver the easiest and smoothest way for any user to hedge their crypto positions. We do this by offering users the ability to hedge volatility through the use of options contracts, which are one of the most common types of financial derivatives. With Pods, hedging market risk has never before been so easy for the end-user.
Our integration with Chainlink helps enable composable, continuous and decentralized risk management, which is vital for DeFi hedging. To appreciate the importance of this integration, it’s important to understand how our protocol is designed.
Pods is a decentralized non-custodial options protocol that allows users to create call and put options contracts, and then trade them seamlessly within the Options AMM. Pods is built upon a system of non-upgradable smart contracts on the Ethereum blockchain and on Polygon.
Currently, users can participate:
- as sellers or buyers of either puts or calls
- as liquidity providers in the Options AMM.
Our Options AMM is a one-sided AMM built to:
- Facilitate bootstrapping of options markets that are initially illiquid using an AMM approach.
- Price options algorithmically using the Black-Scholes model to account for changes in factors such as time to maturity and spot price.
- Programmatically update the Implied Volatility of the model based on the pool’s conditions.
- Keep the delta of AMM liquidity providers hedged during the provision period.
- Maintain the liquidity provider’s exposure over time and distribute the pool’s earned fees equitably among participants.
There are several models for pricing options in traditional finance. The most widely known methodology is Black-Scholes. In general, all pricing methods attempt to calculate the probability that an option will expire in-the-money and, if it does, the notional value of that option.
To calculate this theoretical price, pricing models incorporate factors like the underlying asset spot price, time to expiration, implied volatility and strike price. All of these factors are taken into account each time there is a trade on our Options AMM with the spot price coming from Chainlink Price Feeds and Implied Volatility updated as pools rebalance.
After reviewing various oracle providers, we selected Chainlink as our go-to oracle solution for market data like spot prices. Some of the reasons why include:
- High-Quality Data — Chainlink Price Feeds source data from many high-quality data aggregators like BraveNewCoin and Kaiko. Their price data is aggregated from hundreds of exchanges and weighted by volume to arrive at a global volume-adjusted market price. This mitigates vulnerabilities like data manipulation, API downtime, and exchange inaccuracies.
- Reliable Nodes — Chainlink Price Feeds are secured by a large collection of independent, security-reviewed, Sybil-resistant oracle nodes run by leading blockchain DevOps teams. Chainlink nodes have a strong history of performance, even during periods of extreme network congestion and centralized infrastructure outages.
- Decentralized Infrastructure — Chainlink Price Feeds are decentralized at the data source and oracle node level, removing any central point of failure in the sourcing and delivery of external data to the blockchain.
- Transparent Performance — Chainlink Price Feeds can be monitored by anyone in real-time, allowing users to verify that they received a fair-market exchange rate.
Another interesting data feed provided by Chainlink Price Feeds is for Implied Volatility. The current version of Pods protocol needs the IV that the AMM algorithm automatically calculates. However, in the future, we may integrate the Chainlink IV feed to analyze the convergence between the two.
“The main drivers for our decision to integrate with Chainlink Price Feeds were that Chainlink is time-tested, is natively integrated on various blockchains, and is already integrated with several DeFi protocols,” stated Rafaella Baraldo, Co-Founder and CEO of Pods.
“The robust market coverage of Chainlink Price Feeds combined with their decentralized infrastructure helps ensure Pods is able to price options contracts within its AMM in a precise yet tamper-proof manner.”
Chainlink is the industry standard for building, accessing, and selling oracle services needed to power hybrid smart contracts on any blockchain. Chainlink oracle networks provide smart contracts with a way to reliably connect to any external API and leverage secure off-chain computations for enabling feature-rich applications. Chainlink currently secures tens of billions of dollars across DeFi, insurance, gaming, and other major industries, and offers global enterprises and leading data providers a universal gateway to all blockchains.
Pods is a decentralized non-custodial options protocol. Users can create options and trade them through an Options AMM on the Ethereum Blockchain. Pods is the easiest way to hedge crypto in DeFi.
We invite you to take the first step in your new mission: start using the app on app.pods.finance