UNION Integrates Chainlink Oracles For Mainnet Pricing of UNION Products
UNION, the DeFi protection protocol, is thrilled to announce our integration of Chainlink on mainnet to calculate pricing and risk parameters for our collateral optimization product (C-OP), solvency capital requirement (SCR), and minimum capital requirement (MCR) protection pools. By sourcing data through the industry-leading decentralized oracle network, Chainlink enables UNION users to get strong assurances that coverage risks are accurately measured and the solvency of capital pools is securely maintained.
UNION will begin by integrating the following Chainlink Price Feeds: ETH/USD, BTC/USD, DAI/USD, and USDC/USD. These decentralized price oracles will be referenced by UNION smart contracts during SCR and MCR calculations. By relying on Chainlink’s high-quality price data, our bundled protection products are able to provide users with a seamless yet highly secure and reliable way of hedging DeFi’s inherent risks.
Integration Overview & Use Cases
UNION is a technology platform that provides DeFi users with bundled protection, featuring different layers of coverage and segregated underwriter exposure such as Layer-1 risk, smart contract risk, exposure risk, and transaction completion risk. UNION is tapping into Chainlink’s decentralized oracle network to securely and reliably feed the necessary data needed to price our innovative C-OP and manage the risk of UNION’s protection pools, which involves maintaining pool liquidity thresholds via the MCR and SCR ratios.
Oracle data is paramount to pricing C-OP itself. At its core, C-OP is a decentralized American put option on the underlying collateral being optimized. Correctly pricing C-OP requires knowing the price and volatility of the optimized collateral, which itself is a derivative of the historic price. For a deeper explanation of C-OP, read here. Accurate C-OP pricing makes sure both buyers and liquidity providers are properly compensated.
On the other side of C-OP is issuing payouts, wherein liquidity is sourced from capital pools by optimizing the leverage of protection writers. As a result, both rewards and risks are shared among underwriters (liquidity providers). Maintaining solvency of the pool protects liquidity providers by making sure their capital is not over-leveraged, as well as safeguarding protection buyers through verification that there’s adequate capital to meet policy claims.
MCR and SCR form the basis of the solvency framework to meet obligations (e.g., pool liabilities) with high probability while still enabling efficient allocation of excess pool capital. This framework is the same as the Solvency II framework, which ensures that European companies can meet their obligations over one year with a 99.5% probability.
Adequately adjusting the MCR to ensure pool solvency means ingesting market data from Chainlink to calculate relevant financial parameters to the MCR, such as volatility, precise and tamper-proof asset pricing, and more. As we have mentioned before in our risk management piece on C-OP:
“To capture the non-linearity of option risk, UNION is experimenting with two well-tested financial approaches: delta-gamma approximation and full repricing. Both approaches rely on first shocking the underlying collateral to its VaR price, and then calculating the resulting market value shock of the portfolio.”
We also calculate the MCR of UNION’s capital pools as a whole to preserve the solvency of the entire platform. Excess capital supply beyond a safe solvency threshold is passed on as additional yield to UNN stakers and deployed across low-risk yield farming opportunities. Pool capital falling below the MCR preserves the pool’s solvency by withdrawing from the surplus pool until the necessary MCR is met.
Why We Chose Chainlink
Chainlink is a decentralized oracle network that vastly expands the capability of blockchain-based smart contracts by providing a secure and reliable bi-directional, compute-enabled gateway to any off-chain resource. The Chainlink Network is the industry standard for blockchain oracles, with their widely used Price Feed oracles servicing leading DeFi projects like Aave, Synthetix, and dYdX.
Some of the key features offered by Chainlink Price Feeds which drove our decision to integrate them as Union’s go-to oracle solution, include:
- Premium Data — Chainlink Price Feeds source data from numerous premium data aggregators like BraveNewCoin and Kaiko, leading to price data that’s aggregated from hundreds of exchanges and weighted by volume. This ensures price feeds that represent global prices, which are resistant to single or a small set of exchanges going offline, being inaccurate, or even exploited via flash loans.
- Decentralized Infrastructure — Not only are Chainlink Price Feeds decentralized at the data source level, but they are decentralized at the oracle node level to remove central points of failure in both the sourcing and delivery of external data on-chain.
- Reliable Nodes — Chainlink Price Feeds are powered by security-reviewed Chainlink nodes run by a large collection of leading DevOps teams. This generates Sybil-resistance and high reliability, as these nodes have a history of providing oracle services during periods of high volatility and network congestion.
- Transparent Networks — Chainlink Price Feeds can be independently monitored by anyone in real-time via open-source visualizations and on-chain monitoring, enabling users to verify they are receiving fair market values.
Additionally, Chainlink is API-agnostic, meaning that beyond its price feeds UNION can get virtually any off-chain data point, even from premium data providers. This is key in allowing us to fetch unique data sets that help us create more precise risk certain parameters like volatility.
“Chainlink’s trusted, flash-loan arbitrage resistant price feeds are a critical input to all of UNION’s models, from the buying of protection to the solvency protection of our providers. The best models and code in the world won’t mean a thing if we overlook the data securing our protocol and its delivery to our on-chain contracts. We look forward to expanding UNION’s set of oracle feeds from Chainlink to encompass the array of parameters essential to maintaining capital-efficient solvency of the liquidity pools that underwrite UNION protection.” John Liu, CPO of UNION.
Chainlink is the most widely used and secure way to power universally connected smart contracts. With Chainlink, developers can connect any blockchain with high-quality data sources from other blockchains as well as real-world data. Managed by a global, decentralized community of hundreds of thousands of people, Chainlink is introducing a fairer model for contracts. Its network currently secures billions of dollars in value for smart contracts across the decentralized finance (DeFi), insurance and gaming ecosystems, among others.
Chainlink is trusted by hundreds of organizations to deliver definitive truth via secure, reliable data feeds. To learn more, visit chain.link, subscribe to the Chainlink newsletter, and follow @chainlink on Twitter.
UNION is a technology platform that combines bundled protection and a liquid secondary market with a multi-token model. DeFi participants manage their multi-layer risks across smart contracts and protocols in one scalable system. UNION decreases the entry barriers for retail users and lays the foundation for institutional investors. UNION’s full-stack DeFi protection is inclusive, composable, and brings battle-tested capital and pricing models from TradFi to the DeFi ecosystem.
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