Y2K Finance
22 Sep, 2022
·
3 min read
Y2K’s Earthquake Vault Strikes
Doomsday is quickly approaching and we’ve been doing some research to provide optimal strikes and corresponding APR for Earthquake vaults. Determining these strikes involved different risk pricing methods depending on the strike’s class, either high strike betting vaults, or low strike depeg vaults.
High Strike Vaults
High strike vaults are the riskiest strikes, and they have one week epochs. Determining these high strikes ultimately revolved around the fact that stablecoins experience constant small price swings slightly above and below a dollar. As many of us know, it is very normal for stablecoins like Tether to drop below $0.998, and these small deviations are regularly corrected by market participants.
With that said, we used a distributed model to calculate how often these natural price swings occurred over a certain time period. From there, we constructed a range of practical strikes based on how frequent deviations to those strikes occurred. These strikes were chosen to correspond with a payout frequency of every few months.
High strike vaults are more “bets” than actual depeg hedges, since they correspond with such small price movements. High strike vaults give the market a way to speculate and bet on whether these small price deviations will occur during a given epoch.
Low Strike Vaults
Low strike vaults retain the least amount of risk (and subsequently lowest yield), and they have one month epochs. These strikes are chosen such that the expected value of the vaults corresponds to a payout that occurs once a year.
These vaults are designed around more extreme price swings not usually seen in normal market conditions. For lower strikes, we used a different type of model to calculate the probabilities of these deviations given these deviations are independent of their price.
Y2K Mint page where users can choose their strike
The Merton Model is a structural model for credit risk well-known in traditional finance for measuring the probability of a default, specifically by analyzing a company’s equity and its debt. As such, this model can be applied to collateralized stablecoins by substituting equity for stablecoin collateral.
We used the Merton Model to predict the probability of these more extreme depegs. From there, we assessed a list of ideal strikes using this model while accounting for different components like borrows, collateral type, etc. depending on the underlying risk asset.
Conclusion
The Y2K protocol offers top quality vault strikes determined by the most diligent research and most trusted probability models. Earthquake will offer high strike and low strike vaults, and these strikes are all precisely chosen with our research findings and model outcomes.
The ultimate goal is to offer an efficient playing field for participants to approach these vaults using their own strategies. Perhaps after some calculations a participant believes the market is incorrectly pricing a depeg event. Our vaults will be designed for users to profit off of that with the most effective strikes at disposal with other tools like automated vault strategies (ex: Martingale) and roll-overs by epoch.
By no means does the protocol “endorse” the probability of these strikes. In short, we look to offer the most adequate strike prices and APR based on the mathematical probability of these deviations, not based on the opinion of the Y2K team.
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