Frequently Asked Questions
Questions & Answers
Here are some questions we answer a lot. Note that Volatility Protocol is still evolving, so you should visit often.
About the protocol
- What is Volatility Protocol?
- Volatility Protocol publishes real-time index feeds that track the volatility of various types of crypto assets. Our feeds are composable, meaning they can easily be extended with other decentralized protocols like UMA and Balancer to make crypto-volatility tradable.
- What does Volatility Protocol offer?
- Our core mission is to create a suite of fully decentralized volatility feeds for ETH, BTC, and other popular crypto assets. We started out with a simple mission to create an index that could be extended to provide both protective and speculative benefits similar to those found in traditional finance, and we've done that. Now we're working to offer fully decentralized measures with the same properties. We're simultaneously working on a whole suite of volatility products including those seen in traditional financial markets as well as new offerings that simply don't exist yet.
- Are your feeds fully decentralized?
- Yes and no. The volETH implementation available today relies on options data from Deribit and OKEx. As DeFi options protocols continue to become more robust we intend to make all of our crypto-native volatility feeds fully decentralized. We brought one of the world's leading volatility researchers on board to help develop fully decentralized, on-chain indices for crypto assets using data exclusively from DeFi and these feeds will be live very soon.
- What is the volETH Index?
- volETH is a model-free, real-time measure of the forward-looking volatility observed in the leading ETH options markets. This provides a 14-day snapshot of expected volatility of ETH. It offers traders a way to take long positions on ETH volatility.
- What is the ivolETH Index?
- ivolETH is the inverse of volETH. In other words, it moves in exactly the opposite way volETH does on a percentage basis (i.e. if volETH goes up by 5%, ivolETH goes down by 5%).
- So is volBTC/ivolBTC the same, but for Bitcoin?
- Yep, you nailed it. The volBTC Index is a model-free, real-time measure of implied volatility derived from the current premium for future risk exposures offered by participants in the leading Bitcoin options markets.
- How are volETH and volBTC calculated?
- We calculate both the volETH Index and the volBTC Index using a similar methodology to that which underpins the VIX® Index*, the premier volatility benchmark for the U.S. stock market. It is calculated using out-of-the-money (OTM) call and put options pricing from Deribit, the largest market for ETH and BTC options globally. You can learn more about the methodology used to compute volETH and its inverse in the volETH Methodology paper.
While there are no DeFi options platforms with sufficient volume and resistance to manipulation to provide a sound data source for model-free volatility at this time, intend to switch to using only decentralized options protocols as more robust platforms come available.
* Important Note: VIX® Index is a registered trademark of Cboe Global Indices, LLC, used for comparative purposes only. Volatility Protocol is in no way associated with or endorsed by Cboe or any of its affiliates.
- Why do your index feeds have inverses?
- An inverse volatility index offers an easy way to create short convexity positions on volatility, and it provides numerous other affordances for DeFi participants more generally. For example, LPs and arbitrageurs can take nearly market-neutral positions with equal nominal values of long and short volatility synthetics for a given asset.
- How does one trade crypto volatility?
- Using UMA's synthetic contracts, tokens are created for both long and short volatility for each index we offer. These tokens are launched after and expire before rollovers, which occur every Thursday at 08:00 UTC. After expiration anyone holding volatility tokens can redeem them for an amount of USDC equal to the respective index prices at expiration. This is called the settlement price. As ERC-20 tokens, the tokens can be traded on any exchange that supports them.
The main pools for trading these tokens are hosted by Sushi, where everyone participating in the pool will earn multiple rewards: VOL + SUSHI (+ MATIC as soon as L2 trading on Polygon is released).
- What is volatility?
- At a high level, volatility is most easily described as a statistical measure of the degree of an asset's price fluctuations over time. It describes the variance or dispersion of prices during a given period.
- What are the types of volatility?
- There are two major classes and each have several subtypes: implied volatility (commonly referred to simply as IV), which is forward-looking, and historical volatility (also called realized volatility), which is retrospective as the name suggests.
- What is implied volatility, and what does forward-looking mean?
- Implied volatility is a measure of the expected volatility, or the premium associated with uncertainty around the future price of an asset. In other words, IV represents the premium paid at a point in time for options that expire several weeks or months down the road. It provides a view to how much market participants (most commonly makers) think prices will move over a period of time. Forward-looking in this context means that the options prices used as inputs to the calculation expire at some point in the future (e.g. an average of 14 days after the measurement period).
- What is historical volatility, and what does realized mean?
- Historical volatility is a measure of the dispersion of returns over time, or the amount of variance observed in an asset's market price during a given time window. It provides insight into how much the price actually varied across observed trades, measured at a certain interval (e.g. daily or hourly) during the targeted time series. Realized simply means the inputs are based on executed (or "realized") trades.