Polynomial Liquidity Protocol
Polynomial option vault tokens are pooled together with the underlying collateral on Uniswap v3 to create meaningful liquidity. The protocol manages this liquidity; we call this Protocol Controlled Liquidity (PCL). This liquidity will consist of a small price range predicted by the Black-Scholes pricing mechanism.
When the user creates the liquidity pool for a specific vault, the Black-Scholes set the initial price. The protocol adds the initial liquidity in a small range around this price. The price range is rebalanced to a new range every 24 hours. The protocol will invoke an emergency rebalance if the pricing range is invalidated (due to volatility or other external factors). During each rebalance, the protocol also collects the fees accrued by the liquidity pool.
The volatility of the underlying asset is an input to the Black-Scholes. We are exploring probable methodologies to bring volatility on-chain. Please email us if you are interested.
For eg: If the Black-Scholes pricing is at 8$ for ETH $10000 Call Dec 2021, then we provide liquidity in a small range like $6 to $10. Here the option can be freely traded in the Uniswap v3 pool. This price range is updated every 24 hours or in-case of emergency.