DOVs offer end-users the ability to deposit crypto into vaults, through either covered call or put selling strategies. These vaults represent a Total Value Locked (TVL) that market makers then buy options against for a weekly premium at a strike price determined by AlgoRai. This premium is the yield that depositors receive.
If the options settle “out of the money”, the vault keeps the premium and distributes pro-rata to the depositors. If the options that the market maker buys end “in the money” (i.e. the spot price is above the strike price at expiry for calls or below in the case of puts), there is a net financial payment at the end of the week by the vault.
Like traditional call selling, AlgoRai’s DOV covered call vaults sell upside calls based on the seller possessing the underlying reference asset. The options pricing mechanics are based on universally accepted pricing theory and practices of option valuation.
Unlike traditional options operations, the options are priced, and the premium paid is in the asset, not the reference currency (such as USD, etc.). This innovative feature results in growth in the quantity of the reference asset over time.
AlgoRai is the first DeFi protocol on Algorand, where there is a transparent and sustainable yield, paid in the same token the user deposits. So you deposit ALGO, you get your yield in ALGO (hence there is no impermanent loss, which is a feature of many DeFi strategies) and the yield comes from the value capture of the inherent volatility of the price of the asset. Market liquidity is facilitated from market makers who have native economic risks in ALGO (or other coins) which they need to manage.
Like traditional put selling, AlgoRai’s DOV stablecoin vaults sell puts based on the underlying reference asset. The options pricing mechanics, as with covered call selling, are based on universally accepted pricing theory and practices of option valuation.
Unlike traditional finance strategy, AlgoRai's put selling vaults are based on the holders' assets being used as collateral to mitigate the risk of the put sales instead of being used to gain exposure. The traditional strategy when short puts end in the money result in an asset being acquired at the strike price (resulting in a net position slightly below the strike taking into account the premium received at the outset). While AlgoRai's strategy features a yield pickup unless the options settle below the strike price, there is no asset delivered. Instead, it is simply a financial settlement in a stablecoin based on the spot price at maturity and strike price which the vault user pays.
The advantages of AlgoRai’s stablecoin put selling vaults are they offer an additional yield pickup for crypto asset holders in a stable, rising, or range bound market without compromising potential gains from price appreciation. Because they are also paid in stablecoin, there is some embedded protection against price declines in the reference asset over time by their accumulation.