KittenSwap (7) : AMM for Lending+Option by Minting Option Tokens using Put-Call Parity

1. From Put-Call Parity to Lending

  • Keep (i) to yourself. Because it is a call option, you can payback 3 ETH to get back 100 TOKEN.
  • Find a lender to take (ii) + (iii) from you. The lender will pay you probably 2.9 ETH. We will create an AMM to determine this value dynamically.
  • After 2 weeks, the lender will either receive 3 ETH (if 1 TOKEN ≥ 0.03 ETH), or 100 TOKEN (if 1 TOKEN < 0.03 ETH).

2. Pricing K by an AMM

  1. Price(K) ≤ 0.03 ETH. In fact, the price of K shall be lower than 0.03 ETH discounted by interests, because you can only receive 0.03 ETH on Apr-14-2021, which is in the future (here we assume the interest rate of TOKEN is lower than the interest rate of ETH).
  2. If TOKEN trades at a much higher price than 0.03 ETH, then Price(K) will rise with time, and reach 0.03 ETH at expiration. It is similar to the price of a zero-coupon bond.
  3. Price(K) ≤ Price(TOKEN).
  4. Price(K) ≥ 0.
  5. Price(K) = MIN(0.03 ETH, Price(TOKEN)) at expiration. Because K will be settled at this value, unless some borrowers make mistakes (in that case lenders will have more profit).

3. Minting Option Tokens

  • Deposit ETH to mint [CALL ETH @ 1000 USDC per ETH] + [SELL PUT ETH @ 1000 USDC per ETH] + [BORROW 1000 USDC per ETH].
  • Deposit USDC to mint [CALL USDC @ 0.0005 ETH per USDC] + [SELL PUT USDC @ 0.0005 ETH per USDC] + [BORROW 0.0005 ETH per USDC].
  • Deposit USDC to mint [PUT ETH @ 2000 USDC per ETH] + [SELL CALL ETH @ 2000 USDC per ETH] + [BORROW 1 ETH per 2000 USDC].

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https://www.kitten.finance/

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