Neon Hedging Model

Our own adaptation of a blockchain hedging model.

We are not reinventing the wheel in order to create a robust platform, we share some fundamental pillars with other blockchain hedging platforms.

Our blockchain hedging model is built on these four pillars:

Vault

This is our universal ERC-20 handling smart contract, inspired by Unicrypt, it can process deposits and withdrawals for any token. Token balances storage is mapped per token per wallet address, using userBalanceMap.

Collateral Locker

Using the userBalanceMap lockedInUse storage, when a hedge is written or taken, the collateral is locked using this mechanism until the deal is settled. This applies for all collateral in all deals.

Call and Put Options, Writer provides underlying asset or collateral, Taker pays cost only.

Equity Swaps, Both parties provide matching value collateral, in token and its pair respectively.

Hedge Premium Costing:

Instead of relying on the traditional premium calculations, users are able to price their own hedges using OTC rates or prevailing market rates.

Writers dictate the cost of taking their hedge, it is valued in the quote or pair currency of the underlying token in the deal.

For Options, collateral and cost don't need to be proportional, users can speculate.

For Equity Swaps, collateral and cost should be equal. The cost is not send to Writer but locked in use as collateral.

OTC P2P Market Making

Our smart contract does not need to pool premiums and collateral, nor does it need to match orders between buyers and sellers at certain price levels as traditional hedges do. We simply allow sellers to write hedges and list them on our open marketplace.

Terms are set by the Writer, the Buyer can only accept. Terms can also be adjusted after the deal has started, through deal requests.

Hedge Writers or sellers have their collateral, which is the underlying token being hedged, locked in the lockedInUse storage when they write a hedge.

Hedge Takers or buyers have their collateral, which is the hedge premium or cost to buy the hedge from the seller, locked in the lockedInUse storage when they buy a hedge.

Dynamic Pacts - Evolving Agreement

Parties in a hedge have the ability to adjust deal terms after the deal has started. Limited to the Neon Hedge platform only which houses Call Options, Put Options and Equity Swap tools. Neon Lending currently doesn't support these features.

Either of the parties in the deal have:

• Right to request increasing the collateral and cost.

• Right to request instant settlement, overwriting the initial expiry date agreed.

• Right to reject or accept the request and bring the terms to effect.

The type of deal is key in determining if the other party accepts or rejects any of those requests. For example:

• Call and Put Option Takers can always exercise their right when they want, a zap request from the Writer provides no advantage. Takers will only accept out of mercy.

• Writers always enjoy the full benefits of accepting requests when the terms are favorable.

Automated Settlement

Smart contracts can't self-execute, but users can validate and settle hedges once they expire. We use a validation approach for prompt hedge settlement. Both parties in the hedge can also trigger a settlement.

We incentivize users to settle hedges by offering a percentage of the profit or payoff to the winning party. A 5% settlement fee, subject to change, is charged for each hedge settled. This fee generates revenue for the protocol, with 10% of it awarded to the miner.

Capped Losses

When a hedge expires, the strike price of the underlying asset continues to fluctuate. This poses a risk if the hedge is settled using the market price at the time of settlement rather than the price at expiry. The longer the delay in settlement, the greater the risk of loss for both parties.

Liquidity Provision

The Neon Farming platform will incentivize liquidity providers to deposit their favorite ERC-20 tokens into a staking contract, then assign them to Liquidity Farming Pools. This is described in Native Hedge Liquidity. After these tokens are assigned to pools, they are used to write fixed term options and swaps. Farming is intended to be done by the owners of the ERC-20 project tokens pooled or strategy managers, not by Xeon Protocol.