Neon Hedging Model

Neon Hedge structure. 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:

Neon Vault

This is our universal ERC20 handling smart contract, inspired by Unicrypt, it can process deposits and withdrawals for any erc20 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.

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.

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, and a buyer will simply agree to the price and buy or pass otherwise.

The hedge writers or sellers have their collateral, which is the underlying asset or token being hedges, locked into the lockedInUse storage when they list a hedge.

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

Automated Settlement

Smart contracts cannot self execute, however other users can mine or settle the hedges as soon as they expire. We adopted the mining approach to solve hedge settlement as soon as it expires. Both parties in the hedge can also trigger a settlement.

We incentivize users of our protocol to settle hedges and earn a percentage of the profit or payoff to the winning party in a hedge. We will charge a settlement fee for every hedge settled, 5% but subject to change. This fee goes to the protocol as revenue, but before it does, the miner is also awarded 10% of the fee revenue.

Capped Losses

When a hedge expires, the strike price of the underlying asset does not stop fluctuating. This poses a risk if the hedge is to be settled using the market price at time of settlement not price at expiry. The longer the delay in settlement, the greater the risk of loss to both parties.

Liquidity Provision

The platform incentivized liquidity providers to deposit their favorite ERC20 tokens into the 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 ERC20 project tokens pooled, not Neon Protocol.