Pros
  • Leveraging Wrapped tokens
  • Can generate up to 30% a year
  • Support Multiple cryptocurrencies
Cons
  • No Layer 2 protocol

Introduction

Ribbon Finance is a novel technology that optimizes the yield generation process while creating blockchain structured products for DeFi. A proprietary coin( RBN),  programmable infrastructure, and structured products are all part of the platform. Structured products are packed financial assets that employ a variety of derivatives to obtain a particular risk-return aim, such as wagering on volatility, increasing returns, or protecting principal.

As a result, by integrating Ribbon Finance, you can boost your ROIs and simplify your overall strategy.

Structured products

Ribbon finance offers a variety of structured products  which are as follows:

Option:

An option is actually a financial contract that offers the buyer the right but not the necessity to sell or purchase an asset at a fixed price. Unlike buying an asset at the moment, options contracts enable investors to speculate on the value of the asset with defined risk and a high potential gain (particularly for volatile assets) without even purchasing it. Investors purchase CALL options to wager on an asset's price increases, and PUT options to gamble on the asset's price decreases. To comprehend how options function, you must first comprehend the three main parts of an option. You pay a premium for an option contract that grants the owner the right to sell or buy an asset at a specific price until the expiry date of the contract.

An option's strike price is actually the preset price at which you get the right of buying an asset. The duration or length of your options contract is determined by the expiry date. This provides a term in which you have the right to buy the commodity at the strike price until a certain date. A premium is an amount you pay for a certain option.  

Illustration of ETH Call Option:

Let's take a look at a call option in action. As an investor, I believe the price of Ethereum (ETH) will rise from $3200 to $4000 in the near future. I can bet on this by purchasing a call option using the components listed below. The strike price of $3600, with an expiration date of next week and a premium of $100 (premium = price to purchase option).

Depending on whether my prediction is true, I've already spent $100, allowing me to buy ETH at $4000 in a week's time. My option is worthless at the current price of $3200. When the price of ETH rises, my option to buy one at $3200 becomes more valuable. Once ETH reaches $3700, which is equal to the options premium ($100) plus the strike price of $3600, I break even (I'm “in the money”). As the price of ETH rises, my upside increases since I can acquire it at a lower price.

Illustration of ETH put option

Put options work the same as call options, but they are also used to wager against the value of something.

The strike price, premium, and expiry date are all the same as we had before. Instead of buying an item at the strike price, you can now SELL another person's item at the strike price. Puts allow investors the option to sell a stock at a predetermined “strike price” before a given deadline. Just before options expire, the holder can trade the shares for a profit if the companies' stock values fall below the appropriate strike prices. In this case, I wish to wager that the cost of ETH will drop from $3200 to $2500 in one week, so I purchase a put option with the strike price of 3000 dollars and a one-week expiration from now at the premium (option's price)  = $100.

  • Scenario A: In the next week, ETH is trading at any price higher than $32000. At expiration, my option is worthless, and I've lost $100. Nobody appreciates my right to sell BTC at a lower price than it is now.
  • Scenario B: As projected, the Ethereum price drops below $2500, and my option to trade Ethereum at 2900 begins to gain value. I can utilize your option to sell Ethereum at 2900, giving me a profit of $600 (3200-(2500+$100)).

Business Model for Ribbon Finance

What we just described was the viewpoint of someone who buys a call and put options. Ribbon Finance, on the other hand, uses user funds to sell (or underwrite) call and put options to other market participants hoping to earn money through the options premium.

When an option stays  (OTM) “out of the money,” an option seller gains money on the premium paid on the option.  If the price of a call option is under the strike price upon expiry, the option is out of the money. When the price of a put option expires above the strike price, it is considered OTM.  Ribbon writes options on a weekly basis by using Opyn with a carefully determined strike price that tries to maximize the option's sale price while minimizing the danger of the option being “in the money” by utilizing the funds' users' deposit in Theta vaults. Every time they do this, the vaults' premium is returned to the vault's investors, multiplied, and reinvested the next week.

Ribbon products

Ribbon Finance

Currently, Ribbon offers a high yield product that creates yield by using an automated option strategy on ETH, Aave, USDC, AVAX, SAVAX, WBTC, SOL, StETH, and APE. Ribbon will keep expanding its product offerings with time, which includes structured products created by the community.

T-APE-C

A weekly automatic covered call strategy provides the vault yield on its APE deposits. The vault reinvests the profit into the call strategy, effectively increasing the depositors' returns over time.

T-APE-C

T-ETH-C 

An automated weekly covered call strategy is used by the vault to earn a yield on its ETH deposits. The vault reinvests the return into the strategy, ultimately increasing depositor yields over time.

T-ETH-C 

T-yvUSDC-P-ETH 

T-yvUSDC-P-ETH earns interest on its USDC deposits by employing an automated weekly ETH put-selling method with yvUSDC as collateral. The vault reinvests its earnings back into the put strategy, effectively increasing depositor yields over time.

T-yvUSDC-P-ETH 

T-STETH-C 

The vault earns interest on its own ETH deposits by employing an automated weekly ETH covered call strategy in which it puts a bet on its ETH deposits in Lido and additionally uses its stETH to collateralize weekly OTM (out-of-money) ETH call options. Both the ETH staking rewards and covered call strategy yields are re-invested every week, effectively increasing the depositor's yield over time.

T-STETH-C 

T-WBTC-C 

An automated weekly covered call strategy earns the vault yield on its WBTC deposits. The vault reinvests the profit into the call strategy, effectively increasing the depositors' returns over time.

T-WBTC-C 

T-AAVE-C 

An automated weekly covered call strategy earns the vault interest on its AAVE deposits. The vault reinvests the profit into the call strategy, effectively increasing the depositors' returns over time.

T-AAVE-C 

T-USDC-P-ETH 

T-USDC-P-ETH earns interest on its USDC deposits by employing an automated weekly  ETH put-selling method with USDC as collateral. The vault then reinvests its earnings back into the put strategy, ultimately increasing depositor yields over time.

Theta Vault Expected yield 

The yield varies, but we predict it to be in the range of  20-30%.  We ran a backtest on the strategy in 2020 and 2021, and the results are available here.

Due to transaction expenses and other factors, the yield in production will most likely be lower, but we may expect something in the double APY range.

Risks of Ribbon Finance 

The main risk of pursuing this method is that depositors may be willing to forego upside in return for a guaranteed yield. Users who sell call options are essentially pledging to sell the assets at the given strike price, even if it rises above it (a.k.a selling early). As a result, if the price of the asset rises dramatically in a short period of time, depositors may receive a “negative yield” on the ETH.

This will only happen if the ETH/USD exchange rate rises sufficiently, so depositors would still be up in the USD terms. The vault additionally sells call options that are quite out of the money, implying that the options are unlikely to be exercised.

ChainSafe and OpenZeppelin audit the smart contracts. Despite this, users should proceed with patience and only bet with money they can afford to waste or lose.

Ribbon Finance Tutorial

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Conclusion

The Ribbon Finance strategy is just what the market requires. New customers are looking for a way to make steady, low-risk profits. Farming DeFi features and services, on the other hand, can be puzzling for these token holders. Ribbon Finance optimizes the onboarding process and assists traders in maximizing their profits. As a result, the network caters to a rising user base. As more people enter the DeFi sector, you can hope to hear more of this effort. Ribbon Finance is currently in the best position to secure new users entering the market.

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