diff --git a/packages/website/_posts/diva-flash-loans.mdx b/packages/website/_posts/diva-flash-loans.mdx new file mode 100644 index 0000000..bdf8395 --- /dev/null +++ b/packages/website/_posts/diva-flash-loans.mdx @@ -0,0 +1,132 @@ +--- +title: Flash loans in DIVA Protocol +description: Flash loans in DIVA Protocol +date: 2024-03-16T20:37:00.284Z +coverImage: prediction_market.jpeg +coverImageDescription: Chart +coverImageWidth: 900 +coverImageHeight: 628 +author: Walodja1987 +--- + + +**TL;DR: This article explores the use of flash loans in prediction markets built on top of DIVA Protocol, aiming to enhance user +experience and optimize market making activities. This idea is inspired by a prediction market app currently under development.** + +In prediction market applications, ease of use for participants is key. Users should be able to easily place bets on outcomes and close +their positions with a simple click. + +This simplicity is achieved by limiting users to market buys and sells of the corresponding outcome shares, reserving the complexity +of limit orders for advanced market participants like market makers. + +In DIVA Protocol, market makers are essential for liquidity, as they mint position tokens to sell them on the market for a profit. +This process involves (i) depositing funds into DIVA Protocol to mint equal quantities of LONG and SHORT position tokens (which +combined represent a claim on the deposited funds) and (ii) placing sell limit orders via decentralized protocols such as 0x Protocol, +facilitating market buys for users. The goal is to sell these tokens to two independent users for an amount exceeding the initial deposit. + +> **Example:** Bob deposits $100 into DIVA Protocol to mint 100 LONG and 100 SHORT Tokens. He then lists the 100 LONG tokens +for sale at a total price of $60 and the 100 SHORT tokens at $45. With Charlie buying the LONG tokens and Emily the SHORT tokens, +Bob earns a profit of $5. + +Furthermore, in order to enable users to close their positions via market sell, market makers must provide buy limit orders +for both tokens. Consequently, a market maker would have to maintain a four-sided market to achieve the desired simplicity +for users. This is adding complexity and operational burden. + +The following sections will detail how integrating flash loans can significantly reduce this complexity, offering a more +streamlined approach for market makers. + +## 💎 Closing positions with opposite outcome token + +The first step towards reducing the complexity for market makers is to realize that instead of selling their position, users can +buy an equivalent amount of the opposite outcome token and redeem them for collateral via DIVA Protocol. + +> **Example:** Let's say Alice has 100 LONG tokens, each priced at 20c. Directly selling these tokens would yield her $20. Alternatively, +Alice could achieve the same outcome by buying 100 SHORT tokens, trading at an implied price of 80c each, for a total of $80, and +redeeming both for $100 from DIVA Protocol, netting her $20. + +Yet, an issue arises since Alice needs funds ($80 in our example) to purchase the opposite token, which may not be always available. + +What if Alice could briefly borrow the necessary funds to buy the opposite token and immediately repay the loan upon redeeming the +collateral from DIVA Protocol? That’s where flash loans come in. + +## ⚡ Flash loans + +Flash loans introduce an innovative form of lending unique to the blockchain world. These loans do not require collateral but must be +repaid within the span of a single smart contract transaction. Failure to do so results in the reversal of the entire transaction, +thus eliminating any repayment risk. + +To grasp the concept of flash loans, particularly for individuals that come from traditional finance, it's essential to understand the +atomic nature of smart contract transactions. Essentially, a smart contract transaction comprises a sequence of instructions executed as +one unit. Should any part of this sequence fail, the entire transaction is undone, leaving the blockchain unchanged. + +A flash loan is integrated as a specific instruction within a smart contract transaction. It involves borrowing funds at the transaction's +start and repaying them by its conclusion. Overcollateralized lending protocols like Aave, Compound or MakerDAO have flash lending +capabilities integrated into their protocols for public use. + +To illustrate, consider Alice’s situation again: She owns 100 LONG tokens valued at 20c each and aims to liquidate her position. +With an implied SHORT token price of 80c, the following steps are executed as part of a single smart contract transaction: +* Borrow $80 from Aave +* Purchase 100 SHORT tokens with the $80 +* Redeem 100 LONG and 100 SHORT tokens from DIVA Protocol for $100 +* Repay the $80 loan, retaining $20 as the net proceeds, mirroring the direct sale of LONG tokens + +The example shows how the flash loan instructions (steps 1 & 4) encapsulate the transaction's other operations (steps 2 & 3), +allowing for their replacement with any other operations, such as exploiting arbitrage opportunities or refinancing outstanding loans. + +## 🫰 Presence of fees + +In our previous example, we omitted flash loan fees, trading fees and redemption fees for the sake of simplicity. However, in +reality, those fees are not zero. Aave charges a 0.09% interest on the flash loan, DIVA Protocol applies a 0.25% upon redemption, +the trading fee is also typically non-zero. + +Intuitively, in the presence of fees the net dollar amount received at the end of a transaction will be lower, introducing the +possibility that the flash loan cannot be repaid. + +To illustrate the impact of fees, let’s revisit our previous example, assuming the standard Aave and DIVA fees and a 1% trading fee: + +**Scenario 1:** Alice intends to liquidate her LONG tokens, which are traded at 20c and the implied SHORT token price being 80c. +* Borrow $80.80 from Aave to cover the $80 purchase price for 100 SHORT tokens and the trading fee of $0.80, leading to a repayment amount of $80.80*1.0009 = $80.8727 +* Purchase 100 SHORT tokens for $80.80 including trading fee +* Redeem 100 LONG and 100 SHORT tokens from DIVA Protocol for $100*(1-0.0025) = $99.75 after the redemption fee +* Repay the $80.8727 loan, yielding $18.8773 net proceeds after all fees (vs. $20 in the absence of fees) + +Here, the funds available after fees ($99.75) suffice for loan repayment ($80.8727), ensuring the transaction concludes successfully. In mathematical terms we have: $99.75 - $80.8727 >= 0. + +**Scenario 2:** Now let’s consider a scenario where Alice’s LONG token is valued at 1c, with the SHORT token priced at 99c. +* Borrow $99.99 from Aave to cover the $99 purchase price for 100 SHORT tokens and the trading fee of $0.99, leading to a repayment amount of $99.99*1.0009 = $100.08 +* Purchase 100 SHORT tokens for $99.99 including trading fee +* Redeem 100 LONG and 100 SHORT tokens from DIVA Protocol for $100*(1-0.0025) = $99.75 after the redemption fee + +In this case, loan repayment is not possible since the available funds after step 3 ($99.75) are less than the required repayment amount ($100.08), +leading to a transaction failure. In mathematical terms we have: $99.75 - $100.08 < 0. + +From these reflections, we can derive a general formula to calculate the threshold price of the opposite token that ensures loan repayment: + +

+ +

+ +where _p_ represents the price of the opposite token, and _m_ the quantity of the owned token being liquidated (100 in our previous example). + +Simplifying this formula yields: + +

+ +

+ +Under the assumed fee structure, the threshold price _p_ would be $0.986736, meaning that the flash loan will succeed if the price of the SHORT token +is less than or equal to $0.986736. + +## 💡 Additional considerations + +In a scenario where a user has sufficient funds to buy the opposite side, no flash loan is needed. To address instances where a user has partial funds, +the smart contract function that triggers the flash loan based liquidation operations could be designed to accept the loan amount as an input parameter. + +## 🌔 Conclusion + +This article explored a flash loan-based approach for liquidating derivative positions created on DIVA Protocol, aimed at enhancing the user experience +and streamlining market-making processes. + +If this concept piques your interest, we invite you to join us in the development of this (small) smart contract adapter to expand the DIVA infrastructure +ecosystem. + diff --git "a/packages/website/public/images/posts/Front - Gold (1).png\357\200\272Zone.Identifier" "b/packages/website/public/images/posts/Front - Gold (1).png\357\200\272Zone.Identifier" deleted file mode 100644 index e6a0282..0000000 --- "a/packages/website/public/images/posts/Front - Gold (1).png\357\200\272Zone.Identifier" +++ /dev/null @@ -1,3 +0,0 @@ -[ZoneTransfer] -ZoneId=3 -HostUrl=https://files.slack.com/files-pri/T02MQL62QSG-F06M0DA4C2C/download/front_-_gold.png?origin_team=T02MQL62QSG diff --git "a/packages/website/public/images/posts/Front - Silver (1).png\357\200\272Zone.Identifier" "b/packages/website/public/images/posts/Front - Silver (1).png\357\200\272Zone.Identifier" deleted file mode 100644 index 84ee4ae..0000000 --- "a/packages/website/public/images/posts/Front - Silver (1).png\357\200\272Zone.Identifier" +++ /dev/null @@ -1,3 +0,0 @@ -[ZoneTransfer] -ZoneId=3 -HostUrl=https://files.slack.com/files-pri/T02MQL62QSG-F06LE3MCC84/download/front_-_silver.png?origin_team=T02MQL62QSG diff --git a/packages/website/public/images/posts/Plancorp-market-prediction-is-harder-than-you-think.webp b/packages/website/public/images/posts/Plancorp-market-prediction-is-harder-than-you-think.webp new file mode 100644 index 0000000..fed1e8b Binary files /dev/null and b/packages/website/public/images/posts/Plancorp-market-prediction-is-harder-than-you-think.webp differ diff --git a/packages/website/public/images/posts/formula_threshold_price_1.jpg b/packages/website/public/images/posts/formula_threshold_price_1.jpg new file mode 100644 index 0000000..86ecc16 Binary files /dev/null and b/packages/website/public/images/posts/formula_threshold_price_1.jpg differ diff --git a/packages/website/public/images/posts/formula_threshold_price_2.jpg b/packages/website/public/images/posts/formula_threshold_price_2.jpg new file mode 100644 index 0000000..78a10dd Binary files /dev/null and b/packages/website/public/images/posts/formula_threshold_price_2.jpg differ diff --git a/packages/website/public/images/posts/prediction_market.jpeg b/packages/website/public/images/posts/prediction_market.jpeg new file mode 100644 index 0000000..d577f33 Binary files /dev/null and b/packages/website/public/images/posts/prediction_market.jpeg differ