How it works
The basic concept behind DIVA Protocol is known as Parametric Asset Claim Decomposition (PACD)
After depositing collateral (which can be almost any ERC-20 token), a user is issued two directionally reversed positions, referred to as long and short positions, that combined represent a claim on the deposited collateral, but when held in isolation exposes the user to the upside (via the long position) or downside (via the short position) of the underlying metric.
The payoffs of long and short positions are zero-sum meaning that for every unit of collateral that the long position may gain, the short position will lose and vice versa. The shape of the payoff curves is governed by four parameters (floor, inflection, cap, and gradient) which allows the creation of a wide range of payoff profiles and unique derivative products. The described concept is referred to as Parametric Asset Claim Decomposition (PACD) and is illustrated in the following graphic.
Illustration: Parametric Asset Claim Decomposition
Long and short positions are represented by ERC20 tokens which can be integrated into any decentralized or centralized trading infrastructure. Traders can buy and sell those position tokens on the secondary market for the sake of speculation or hedging.
The payoffs of long and short position tokens are derived based on the outcome of the underlying event (e.g., the BTC price at the end of the year) and the underlying payoff function. After the outcome has been reported by an oracle following expiration, users can withdraw their respective share in the collateral by sending their long and short position tokens back to the DIVA smart contract. Position tokens are burnt in that process. The vault that holds the collateral asset during the lifetime of the position tokens is referred to as a contingent pool.
Last modified 1yr ago