"Bottom-Is-In" bet
Last updated
Last updated
Sassal wants to make a bet with his Twitter friends that ETH's recent drop to $1'700 has marked a bottom. In other words, Sassal would like to create two opposing positions, one that will lose in value if ETH/USD drops below $1'700 (long position owned by Sassal) and one that will gain in the same scenario (short position owned by everyone betting against Sassal).
Instead of a binary loss curve with a jump at $1'700, Sassal prefers to have a linear loss curve in the range $1'500 and $1'700. That is, if the ETH price drops slightly below $1'700, he will lose some of his stake but not all. Only if the ETH price drops below $1'500, then Sassal will lose his full stake.
Sassal would like to put WETH at stake. If he is right, he will end up with more WETH.
Sassal can use DIVA Protocol to create the desired positions with the following configuration:
Event
Reference asset: "Min ETH/USD"
Expiry time: 31/12/2022 12:00am UTC
Payoff
Floor: 1'500
Inflection: 1'600
Cap: 1'700
Gradient: 0.5
Collateral
Asset: WETH
Amount: 100
Oracle
Tellor (0x123...fde)
The resulting payoff profiles of the two positions are illustrated below:
For the resolution of the market, Sassal assigns the whitelisted Tellor protocol as the data provider.
Sassal deposits 100 WETH to mint the two position tokens. He then sells the short position tokens for a total of 40 WETH. This results in a net deposit/stake of 60 WETH for Sassal.
End of year (expiration), the oracle reports the minimum value of ETH/USD during the lifetime of the bet and thereby determines the payoffs for long and short position tokens. Users can then claim their share in the collateral by sending back their position tokens.
$1'700 was really the bottom (i.e. min ETH/USD >= $1'700): Sassal can return the 10 WETH that he initially deposited and keep the 3 WETH from the sale of the short position -> +30% net gain
ETH/USD dips below $1'700: Let's look at two possible scenarios:
ETH/USD drops to $1'600: Sassal will lose 50% (5 WETH) of his initially deposited collateral and keep the 3 WETH from the sale of the short position -> -20% net loss
ETH/USD drops below $1'500: Sassal will lose 100% (10 WETH) of this initially deposited collateral and keep the 3 WETH from the sale of the short position -> 70% net loss
Note that the payouts depend on the payoff profile. A less risky payoff profile would involve moving the floor lower and thereby slowing down the loss incurred when ETH drops below the $1'700 mark.
