ncETH Vault
ncETH Vault is an WETH vault that follows ERC-4626, a standard API for tokenized yield-bearing vaults that represent shares of a single underlying ERC-20 asset. For this vault, ncETH shares are representative of the underlying WETH asset.
The vault serves as the counterparty to all trades made on the platform:
When traders win (positive PnL), their profits will be paid by the vault.
When traders lose (negative PnL), their losses (premiums) will be obtained by the vault.
90% of the premiums will be sent to the vault, while the remaining 10% will be treated as protocol income.
ncETH
ncETH is an ERC-20 representing ownership of the underlying WETH asset. It follows an exchange rate model (similar to Compound's cTokens) where the price of ncETH to WETH changes in real-time from two variables: accumulated option premiums and trader options value (open options).
unrealizedPnL: accumulated options premiums of all open options minus the trader's corresponding option value.
Withdraw locks & fees
For the security of the vault, and to prevent stakers from front-running PnL changes, WETH can't be withdrawn immediately. Instead it will be locked for 72 hours.
After 72-hour lock, stakers can withdraw their funds.
Withdrawal incurs a fee of 0.3%, which will be added to the backstop pool to mitigate potential losses in the vault.
Please note that you will only be able to withdraw funds when the amount of available WETH in the Vault is sufficient, and you can only withdraw up to 50% of the available WETH in the Vault at one time unless the withdrawal amount is less than 1 ETH.
Hedging risks
The protocol aims for the ncETH vault to be close to delta-neutral, reducing PNL fluctuations for LPs and aiming to ensure that returns are driven by market making.
There are several ways to hedge the potential risks:
Position restriction
The number of WETH deposited determines the options positions that can be sold from the vault. 95% of the WETH in the treasury can be used as collateral for opening positions, while the remaining 5% is reserved as liquidity for users to withdraw at any time.
The proportion of selling call/put can be adjusted, for example, reducing the proportion of calls during a bull market and reducing the proportion of puts during a bear market.
Each NFT collection has a weight to control positions in the vault. For example, BAYC should not exceed 30% , and Azuki should not exceed 15%. The better the liquidity of a blue-chip collection, the higher the proportion of positions that can be opened. The weights of all collections combined may exceed 100%.
Limited payout
For call options, as there is no upper limit to the price rise, option sellers may have to bear unlimited risks. Therefore, the vault only provides limited payout for call options buyers. This means that that the maximum payout from the vault equals to the current floor price. At the same time, in order to compensate traders, the protocol will adjust down the premium for buying call options.
Assuming that the current floor price of BAYC is 80 ETH, the buyer plans to purchase a call option with an expiration date of 7 days and a strike price of 100 ETH. The premium for this option before adjustment is referred to as premium_100. At this point, the protocol will calculate the premium for a call option with the same expiration date and a strike price of 180 ETH, which is referred to as premium_180. The final premium that the buyer needs to pay will be determined by the following calculation.
The calculation of final premium is equivalent to the vault selling a call option with a strike price of 100 ETH and buying a call option with a strike price of 180 ETH at the same time to the trader. This combination of options allows for loss control, with the maximum loss occurring when the spot price increase exceeding 100% of the current floor price.
For put options, the maximum loss caused by the price drop is only 100%, so the vault's maximum loss is limited, which occurs when the spot price fall by 100%.
Tuned premium
In NFTCall Surge, the options pricing module will also consider the position of the vault, delta and PnL of each NFT collection and make corresponding adjustments to produce fair prices, decreasing the risks of the vault.
You find the details in the Options Pricing section.
Backstop pool
NFTCall Surge creates an backstop pool to deal with certain extreme situations. If the vault suffers losses due to extreme events, the backstop pool will decide through DAO voting whether to compensate for LPs.
The funding source of the backstop pool mainly consists of two parts:
The exercise fee collected by the protocol when a option is exercised, which is 0.5% of the nominal amount of the option.
The withdrawal fee generated when LP withdraws, which is 0.3% of the withdrawal amount.
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