NFT and ERC20 covered call vaults
Clone the repo and then run:
forge install
forge test
Rinkeby demo site: https://rinkeby.cally.finance
Rinkeby etherscan: https://rinkeby.etherscan.io/address/0xfccf2ee317f46d032a3a70dccffc311db499921f#code
Twitter: https://twitter.com/callyfinance
Discord: https://discord.gg/rxppJYj4Jp
| Name | LOC | Purpose |
|---|---|---|
| Cally.sol | 219 | Entry point to the protocol. Holds the business logic. |
| CallyNft.sol | 220 | NFT contract to represent Cally vault and option positions. |
A user specificies their desired premium, and duration (days) of each call they would like to sell. Every time the duration period passes, the option inside of the vault is put up for auction. The auction starts at a max strike price set by the vault owner initially and then decreases to 0 over time.
Regular example:
-
Alice creates vault with 0.1 ETH premium, 30 day duration on her BAYC, max strike of 500 ETH
-
Dutch auction starts at a strike of 500 ETH and decreases to 0 ETH over a 24 hour auction period
-
Bob buys the call for 0.1 ETH, 30 day duration at a strike of 164.3 ETH after
Tamount of time has passedeither a)
- Bob exercises his option after 23 days
- He sends 164.3 ETH (strike amount) to the contract and the BAYC is sent to him. The 164.3 ETH is credited to Alice
- His option is burned and Alice's vault is marked as
isExercisedand is stopped from starting any more auctions
or b)
- After 30 days Bob's option expires out of the money and he has chosen not to exercise
- The option is automatically put up for auction again with the same parameters (0.1 ETH premium, 30 day duration, BAYC, max strike 500 ETH)
At any point Alice can harvest her uncollected premiums.
If the option has been exercised then she can harvest the 164.3 strike ETH too.
If Alice wants to withdraw her underlying assets (ERC721/ERC20) and close her vault, then she has to initiate a withdrawal first and then wait for the currently active option to expire.
Flow diagram:
(Alice)
┌────────────────┐
│ │
│ NFT holder │
│ │
└───────┬────────┘
│
1.Create vault │
+ deposit │
NFT │
│
│ 4.Transfer option
│ from old trader (Bob)
┌──────────▼──────────────────┐ to new trader ┌────────────────┐
│ ├──────────────────► │
│ Cally.sol │ │ Trader │
│ ◄──────────────────┤ │
└─────────────────────────────┘ 3.Send premium └────────────────┘
2.Start auction ETH and buy
┌──────────────► for call option option at the
│ current auction
│ strike
│
│
│ *Some time passes*
│
│ Flow (a): Trader decides to exercise
│ ....................................
│
│
│ 6a.Credit ETH to
│ beneficiary of the
│ vault 5a.Exercise and (Bob)
│ ┌─────────────────────────────┐ send strike ETH ┌────────────────┐
│ │ ◄───────────────────┤ │
│ │ Cally.sol │ │ Trader │
│ │ ├───────────────────► │
│ └─────────────────────────────┘ 7a.Send NFT └────────────────┘
│ to trader
│
│
│ *Option duration time passes*
│
│ Flow (b): Trader decides to let option expire
│ .............................................
│
│
│ ┌─────────────────────────────┐
│ │ │
└─────────┤ Cally.sol │
5b.Auction is │ │
automatically └─────────────────────────────┘
restarted for
a new option
Withdrawal example:
Alice can also initiate a withdrawal on her vault and get her NFT back. This is the flow for withdrawals:
- Alice creates vault with 0.1 ETH premium, 30 day duration on her BAYC, max strike of 500 ETH
- Auction starts at a strike of 500 ETH and decreases to 0 ETH over a 24 hour auction period
- Bob buys the call for 0.1 ETH, 30 day duration at a strike of 164.3 ETH after
Tamount of time has passed - Alice initiates a withdrawal (
initiateWithdraw) - Bob's option expires out of the money after 30 days
- Auction is not automatically started again because Alice's vault
isWithdrawing - Alice can
withdrawher BAYC and burn her vault
Every time an option expires, a dutch auction is started for the strike price of the new option being sold following a quadratic curve.
The input parameters are startingStrike, auctionDuration, auctionEndTimestamp, reserveStrike. To get the current strike price in the auction:
delta = max(auctionEndTimestamp - currentTimestamp, 0)
progress = delta / auctionDuration
strike = (progress^2 * (startingStrike - reserveStrike)) + reserveStrike
for example using the following parameters:
startingStrike = 26 ETH
reserveStrike = 2.6 ETH
yields an auction curve for the strike price that like this (https://www.desmos.com/calculator/omwlvxy3ed):
There are various optimizations that may make the contracts harder to reason about. These are done to reduce gas costs but at the expense of code readability. Here are some helpful explanations of those optimizations.
To save gas, the details of each vault are represented as a struct with packed variables. To reduce storage costs, premium and dutchAuctionStartingStrike are uint8 indexes.
They index to:
uint256[] public premiumOptions = [0.01 ether, 0.025 ether, ... 100 ether]
uint256[] public strikeOptions = [1 ether, 2 ether, ... 6765 ether]This means that instead of storing a uint256 for the strike and premium values, we can just store a single uint8 index that references one of those options in the array. The cost here is flexibility since a user is limited to our predefined set of starting strike/premium options.
Auctions are automatically started without anyone having to call a method such as startAuction or something similar.
If the block.timestamp is greater than the current expiration of the vault's option then the auction has started.
This is the key condition.
The start time of the auction is the expiration timestamp.
When a vault is first created, the expiration timestamp is set to the current timestamp; this ensures that the auction is immediately started.
Whenever a user buys a new option the expiration for the option in the vault is set to block.timestamp + duration.
Maybe a nice intuition: expirationTimestamp == auctionStartTimestamp
When a user creates a vault they are given a vault NFT.
When a user buys an option, they are given the associated vault's option NFT (1 per vault).
Vault token ID's are always odd. And option token ID's are always even optionId = associatedVaultId + 1.
Each vault NFT has 1 associated option NFT which is forcefully transferred between the old owner -> new owner whenever they buy an option from the vault auction.
Cally creates NFTs for each vault and option.
All balanceOf modifications have been removed from the Cally NFTs.
Given our use-case, it is a reasonable tradeoff.
The balanceOf for each user is set to be defaulted to type(uint256).max instead of 0.
function balanceOf(address owner) public pure override returns (uint256) {
require(owner != address(0), "ZERO_ADDRESS");
return type(uint256).max; // return max for all accounts
}
This was done to save gas since not tracking the balanceOf avoids a single storage modification or initialisation on each transfer/mint/burn.