monte carlo simulation of SwanDAI returns based on historical DAI volatility
As DeFi has grown exponentially, some have concerns about the mechanisms underpinning it.
We want to let people bet on or hedge against the risk of black swan events.
One example: the risk of the DAI peg breaking
What it does
SwanDAI is a synthetic asset that tracks the deviation of DAI's price from its dollar peg in an exponentially increasing fashion.
Taking a long position on SwanDAI can result in a massive payoff in the event of a black swan.
At the expiry, the contract will trade exactly at the index price.The sellers takes a time premium, compensating them for the estimated risk of DAI de-pegging.
Our SwanDAI dashboard allows a user to purchase SwanDAI and provides visualizations to inform the user about their potential investment.
SwanDAI has the following return characteristics, tuned considering the dynamics of the Single Collateral DAI system.
- the price will 100x if the peg deviates by 50% (returns are capped at 100x)
- the price will 2x if the peg deviates by 13%.
Beyond the 13% threshold on the upside, liquidation is cheaper than wiping.
There is also the risk of global settlement being called which would likely bring the peg back.
Speculators and stablecoin naysayers can now put their money where their mouth is and bet on the DAI peg breaking.
The Maker Foundation can serve as the counterparty and owner of the token facility. By sponsoring the short position on SwanDAI, Maker would collect premiums while increasing their skin in the game.
A payroll company that issues DAI payments could hedge against a DAI death spiral that would otherwise destroy their business.
How we built it
SwanDAI leverages the UMA Token Builder to create the tokenized synthetic asset.
- designed SwanDAI return profile
- used Coinbase API for DAI/USDC prices
- calculated historical volatility
- simulated returns using Monte Carlo methods
- built react front-end
- integrated the UMA Token Builder on Rinkeby
Challenges we ran into
- Getting Synthetic Token Builder to work
- Using USDC as collateral
What's next for SwanDAI
- Deeper integration with UMA (custom collateral assets)
- Token derivative contracts
- Sourcing counterparties to sponsor Token Facilities
Find us on the internet!
Will Price - https://twitter.com/willprice221
Will Shahda - https://twitter.com/ethdapp
Will Sheehan - https://twitter.com/_wilbur4ce_