Shield’s Perpetual Option is an innovative financial instrument that pioneers the first long-term, on-chain options without the effort, risk, or expense of rolling positions. It is a unique and optimal trading toolkit in all market conditions. It’s a new era for on-chain derivatives traders.
Shield uses oracle as price feed. Compared to AMM model, having oracle as price feed indicates less price discrepancy between the quoted price and live market price, leaving room little for arbitrage traders and low impermanent loss as a result.
No Risk of Liquidation
Each private pool has its own wallet, which makes it possible to calculate the risk each pool undertakes that could be hedged accordingly. The majority of the counter-party risk is undertaken by private pools, leaving the public pool limited risk.
The P2DP model allows both public pools and private pools to provide liquidity for the trade. Apart from that, Shield allows 5x the leverage for the private pool and 2.5x leverage for the public pool, which increases the capital efficiency and enlarges the depth of the trade.
Limited Downside, Unlimited Upside
Maximum trading loss is the daily funding fee, while the profits will be calculated using the following formula: (No. Of Contracts*Price Change) - Funding Fee. While the funding fees are known at the time of opening positions, the profits are unlimited depending on market conditions.
On-chain perpetual options pricing
Applying mathematical knowledge of stochastic processes, volatility, and partial differential equations with initial margins, Shield finds the exact solution for perpetual option funding fees. Meanwhile, Shield applies the non-linear cutting process and succeeds in implementing the pricing on-chain by replacing the exact solution of the non-linear pricing model with linear computation to find an approximate solution. After hundreds of data back-testing, the error between on-chain pricing and pricing falls within 5%.
Peer to Dual Pools
P2DP essentially solves the LP counterparty risk of on-chain derivatives by introducing two types of pools, private ones for professional market makers and a public one for regular users, that ensures on-chain liquidity and minimal risks for regular users. Professional market makers can provide risk-free liquidity in the private pool through risk-hedging strategies or take orders first, while regular users can provide almost risk-free backup liquidity in the public pool.
Third-party Liquidator System and Brokerage System
Shield designed a third-party liquidator system and a brokerage system based on non-cooperative game theory and introduced an innovative trading fees buy-back and burn mechanism, which resulted in a Nash equilibrium inside the protocol and ultimately delivered a perfect decentralised network.
On-chain Random Matching Engine
Shield pioneered the first on-chain random order-taking algorithm. Newly opened orders are randomly generated by two random factors: the hash of the block and the block time, and the remainder is taken using the current private pool length, i.e., the order is assigned to the corresponding private pool first. If the private pool is critical or the available balance is insufficient, it is polled sequentially until an available private pool is encountered.