The state of Ribbon Finance
This is the fifth post in our research series. In this series, we publish data-driven analysis on specific blockchains, dapps, and market segments. Let’s dig in!
Topic: Ribbon Finance, a protocol for structured products.
Ribbon Finance is a protocol that enables investors to earn yield by depositing assets in vaults that execute automated options trading strategies. The protocol launched on Ethereum in April 2021 and has since expanded to Avalanche and Solana.
Here, we provide an overview of the protocol and look at its performance using Token Terminal’s data.
Ribbon’s core product is Theta Vaults. These vaults are smart contracts that automatically run options trading strategies using assets that users have deposited into them. Instead of paying high gas fees for running the strategy using the funds of an individual, Ribbon pays relatively low gas fees by running the strategy using pooled funds.
Ribbon launched on Ethereum in April 2021 with call vaults on ETH and WBTC, quickly followed by a put vault on ETH. Since then, the number of vaults has grown to 11. Ribbon launched on Avalanche in December 2021 and on Solana in February 2022. The design of the vaults relies on other protocols that implement the underlying options. The vaults on Ethereum and Avalanche use Opyn and the vaults on Solana use Zeta Markets.
There are two kinds of vaults: covered call and put-selling. A covered call is a financial transaction where the right to buy an asset above its current price is sold. The price for which the option holder can buy the underlying asset is called the strike price. The option seller is willing to sell the potential upside of an asset for a premium, highlighted in the figure below.
A put option on the other hand gives the buyer the right to sell an asset below its current market price. The buyer expects the price of the asset to fall below the strike price.
Each option is associated with an expiration date by which the option can be exercised. Ribbon’s vaults sell weekly options. The price for which the asset can be bought or sold is called the strike price of an option. In Ribbon V1, the strike price was chosen by the manager of the vault. In Ribbon V2, it is automatically determined by using the Black-Scholes model. Ribbon V2 was announced in August 2021 and the migration was finished in January 2022.
To clarify how the vaults work, let’s use the T-ETH-C vault as an example. It is one of the vaults running an automated covered call strategy on Ethereum. Every Friday, the vault uses Opyn to mint European ETH call options, which expire the following Friday, by depositing its ETH balance as collateral. The vault then sells the newly minted options via a Gnosis batch auction. The ETH earned from the action is the yield of the strategy. At expiry, if the strike price is greater than the market price, the options expire worthless and the collateral on Opyn is returned to the vault. If the strike price is below the market price, the option buyers can exercise the options and the vault loses money. Put-selling vaults work in a similar way except the options represent the right to sell the asset to the vault and the options are exercised when the strike price is above the market price at the moment of expiration.
Currently, Ribbon provides call vaults for AAVE, APE, AVAX, ETH, STETH, SOL, and WBTC, and put-selling vaults for AVAX and ETH.
The premiums are deposited back into the vaults once a week. The vaults aim to make a profit by selling options that do not get exercised. If the vault’s strategy is profitable, Ribbon charges an annualized fee of 2% on the total value of assets and an annualized fee of 10% on the profits. Currently, the vaults provide projected annual percentage yields (APY) ranging from 13.8% to 40.7%.
The protocol is governed by the Ribbon DAO whose governance token is RBN. It was launched in October 2021 and it has a total supply of 1 billion tokens. 3% of the supply was airdropped to users of the protocol, its community members, and to users of options protocols on Ethereum. In November 2021, Ribbon launched a staked version of RBN that drew inspiration from the Curve governance system. By staking RBN, users receive veRBN. Holders of veBRN will have more voting power in the Ribbon DAO, receive boosted RBN rewards, and receive a larger percentage of protocol revenue.
Since Ribbon’s main product is vaults that provide passive income, its competition can be understood to be any DeFi platform that provides yield. On a larger scale, Ribbon can be understood to be providing structured products built on financial engineering. A structured product in finance refers to a pre-packaged investment strategy that may combine several financial instruments. Financial engineering refers to the use of mathematics to solve financial problems, such as options pricing using the Black-Scholes model. DeFi innovations, such as liquidity pools, make it feasible to make sophisticated structured products widely available for a small cost. Indeed, Ribbon’s long-term goal is to launch more structured products.
Ribbon Finance is backed by well-known crypto investors. Their seed round was led by Dragonfly Capital, accompanied by Nascent, Coinbase Ventures, Scalar Capital, and more.
This section provides an overview of the historical performance of Ribbon using Token Terminal’s data. We will look at total revenue, total value locked (TVL), and protocol valuation. Note that the data shown here includes only the vaults on Ethereum, which currently make up 95% of the protocol’s TVL across chains.
The figure below shows the weekly total revenue, i.e., the premiums paid on the options sold by the vaults. Supply-side revenue refers to the premiums that the users receive and protocol revenue is equal to the fees Ribbon charges.
The figure below shows the total value locked in different vaults. The vaults with a “P” in their name are put-selling vaults and the others are covered call vaults.
The figure below shows Ribbon’s fully-diluted market capitalization and the number of wallets holding RBN. The price of RBN was on a downward trend since its launch until the end of December 2021. The number of tokenholders kept increasing until the beginning of January when the price more than doubled after Ribbon launched on Avalanche and the migration to V2 was complete. However, the price of RBN hit an all-time low of 0.84 USD in March 2022.
In 2022, Ribbon aims to expand by opening new vaults and launching on new blockchains. Many items on the short-term roadmap relate to the launch of veRBN and implementing the benefits that holding the new token will provide. For example, veRBN holders will be able to select which vaults will receive the most RBN rewards. The team has also said that their goal is to launch permissionless vaults that allow anyone to create their own vaults that support any strategy. Finally, as mentioned before, the long-term goal of the team is to expand to other structured products.
Ribbon is paving the way for the widespread use of financial engineering and structured products in DeFi. The protocol has kept growing steadily in terms of usage and revenue. However, its protocol valuation has kept decreasing.
This newsletter is meant for informational purposes only. It is not meant to serve as investment advice. Please consult with your investment, tax, or legal advisor before making any investment decisions.