Unlocking Rysk

Achieve Uncorrelated Returns

Rysk Finance

Published in

Rysk Finance

6 min readJul 18, 2023

It’s here, it’s happening — Rysk Beyond has hit Arbitrum mainnet!

Our advanced options protocol, offering enhanced capital efficiency and unique features, will now serve its liquidity providers with uncorrelated returns while facilitating superior on-chain options trading for everyone.

After an alpha phase, security audits, and a month-long testnet trading competition hosting over 4,000 entrants, Rysk Beyond is now welcoming liquidity providers eager to tap into its uncorrelated returns.

Make Rysk a part of your portfolio diversification today!

Why We Built Rysk

Crypto assets are historically highly correlated, meaning they all move in a similar direction, making it complex to diversify and generate higher returns with lower risk.

The high correlation makes diversifying and reducing risk in crypto portfolios difficult. Rysk fixes this by allowing everyone to access superior returns that don’t move with the market. Rysk is the only free lunch.

Before Rysk you were in crypto and stables; after Rysk you will be in crypto, stables, and Rysk.

Rysk was designed with a main goal in mind: to create decentralized crypto-native uncorrelated assets that enable market-neutral returns for better crypto portfolio diversification.

To achieve this goal we built the Dynamic Hedging Vault (DHV) — a hybrid AMM (Automated Market Maker) and RfQ (Request For Quote) options protocol, generating uncorrelated returns for its liquidity providers whilst enabling anyone to trade (buy and sell) options with a wide range of strike prices and expiry dates. The DHV uses a dynamic approach in hedging risk to generate market-neutral uncorrelated returns for liquidity providers.

Dynamic Hedging Vault (DHV) Mechanism

Liquidity providers deposit native USDC into the DHV to fund ETH options trades. The DHV acts as a counterparty to options traders, enabling anyone to trade ETH options on multiple expiries and strike prices.

The deposited funds are used to collateralize the options sold by the vault or to pay for options being collateralized by the seller (bought by the vault). The DHV collects premiums from traders buying options from the vault and pays out a premium for each option sold to the vault.

The DHV uses its own price mechanism to quote:

A price to SELL the option to a trader
A price to BUY the option from a trader

The difference (spread) between the sell and buy price forms the uncorrelated returns generated by liquidity providers. The vault Revenue Potential for the Liquidity Providers comes from spread * volume.

The risk can be measured through Inventory Turnover. The Rysk model is targeting to turn over as much option inventory as possible to decrease risk and increase revenue (assuming the same spread), increasing profitability for Liquidity Providers.

At all times, the DHV will be aware of its position and will price its options in such a way as to incentivize sales or purchases that bring its directional exposure closer to zero.

In the case where options bought by traders remain on the DHV’s books, they are dynamically risk-managed through to expiry.

Statistically speaking, implied volatility is higher than realized volatility. This means that, on average, the cost of delta hedging an option through to expiry is less than the market-price premium paid. Again, the revenue from this statistical phenomenon passes through to liquidity providers.

Options can also be purchased by the DHV to help risk manage the book in the case that this statistical observation doesn’t hold or too much risk is concentrated around a specific strike and/or expiry.

During periods of sustained strong demand in one direction and where the rebalancing incentive alone isn’t enough, the DHV can immediately hedge delta by trading spot or other derivatives (such as perpetuals) to minimize market exposure and reduce directionality. Currently, the DHV is integrated with GMX, Uniswap, and Rage Trade to hedge the options exposure, with more integrations coming soon.

Although the DHV targets a delta-neutral book position, being delta neutral does not impact the overall yield of a trading book. What it does do, however, is greatly reduce the variability in the daily returns. By staying delta-neutral, the DHV’s daily revenue stream is kept more consistent, adding protection for liquidity provider USDC deposits against the price fluctuations of the ETH/USDC market, leading to the LP token price becoming largely uncorrelated to the rest of the crypto market. The DHV purchasing options also aids in hedging off positions and reducing the book’s short gamma position, in turn allowing the DHV to act as an exchange collecting the difference between the buy price and sell price as profit (the spread).

What are the Risks of the DHV?

Rysk Beyond is a complex new protocol, and as such there are risks involved in using the platform and providing liquidity. Below, the main risks are identified and mitigations are explained.

Smart Contract Security

Rysk Beyond is a complex and inherently experimental protocol that carries the risk of a smart contract vulnerability which may result in a total loss of funds.

Rysk prioritizes security and our smart contracts have completed multiple audits with Dedaub, Trust, and Akira. Audit reports are available here. Currently, there is also an ongoing bug bounty in place with Immunefi. In addition, constant monitoring using Dedaub Watchdog and Tenderly tracks suspicious activities and can be used to potentially pause the system.

AMM mispricing

Rysk Beyond introduces an AMM with an on-chain price mechanism to price selected expiries and strikes. At a high level, the price model is a combination of 4 functions: Vanilla Black Scholes price, a Slippage model, a Spread model, and Trading Fees.

In the case that the pricing mechanism is not performing as expected, the options might be mispriced, increasing the risk for the DHV and potentially leading to losses for Liquidity Providers.

The AMM and the pricing mechanism have been extensively tested and a trading competition with over 4,000 registrants took place in May 2023 to validate the robustness of the mechanism.

Incorrectly Hedged DHV

The DHV targets a delta-neutral book position to achieve market neutrality, but the delta can deviate far from zero. This directional exposure increases the risk to Liquidity Providers, especially in case of a spike in volatility.

One of the core features of the DHV is the hedging mechanism that reduces the risk of market movements, creating uncorrelated returns for Liquidity Providers. The hedging mechanism happens in different ways:

The DHV prices options in such a way as to incentivize the sale/purchase of options that bring the DHV’s exposures closer to zero
Using external protocols, such as Uniswap and GMX, the DHV trades spot or perpetuals to rebalance its delta exposure. The goal of this hedging mechanism is to target efficient hedging where the options inventory is reduced and the cost of hedging is minimized.

For a detailed view of all risks around the protocol, check out our comprehensive documentation.

How Can I Earn Uncorrelated Returns?

Prepare USDC — Rysk Beyond accepts native USDC on Arbitrum. If you don’t own any native USDC on Arbitrum you can:
— Swap USDC.e (bridged USDC) or any other token (make sure the native USDC address is the official one: 0xaf88d065e77c8cC2239327C5EDb3A432268e5831)
— Bridge native USDC using the Cross-Chain Transfer Protocol (CCTP). See the list of supported bridges here
Visit the Rysk Beyond App: https://app.rysk.finance/ and connect your wallet
Input the amount of USDC you will like to deposit, approve the spending transaction, and then complete the deposit
Your deposit is completed and you can start earning uncorrelated returns!