Sigmadex is excited to announce that we are integrating the Chainlink Implied Volatility (IV) Data Feeds and Chainlink Keepers to help create balanced, responsive markets that dynamically update according to external conditions and mitigate impermanent loss for users. The Chainlink IV Data Feeds will provide integral statistics for Sigmadex’s proprietary DAMM and the Sigma Risk Index (SRI) computation algorithms, while Chainlink Keepers will optimize the market algorithm by automatically adjusting parameters according to market conditions and forecasted price volatility.
Chainlink IV Data Feeds and Price Feeds will enable Sigmadex to assess the current state of the derivatives market from multiple independent sources, creating a more robust algorithm backed by high-quality data. Moreover, Chainlink Keepers will optimize the parameter dynamics in real-time by triggering market contract state changes according to IV data, helping ensure the algorithm can quickly respond to market conditions.
Sigmadex aims to provide users with the best DeFi experience as we continue to develop the protocol in anticipation of a multi-phased launch. Utilizing industry-leader Chainlink as a trusted source of secure and reliable real-world prices and volatility on the Sigmadex platform will serve as valuable integration for the ecosystem.
“Integrating a reliable Implied Volatility data feed into Sigmadex's AMM architecture will enable liquidity concentration to be determined algorithmically. Chainlink's history in building high-quality, tamper-proof data sources is second to none and provides the confidence we require to continue building the foundation of Sigmadex”.
- Roland Haggins, Sigmadex Co-Founder
Prototyping and Testing
Our team will be prototyping this new implementation on the Rinkeby test network while preparing its integration into our SRI and DAMM algorithms for use on Sigmadex. This prototyping will enable us to bring key computation on-chain for a seamless user experience.
By integrating Chainlink IV oracles, Sigmadex’s dynamic market algorithms will be able to automatically adjust their parameters with the help of Chainlink Keepers. This allows the market parameters to be optimally tuned for the current price market and the volatility forecasted by various options markets.
Risk and Volatility
Risk is defined as "a situation involving exposure to danger". Humans are programmed to be risk-averse, meaning we avoid risk as a safety mechanism for survival. It is likely that when the word risk is considered, the association is usually made with potential loss or similar negative connotations.
It is often assumed that the wealthy have a higher tolerance for financial risk. While there is a correlation between high risk and high reward, this is not always black and white. It is not rational to assume that taking a risk can only result in gains or losses. There are always many variables at play to consider when calculating risk.
Volatility and risk are often brought up in the same conversation; however, they are not as easily comparable as one might think. Market volatility can be measured with metrics whereas with risk there is no hard data to make a fair comparison. If a market experiences increased volatility, the upside can be considerable. On the flip side, we can experience extreme loss without notice. This analysis suggests that humans will correlate volatility as risk and become intimidated to enter the market.
Why Implied Volatility (Reasons for Integration)
The Black-Scholes options pricing model was a revolution in financial mathematics. Not only is it one of the best ways to determine the fair price of an option, but it can be turned on its head to infer the market’s expectations on the future volatility of an asset, a sort of weather forecast for price stability.
Some existing models subject their liquidity providers to arbitrage loss when increasing volatility of the pair opens up enough volume to be profitable over their 0.6% transaction fee. In simpler terms, setting the price of the asset to the average cost of the oracle doesn't mean much when the depth is radically dispersed around the mean, not concentrated upon it.
Currently, the best network operators can do is manually set transaction fees and liquidity concentration parameters based on prior data, reacting to volatility swings only after liquidity providers have been gouged. While this may be fine for stable pairs, a better solution is needed to put the proactive back in the proactive market maker for volatile pairs—which is why we chose Chainlink IV Data Feeds. Not only do Chainlink IV Data Feeds use the Black-Scholes pricing methodology, but they are also secured by a decentralized network of professional node operators and premium data sources, helping ensure high uptime, security, and precision.
Moreover, with Chainlink IV Data Feeds and Chainlink Keepers, Sigmadex can automatically set transaction fees and proactively optimize the degree of liquidity concentration before volatility hits the market. This protects liquidity providers from arbitrage loss while still maintaining the highest degree of capital efficiency for those who choose to swap, providing the lowest slippage rates in an environment that is consistently prone to sandwich attacks.
Chainlink is the industry standard for building, accessing, and selling oracle services needed to power hybrid smart contracts on any blockchain. Chainlink oracle networks provide smart contracts with a way to reliably connect to any external API and leverage secure off-chain computations for enabling feature-rich applications. Chainlink currently secures tens of billions of dollars across DeFi, insurance, gaming, and other major industries, and offers global enterprises and leading data providers a universal gateway to all blockchains.
Learn more about Chainlink by visiting chain.link or read the documentation at docs.chain.link. To discuss an integration, reach out to an expert.
Sigmadex is an open-source balanced decentralized economy using game theory, DeFi, and blockchain technology to create the ideal automated liquidity protocol. It eliminates the requirement for having to trust any intermediaries, prioritizes decentralization, and is governed by the community.
Sigmadex is unlike any other liquidity protocol and therefore requires meticulous R&D combined with trusted data sources for testing and real-time optimizing. With deep market insights as a requirement for creating its unique feature sets, bringing newcomers into the DeFi space can be done more effectively.