Polysynth’s Option Vaults architecture comprises of the integration between our Option Vault contracts and Opyn Protocol.
Working mechanism of Polysynth Option Vaults
Step 1: The user deposits funds into a vault. Let’s say it's the WETH Covered Call vault i.e. the user needs to deposit WETH as collateral.
Step 2: Strike and Expiry are algorithmically selected as per the model.
Step 3: Polysynth uses the collateral pool to mint Option Tokens or oTokens on Opyn. The collateral gets locked in Opyn’s smart contracts and the oTokens are received for the purpose of auctioning.
Step 4: oTokens are auctioned to Market Makers. Auctions are currently processed through Polysynth's auction interface.
Step 5: The oTokens are transferred to the winning Market Maker in exchange for the options premium.
Step 6: At expiry, the settlement is done and collateral is fully returned to the vault if the expiry is out of money, or else is redeemed as per the payoff.
oTokens [Opyn Protocol]: Polysynth vaults rely on oTokens for creating option contracts and settlements at expiry. oTokens are ERC20 token representations of an options contract wherein owning them is equivalent to owning an options contract for a specific expiry and strike price. The vault’s collateral used for minting oTokens is locked until the expiry. This collateral is used to pay off the oToken holders in the case that the options expire in the money.
Oracles: Since Polysynth uses Opyn for minting and settling vaults, it relies on Opyn’s oracle system for these operations. Currently, Opyn uses Chainlink as the oracle provider that is reliable and not susceptible to price manipulation.