DeFi alternatives have yet to take off. Although we may refer to the success of <a href="https://www.builder.news/crypto-insights/dydx-the-ftx-aftermaths-leading-narrative-4Elt2" alt="dYdX: The FTX aftermath's leading narrative" title="dYdX: The FTX aftermath's leading narrative" target="_blank" rel="" class="">dYdX</a> as a model for perpetual or <a href="https://www.builder.news/crypto-insights/gmx-exchange" alt="GMX evaluation: Will its success last?" title="GMX evaluation: Will its success last?" target="_blank" rel="" class="">GMX</a> as a model for synthetic margin trading, no one DeFi options venue has attained considerable size. Options trading is presently dominated by centralized exchanges (CEXs), especially Deribit, with just a tiny portion of trade occurring on-chain.Options are an important financial derivative that enables investors to efficiently control risk by purchasing them or earning premiums by selling them. Nonetheless, the sophistication of the possibilities might be intimidating to people who are inexperienced with them.32Ribbon Finance began as an asset management protocol focused on basic structured products. They first garnered attention for their <a href="https://www.builder.news/crypto-insights/defi-option-vault-k0Sxe" alt="DeFi Option Vault: The Machinery Option Writers" title="DeFi Option Vault: The Machinery Option Writers" target="_blank" rel="" class="">decentralized options vaults (DOVs)</a> and have now expanded into other products such as R-Earn and R-Lend. Ribbon will also release Aevo, a derivatives <a href="https://www.builder.news/crypto-insights/best-decentralized-exchanges-to-follow" alt="Best decentralized exchanges to follow" title="Best decentralized exchanges to follow" target="_blank" rel="nofollow" class="">DEX</a> built on top of its own roll-up, in the near future.In this article, we will look at Ribbon's business strategy, why decentralized options vaults cannot be their ultimate goal and Aevo.<h2>The ecosystem of Ribbons</h2>Here's a quick rundown of Ribbon ecosystem:<img src="https://cdn.builder.news/news/11edb7473c880f4e8e59028438497b73.jpg" alt="ribbon ecosystem" title="ribbon ecosystem" width="600" height="253" class="lykafe0">Source: Ribbon blogRibbon's major product is DOVs. They enable automatic option selling on depositors' behalf. Selling covered calls and cash-secured puts are the two basic DOV tactics.R-Earn provides principal-protected vaults, which leverage a tiny amount of capital and/or yields gained for different options strategies to generate higher-yield returns. R-Earn currently provides vaults for USDC and stETH.The USDC vault uses uncollateralized loans to market makers and invests a part of the returns in straddle-like ATM knock-out barrier options, enabling depositors to benefit from intra-week volatility.The stETH vault purchases weekly call-like ATM knock-out barrier options using stETH's base yield and 0.5% of deposits.Ribbon's unsecured lending product, R-Lend, earns returns by lending USDC deposits to a variety of institutions. Depositors may choose which institutions they want to lend to. R-Earn deposits are routed via R-Lend.Ribbon's derivatives order book DEX, Aevo, is based on its own roll-up to provide an on-chain trading experience similar to that of a CEX. Later in this article, we shall go further into its functions.Despite the fact that DOVs is an innovative product that seemed to be a win-win solution for retailers and institutions, the product has shown to be subject to market instability. Months of depositor rates might be eroded by a single long-tail event, leaving retail with losses. Additionally, market makers purchasing these options from DOVs capture an easy spread by selling options and driving down IVs before buying them from DOVs to complete their positions – a straightforward sell high, buy low approach.DOVs were initially lucrative for depositors. But, in 2022, uncertain market circumstances resulted in yield erosion. Since September 2021, both covered call and cash-secured put strategies have lost the majority of their gains, leaving several vaults with large losses. This makes DOVs less appealing to ordinary depositors who do not expect to earn significant returns over long periods of time. Moreover, as DOVs gained popularity, rivalry increased as protocols began to develop their own and compete with Ribbon.DOVs have seen a significant drop in deposits as they struggle to deliver consistent profits in the face of severe competition and market volatility. Ribbon's DOVs peaked at $310M TVL in April 2022 but have since dropped to $46M TVL today, signifying an 85% decline.Aevo is introduced.The drop in interest in DOVs is likely to have pushed numerous firms in the area back to the table to figure out how to go ahead. On-chain DOVs before liquid primary/secondary markets for options are akin to trying to skip a step in the financial stack. At this point, it's evident that one of the major potentials in DeFi is to create a really scaled, liquid options trading arena.Aevo is a one-of-a-kind derivative DEX based on its own L2 EVM known as the Aevo rollup. It, like dYdX v3, provides a hybrid off-chain order book and on-chain settlement DEX. Aevo will first concentrate on options trading and will later expand to incorporate perpetual swaps, allowing options traders to delta hedge on the same platform.Aevo will include 100+ trading instruments as well as strike-expiration options such as daily, weekly, monthly, and quarterly. Ribbon can now provide more complicated structured-product vaults that other DOV protocols cannot. Ribbon may differentiate itself from other DOV protocols thanks to Aevo.Aevo also provides flexibility and capital efficiency to The DOV participants (depositors and market makers) by enabling them to close vault holdings into the order book at any moment or utilize these positions as a margin to acquire leverage. Ribbon's DOVs will first boost volume by selling weekly options via Aevo.But contemporary options DEXs have several problems, including:<ul><li>Pricing alternatives in an accurate and effective manner.</li><li>Optional full collateralization.</li><li>Volume and liquidity.</li><li>Mechanisms of hedging.</li></ul>Aevo will fix these issues in order to get traders and market makers to use their platform. Ribbon's attempt at bridging the gap between options DEXs and CEXs, and maybe becoming the market leader for options DEXs, will be Aevo.Closing a Loophole in the Options MarketCEXs now dominate the options market, with DEXs seeing little demand or momentum. Given the aforementioned obstacles, it's not unexpected that CEXs provide superior liquidity, capital efficiency, and execution than DEXs. Yet, the recent demise of FTX underscores the dangers of depending on CEXs. This opens the door for Aevo to fill the void. On-chain options now account for 0.19% of total notional open interest (OI), with a peak of 2% OI in April 2022. Ribbon's own DEX allows it to have synergy with its DOVs, giving it an advantage over other DOV protocols.Despite CEXs' tenacity in maintaining its notional OI, its decentralized rivals have failed to gain momentum. DOVs have been unable to maintain depositor interest, and the lack of traction in DEXs has resulted in an ongoing decline in OI. If Aevo and Ribbon are successful, they will most likely become the market leaders in this industry.<img src="https://cdn.builder.news/news/11edb7473c881b3c8e59028438497b73.jpg" alt="ribbon tvl" title="ribbon tvl" width="600" height="305" class="lykafe1">Source: Defillama<h2>Aevo comes in</h2>When settling deals on-chain, Aevo will operate an off-chain matching engine and order book. This is nothing new if you're acquainted with dYdX's existing infrared setup. Yet, for those who need a refresher:Before being forwarded to the order book, each order is evaluated by an off-chain risk engine to validate margin requirements.<ul><li>Maker: In the order book, produce a resting order.</li><li>Taker: Generates a market order that matches one of the order book's resting orders. When an order is matched, it is published to the Aevo rollup exchange contract.</li></ul>As previously stated, Aevo's <a href="https://www.builder.news/crypto-insights/blockchains-backbone-to-call-smart-contracts-InrUS" alt="Blockchain's backbone to call Smart Contracts" title="Blockchain's backbone to call Smart Contracts" target="_blank" rel="nofollow" class="">smart contracts</a> will operate on the Aevo rollup. The Aevo rollup will be app-specific, supporting just the Aevo DEX. It is a fork of <a href="https://www.builder.news/project-review/optimism-op-a-layer2-scaling-solution-for-ethereum-applications" alt="Optimism (OP) - A Layer-2 scaling solution for Ethereum applications" title="Optimism (OP) - A Layer-2 scaling solution for Ethereum applications" target="_blank" rel="" class="">Optimism</a> and will be updated in tandem with Optimism's stack. The Aevo rollup works with Constellation, a sequencer, to upload batches of transactions onto the Ethereum mainnet every hour, with a two-hour transaction challenge time before complete confirmation. Withdrawals from the Aevo rollup to the Ethereum mainnet took just 2-3 hours, compared to the 7-day delay on other optimistic rollups.Originally, the Aevo rollup will only support the Aevo DEX, but future permissionless or permissioned deployment of additional smart contracts and protocols may be possible.<h3>Aevo margin</h3><img src="https://cdn.builder.news/news/11edb7473c8866868e59028438497b73.jpg" alt="aevo mechanism" title="aevo mechanism" width="600" height="270" class="lykafe2">Source: RibbonAevo has a three-part margin mechanism to support margin trading while also ensuring the platform's solvency. Here are some examples:Price MarkingMark price is essential in the margin system, determining margin needs and liquidation points to avoid bad debt accumulation by any Aevo account. To calculate trustworthy mark prices for its instruments, Aevo employs an internal pricer that combines prices from Aevo and other exchanges.The Margin Framework and the Risk EngineBefore enabling transactions to be made on the order book, the margin framework and risk engine collaborate to guarantee that an account has adequate collateral.On Aevo, there are two kinds of margins:<ul><li>Standard margin is made up of a specified starting and maintenance margin for individual option positions that are segregated from other positions.&nbsp;</li><li>Portfolio margin allows you to obtain reduced margin needs by combining hedged investments. The portfolio margin is calculated by adding two additional margin methods: scenario margin and floor margin. The combined margins are then utilized to compute the portfolio's initial and maintenance margins.</li></ul>Scenario margin models 15 different scenarios of a portfolio position's possible gains and losses based on percentage changes in spot movement and percentage changes in implied volatility (IV). This is paired with an Aevo-controlled parameter that sets the maximum spot and IV movement in either direction. The scenario margin needed will be established at the maximum loss of all scenarios.The floor margin guarantees that an account's portfolio has the bare minimum of coverage. The variable unit floor margin is controlled by Aevo and is presently set at 0.01 ETH. Floor margin = net short exposure (option) * unit floor margin is how the floor margin is computed.Here's an example of a portfolio that includes one ETH long call and one ETH short call. The maximum loss in the scenario margin is -$20, and the price of ETH is $1,600:<ul><li>Case profit = $20</li><li>Floor margin = 1 ETH x $0.01 x $1,600 = $16</li><li>Maintenance portfolio margin = $36 ($20 + $16)</li><li>$36 * 1.25 = $45 initial portfolio margin</li></ul>Engine of LiquidationAevo handles liquidations by entering them into the DEX's order books. But, if cash is scarce, this may have restrictions. To address this, liquidity providers act as backstops to the liquidation process by buying liquidations through a request for quotation (RFQ) mechanism.<h3>Fee Structure at Aevo</h3>Every transaction, liquidation, and settlement will yield Aevo fees. Moreover, since it implements Ribbon's DOVs via Aevo's auction or RFQ system, it may impose fees for transactions that occur there. RBN coins will profit from Aevo's exchange fees, albeit the actual implementation has yet to be determined.<h2>The flywheel for Ribbon</h2>Ribbon's business strategy is based on a flywheel, in which the production of yield-generating products drives larger deposit inflows to its vaults. Losses incurred during times of volatility result in decreased deposit inflows and lower TVL for DOVs. Most vaults have historically lost months of premiums collected due to a few weeks of volatility, some of which have pushed the vaults' return profiles into negative territory since inception.Ribbon created R-Earn and R-Lend to reduce its reliance on DOVs by providing lower-risk products to its customers. These advantages drive Ribbon to develop additional or complementary products, such as Aevo, which reactivates the positive flywheel and attracts depositors to their platform, resulting in new income streams.<h2>Conclusion</h2>The previous year has been turbulent for DOVs, and depending only on these items is not a viable business strategy. Despite this, Ribbon has continued to innovate with products such as R-Earn and R-Lend, giving customers access to lower-risk investing options. As a consequence, a broader choice of vaults is available to depositors with varied risk profiles.Yet, this has not been sufficient. To really establish an "options stack," a marketplace for buying and selling options is obviously essential.Ribbon sees Aevo as a key potential since it intends to address a need in the options DEX market while also benefiting DOVs, enabling it to establish a complete variety of structured-product vaults. Ribbon may need this as a stimulus to regain traction as an asset management methodology.There's no reason why Aevo shouldn't become Ribbon's main emphasis and business segment. After all, the TAM of options-based structured products is dwarfed by the TAM and potential income of a derivatives DEX.Ribbon's answer to the "chicken-and-egg conundrum of liquidity" is Aevo. They created a desire for choices by using DOVs. They merely need to entice the opposite side (options purchasers) to start the ball moving by bootstrapping this volume onto Aevo.It needs to be seen if Aevo can acquire users organically and establish itself as a major player in the options Trading industry. The corpses of promising options protocols litter the DeFi cemetery.Yet, Ribbon has a staff with demonstrated product knowledge in DeFi derivatives, and their approach is solid in theory.<div class="pr-block-special">Disclaimer: This article is intended for and only to be used for reference purposes only. No such information provided constitutes advice or a recommendation that any investment or trading strategy is suitable for any specific name.</div>

Aevo is Ribbon Finance's newest structured DeFi solution. It expands upon the "DeFi Option Vault" (DOV), the platform's yield-generating tool based on crypto options, derivatives, and fixed-rate investment products.

Aevo: The next piece for Ribbon dynasty