The Liquidity-to-Volatility Engine connects Earn Vaults and Impermanent Gain Options.
Each Earn Vault is coupled with a corresponding Impermanent Gain, and vice-versa. As a result, the two share the same reference token and maturity frequency.
Each pair (Earn Vault & Impermanent Gain) is isolated and cannot be affected by the performance of other pairs.
The Engine transforms the Impermanent Loss experienced by the Earn Vault into the payoff for Impermanent Gain Options.
All done while mathematically ensuring payoffs are always perfectly balanced so that neither users nor the protocol are exposed to any unintended loss. This is achieved by determining the correct amount of Impermanent Gain Options mintable out of the Earn Vault liquidity.
Mathematically, the liquidity of the Earn Vault is rebalanced to match an Equal Weight portfolio. By definition, an its payoff always cover the payoff of the DEX LP + the Impermanant Loss.
The Liquidity-to-Volatility Engine is just a conceptual component implemented at the smart contract level within the mathematics of DVPs & Vaults.