Oracles & Risks

Understanding Protocol Risks & Oracles.

Price Oracle

Smilee has been designed to function directly using DEX prices, which are obtained by directly swapping on the DEX.

To avoid to incur in excessive slippage or market manipulation, DEX prices are checked against a Price Oracle. Anytime DEX prices and Oracle prices deviate more than an accepted threshold, swaps revert ensuring no risk of loss to the Earn Vault or the protocol.

Current price deviation thresholds:

  • ETH & BTC: 1.5%

  • ARB: 2%

  • GMX: 2.5%

Smilee uses Chainlink as Price Oracle and Uniswap v3 as DEX. Other Oracles and DEXs will be added in future.

Volatility Oracle

The Volatility Oracle provides the initial volatility for each epoch. The initial volatility is used to:

  • Define the range of the Earn Vault for that epoch (as described in #earn-vaults).

  • Compute the price of Impermanent Gain Options in the Synthetic AMM. The AMM takes the initial volatility as the starting value for the epoch and then adjusts it based on market dynamics.

Oracle data is obtained as follows:

  • For ETH and wBTC: data is taken from Deribit.

  • For Other Tokens: fully on-chain data is computed as the average volatility set by theSynthetic AMM in the previous epoch. You can find the full methodology at section 3.2 of Smilee Bonding Curve research paper.

The term "Oracle" is used for simplicity. Smilee can essentially compute volatility data fully on-chain through its AMM.

ETH and wBTC volatility data is taken from Deribit because of its huge liquidity and market relevance. In any case, Smilee can switch to fully on-chain data for ETH and wBTC as well.

At the smart contract level, the Volatility Oracle is part of the Market Oracle.

Free Risk Oracle

The Oracle provides the data used by the Synthetic AMM to price Impermanent Gain Options.

Given the limited role of such data in the pricing formula, the value is simply set at launch and updated in case of major market changes.

At the smart contract level, the Free Risk Oracle is part of the Market Oracle.

Financial Risks

  • Smilee LPs have the same financial risk as DEX LPs โ€” they have a delta exposure to the underlying assets and suffer Impermanent Loss, while earning an APY.

  • Impermanent Gain buyers have the same financial risk as of option buyersโ€”they pay a premium that may be lost if the options expire out-of-the-money.

  • Funds deposited in #earn-vaults are only swapped on DEXs, and never leave the protocol.

  • There are no liquidation risks.

  • Earn Vaults & DVPs are isolated (as seen in Liquidity-to-Volatility Engine)

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