DEFI

Fear index in the crypto market! Introduction to the DeFi platform Cvi.finance

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Fear index in the crypto market! Introduction to the DeFi platform Cvi.finance

In the US stock market, the VIX, known as the fear index, serves as a volatility indicator, representing investors' future expectations of market changes. Is there a similar indicator available for reference in the cryptocurrency market, or even on decentralized finance (DeFi) platforms?

Crypto Fear Index in the Cryptocurrency Industry! Introduction to the CVI Index

The VIX Volatility Index, compiled by the Chicago Options Exchange, reflects the "implied volatility of the S&P 500 Index in the next 30 days." The higher the value, the more investors believe that the stock market will experience more severe and unpredictable fluctuations in the future; conversely, a lower value indicates a more stable market with smaller fluctuations. Therefore, the VIX index is also known as the Fear Index.

Note: Implied volatility is a volatility measurement standard derived from option market trading prices, calculated using the Black-Scholes option pricing formula, to assess market participants' views on future volatility. Furthermore, volatility includes both upward and downward movements and cannot predict market trends.

In the cryptocurrency investment market, there is a similar index to the VIX, known as the CVI Crypto Volatility Index, co-created by the enterprise blockchain team COTI and Professor Dan Galai, one of the creators of the VIX index. This index provides cryptocurrency investors with a reference standard for market volatility.

The CVI index fluctuates between 0-200, with 0-85 indicating low volatility, 85-105 medium volatility, and 105-200 high volatility. According to current data from the CVI platform Cvi.finance, the CVI index has dropped to 53.14, reaching its lowest point since April 2019, and has not exceeded 85 since December last year. This indicates that the cryptocurrency market has entered a phase of very low volatility, with prices showing minimal fluctuations.

Comparing the CVI trend over the past month with that of BTC, it can be observed that during the period of decreasing CVI, the price fluctuations of BTC were relatively small.

CVI in yellow, BTC in blue

How to Profit Using the CVI Index?

In addition to providing CVI index data, Cvi.finance also serves as a DeFi protocol built on Arbitrum. Even in periods of extremely low market volatility, users can still earn profits through related products. DeFi researcher korpi recently introduced two main ways:

1. Volatility Prediction:

CVOL is a token linked to the CVI index. If users believe that the market will experience volatility, causing an increase in the CVI index, they can mint on the platform or purchase on Sushiswap to obtain the token. They can then sell CVOL after the CVI index rises to profit from the price difference.

However, CVOL has a mechanism for funding rates, charging a certain percentage of fees per hour. The level of funding rates depends on the current high or low of the CVI index; the lower the CVI, the higher the rate, and vice versa. Therefore, it is advisable to purchase CVOL when volatility is expected to rise in the short term.

CVOL Funding Rate Table

2. Become a Market Maker and Earn Transaction Fees

Cvi.finance features a mechanism called the Theta Vault, where users can deposit USDC to provide liquidity and earn funding rates from CVOL holders and transaction fees on the DEX. The current APR is 47.02%.

However, the Theta Vault and CVOL mechanism are similar to the relationship between the GLP token and GMX token on the derivative exchange GMX. In essence, the USDC deposited into the Theta Vault by users will act as counterparties to CVOL traders. If someone profits from trading CVOL, they will extract profits from the vault; conversely, there is also an opportunity to profit from traders' losses.

Therefore, if the CVI index rises significantly in a short period, causing many to profit from trading CVOL, liquidity providers in the Theta Vault may face losses. However, korpi believes that in the long run, being a market maker can be profitable.

The above is an introduction to the main mechanisms and gameplay on Cvi.finance, bringing some fresh air to the currently uninteresting market. Interested readers are encouraged to experience it themselves, but it is still in the testing phase, so caution is advised.