Key Components

Collateral Vault

As put options represent a leverage on the underlying assets, it is critical to ensure that there is sufficient capital upon the execution of the put options to purchase the underlying assets. This is to prevent a default.

The Collateral Vault is funded by on-chain deposits in stablecoins. Depositors can be retail users, foundations or even market makers. Depositors are encouraged to deposit to earn yield in the form of Put Option premiums, which are purchased using the Safety Fees.

When the memecoin price drops, the LTV rises, putting the loan at risk of liquidation. The put options are exercised to force the Collateral Vault to repurchase the memecoin at the discounted strike price, resulting in buy pressure and decreased downside volatility. While this might result in a loss, the put options has been priced to provide an overall positive yield for depositors.

ELI5 version

When the price of the memecoin drops, its value as collateral for a loan drops as well. This makes your loan "riskier" because the collateral is now worth less. This is known as the Loan-to-Value (LTV) ratio going up. If LTV gets too high, you could get liquidated.

To prevent this, the put options that Blendy bought come into play. These put options force the Collateral Vault to buy it back from the market.

This buying pressure cushions the price drop, which decreases "downside volatility" - meaning big drops in the price. In summary:

1. Memecoin price drops.

2. Collateral value falls, making the loan riskier.

3. Put options forces Collateral Vault to buy back the memecoin.

4. The upward buy pressure momentarily cushions the drop in price for the initial 8-hour epoch.

5. This gives your loan a buffer from instantly being liquidated.

Put Options

Put options are financial derivatives that give the holder the right, but not the obligation, to sell an underlying asset at a predetermined price (strike price) within a specific timeframe. In the context of the Moon Module, Blendy acquires put options underwritten by the Collateral Vault to hedge against the potential downside volatility of the collateralized memecoins.

The Moon Module uses put options to keep the collateral price safe for the first 8 hours, stopping any risk of liquidation during this period.

What happens to my collateral when Put Option is bought?

Your collateral is not affected as users do not interact with the put options directly.