Examples

Scenario for all cases

• BONK is trading at ~$1 in BONK/USDT

• The limiter module has set LTV at 25% for BONK

• The moon module has yielded a single out-of-the-money put option at 0.5 BONK/USDT price

• Alice deposits 400 $BONK tokens as collateral

• Based on the 25% LTV, Alice can borrow a maximum of 100 $USDT (25% of the 400 $BONK in $USDT)

1. Full Activation of the Moon Module

What happens:

• The price of BONK drops by 75%, so it's now worth only 0.25$ per token.

Outcome:

• Since the BONK price dropped a lot, the value of Alice's collateral has decreased significantly.

• The Moon Module is fully activated.

• BlonkFi takes over the collateral Alice provided.

• BlonkFi can then exercise the put option they had purchased, which allows them to sell the BONK tokens back at the pre-agreed price of 0.5 $BONK per $USDT.

• This helps mitigate the losses caused by the big drop in BONK.

2. Partial Activation

What happens:

• BONK price falls by 45%.

Outcome:

• The Moon Module uses the put options it had previously purchased to counteract the 45% BONK price drop.

• It does not need to exercise all of the put options it has with a drop of this magnitude.

By only partially activating the put options, the Moon Module is able to maintain the Loan-to-Value ratio at a safe level, without having to take over the entire collateral like in the full activation scenario.

Technical Implementation

Algorithmic Framework

The Moon Module utilizes an algorithmic framework to set lending rates, borrowing rates, and safety fees. This framework ensures that rates are dynamically adjusted based on market conditions and the specific needs of the platform.

Data Analysis and Backtesting

Historical data analysis was conducted to validate the option pricing models and hedging strategies. Backtesting results demonstrate the effectiveness of the Moon Module in providing downside protection under various market scenarios.