Key Components

Hedging Pool

The hedging pool is funded by the safety fees collected from borrowers. This pool is used to buy Put Options from partner foundations, ensuring that there are enough funds to cover any potential losses. The Put Options are constantly re-struck, and their positions are managed to provide adequate protection against price declines. This dynamic management contributes to the stability of the weighted duration and allows for the natural rolling of positions in response to market changes.

When the memecoin price drops, the LTV rises, putting the loan at risk of liquidation. The Put Options are exercised to force the foundation to repurchase memecoin, resulting in buy pressure and decreased downside volatility.

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 BlonkFi bought come into play. These put options force the foundation that created the memecoin to buy it back from the market.

This buying pressure from the foundation 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 force creators (foundations) 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, BlonkFi acquires put options from partner foundations 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.