What is CVI?
CVI or Crypto Volatility Index is the first of its kind, decentralized solution, created to be used as a benchmark for tracking the volatility of the overall cryptocurrency market. It allows crypto investors to hedge themselves against the volatility of the market and impermanent loss.
Crypto Volatility Index was created on the Ethereum MainNet, on January 20th, 2021 by the COTI team, together with Professor Dan Galai, creator of the VIX and part of the CVI board of advisors.
The volatility index or VIX is an index measuring the volatility on the stock market based on the implied volatility. This is also known as the “Market Fear Index”.
So, similarly, the crypto volatility index (CVI) helps users to track and trade the 30-day implied volatility of Ethereum and Bitcoin. It uses the Black-Scholes pricing model which is helpful for determining the fair price or the value for a call, based on six variables - volatility, stock price, risk-free rate, time, strike price and type of option.
The crypto volatility index was created by computing a decentralized volatility index from cryptocurrency option prices and the expectations of the future volatility. This index can be used by crypto traders as a tool for speculation or hedging on their portfolio if they think the volatility in crypto is increasing.
The volatility index can vary between 0 and 200, as 200 indicates the maximum level of volatility and 0 indicates the minimum. So, if we see the prices of Bitcoin or Ethereum drop, the index will spike in the opposite direction.
The future of crypto volatility index
The founders of the Crypto Volatility Index (CVI) have recently announced the implementation of new features for the protocol.
The first feature is the launch of volatility tokens.
As we already said, volatility measures how much a crypto price has gained or lost for a given period of time. So, volatile assets can also generate outsized returns or losses, compared to less volatile assets.
The volatility tokens, that were launched by Crypto volatility index, were created for crypto traders looking to capitalize on these price swings.
Actually, volatility tokens are a significant addition in the CVI upgrade. The first token was named EHTVOL and the second - CVOL. They were tailored based on the funding fees and relocated to maintain their pegs with their respective indexes. The result was - both tokens operating in the cryptocurrency market. The volatility tokens can be used in creating arbitrage trading strategies.
With that came also the implementation of leverage volatility tokens, known as ETHVOL-X2 and ETHVOL-X3, which will be supported within the same liquidity pools and will also be tradable in different DEX environments.
Furthermore, the team behind CVI is also planning to deploy it on the Optimistic Rollup chain Arbitrum. The reason for that is the desire to create a more affordable user experience, without having to sacrifice the security features of the Ethereum mainchain.
Moreover, the project’s roadmap will also increase cooperation and integration with additional onchain data oracles.
Conclusion
As we already explained, the Crypto Volatility Index allows DeFi users to hedge against or profit from volatility in the cryptocurrency market. It works as a version of the S&P 500 volatility index, which is a real time market index representing the expectations for volatility over the coming 30 days.
Crypto volatility index is an open source code, allowing trading instruments to be built upon the CVI by the community. Users are able to open positions, provide liquidity and stake their LP tokens for additional awards.