oALTO
Call Option ALTO
What’s An Option?
There are two types of options, a put, or the right to sell, and a call, or the right to buy. A call option gives you the right (but not the obligation), to purchase the underlying asset at a specified price (known as the strike price), within a specified duration (known as the expiry).
American call options can be exercised at any time up until expiry, in comparison to European options, which can only be exercised at expiration. oALTO, or ALTO call options, have an expiry of 1 week.
Why Options?
The use of ITM (in-the-money) call options as incentives was a concept first introduced by Keep3r Network. The purpose of using call option incentives versus the typical liquidity mining programs seen in DeFi is to create alignment between the protocol, its DAO shareholders and liquidity providers.
In liquidity mining programs, LP’s receive free token emissions for their rented liquidity, which represents near limitless sell pressure. These LP’s typically quickly turn around and sell those tokens to realize a profit, as they are well aware that the value available to be harvested will quickly diminish. Over time from farmers taking profits, the protocol's ability to entice LP’s to continue providing liquidity diminishes. As the protocol begins to lose liquidity, it produces less and less fees, meaning token holders lose on both sides. At the conclusion of the liquidity mining program, the protocol has no ability to continue renting liquidity, has nothing to show for all of the inflation, and is economically disabled.
Thus, liquidity mining has a few key issues, namely value leakage, unsustainability, and misalignment. Alto’s solution to these problems is to employ a brand new incentive model with a foundation in call option incentives, built around the Alto Protocol’s Time Weighted Locking (twl). Call Options capture protocol owned liquidity (POL) ensuring value capture from every redemption, solidifies sustainability with their creation of a natural price floor, and ensures alignment between LP’s, the Alto protocol, and DAO members through the combination of an enforcement of a lock-up period to LP’s, and the aforementioned inflows to the Alto DAO Treasury.
Simply put, if Compound implemented Alto’s call option model during DeFi Summer, Compound would have had $200 million dollars in its Treasury within one year.
Eligibility
Users who pay interest on the Alto Protocol, whether within Mint or Isolated Markets become eligible for oALTO call options. This discount level is always applied to the spot price of ALTO throughout the user’s lock.
Eligibility criteria can be modified by the Alto DAO.
Distribution
Rather than distributing all rewards at once, Alto's Reward Controller implements a gradual distribution over a 3 day period. The distribution begins on the first day of the week, with a new set of users added each day. This approach prevents large-scale simultaneous ALTO sales that could destabilize prices. The distribution occurs through daily updates to the merkle tree root of the distribution contract through automated off-chain calculations. First distribution starts when the epoch advances.
Reward Distribution Calculation
The Alto Reward Controller will distribute 52,500,000 ALTO tokens (52.5% of total supply). Each week, 0.88% of the remaining tokens will be emitted. The following formula calculates how many tokens remain to be emitted in after a specific week:
Where totalAroSupply is the total ALTO tokens to be emitted (52,500,000), decayRate is the decay rate (0.88% = 0.0088), and weekNumber is the week number for which emissions are being calculated. For example, in week 53 (after one year), approximately 33 million ALTO will remain to be emitted at max.
If users do not claim their rewards for the current week, these rewards are automatically forfeited and roll over to the next week's emission pool. Therefore, the total ALTO emitted in any given week is the sum of unclaimed rewards from the previous week subtracted from the current week's emissions. Thus, the more ALTO that goes unclaimed, the slower inflation will become.
Each week, users receive a pro-rata share of that week's ALTO emissions based on their total accrued interest from the previous week, which is then applied to the reward weightings which dictate the user's final amount of oALTO. Interest is accrued from either minting USDO, or borrowing USDO within Alto's Isolated Markets.
Reward Weighting
Specific actions such as minting, borrowing, or lending, and each market can be weighted differently by the Alto Reward Controller. This design was employed in order for the Alto Protocol to effectively incentivize all actions and markets, such as incentivizing the usage of new markets, or diminishing usage of over-utilized markets.
Coming soon.
Exercising
Each epoch (week), eligible users will receive a number of oALTO call option incentives proportional to their address's share of total protocol interest paid during the week. Each oALTO will allow the user to purchase 1 ALTO token from Alto DAO at a fixed price, below market value, up until the expiration of the call option (one week). After exercising, users can then choose to sell the ALTO for a profit, stake ALTO for a share of protocol revenue, or hold it.
User's will receive their oALTO on one of the three reward distribution days after the epoch has advanced based on how much interest they paid in the week prior, and will have a one epoch (week) expiration date.
The strike price is calculated by multiplying the user’s discount level by the Market Price (captured via three 4-hour Uniswap TWAP snapshots).
When oALTO is expired, the OTC deal is null and void, and thus it becomes worthless. If the market price of ALTO falls below the strike price, it becomes unprofitable to exercise oALTO.
All liquidity captured from oALTO being exercised will be sent to the Alto DAO Treasury.
Exercise & Stake
Users may exercise their oALTO call option(s) and directly stake them for sALTO in one action. Doing so provides a flat 25% boost to the user on the amount of ALTO they are receiving from their oALTO incentives. The ALTO acquired from this action will be staked into Bucket 4, or the longest duration bucket. For example, if Bob has 100 oALTO, and decides to exercise and stake, he will receive 125 sALTO.
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