🚒Price Engine

Purpose and functionality

The Price Engine Contract is a crucial component of the Yield Harbour protocol, responsible for calculating the prices of options traded on the platform. It implements a discretized version of the industry-standard Black-Scholes model, providing a transparent and well-understood pricing framework optimized for liquidity concentration.

Key Features

1. Discretized Black-Scholes Pricing Model: The contract employs an innovative discretized version of the Black-Scholes model, developed by the Yield Harbour team. The Black-Scholes model is widely recognized as the industry standard for options pricing in traditional finance. By discretizing this well-established and broadly accepted model, the pricing mechanism ensures transparency and adherence to a proven pricing framework, while optimizing for liquidity concentration within the Yield Harbour protocol.

2. On-chain Deployment: The Price Engine Contract is deployed on-chain, ensuring decentralization and transparency. All pricing calculations are performed on-chain, eliminating the need for trusted third parties or centralized pricing mechanisms.

3. Integration with Historical Volatility: The contract integrates with the on-chain Historical Volatility data provided by the Price History contract. This ensures that option prices are calculated using up-to-date and reliable volatility data, which is a critical input for the Black-Scholes model.

4. Strike Price Selection: The Price Engine Contract works in tandem with the Strike-Bound Liquidity mechanism to automatically select strike prices for each option series during epoch initialization. This ensures that strike prices are chosen to concentrate liquidity and provide optimal trading opportunities.

Pricing Methodology

1. Black-Scholes Model: The Price Engine Contract uses a discretized version of the Black-Scholes model to calculate option prices. The Black-Scholes model is a widely accepted pricing model that takes into account various factors, such as the underlying asset price, strike price, time to expiration, risk-free interest rate, and volatility.

2. Time Discretization: To optimize for on-chain deployment and liquidity concentration, the Price Engine Contract employs a time discretization approach to the Black-Scholes model. This involves discretizing the time dimension into distinct intervals called "ticks", with option prices calculated for each epoch. This time discretization process helps to concentrate liquidity around specific price points and expiration periods, enhancing the overall trading experience and efficiency within the Yield Harbour protocol.

3. Historical Volatility Integration: The contract retrieves historical volatility data from the Price History contract. This volatility data is used as an input to the Black-Scholes model, ensuring that option prices are calculated based on the most recent and accurate volatility information.

4. Strike Price Selection: During epoch initialization, the Price Engine Contract works in conjunction with the Strike-Bound Liquidity mechanism to select strike prices for each option series. The strike prices are chosen to concentrate liquidity and provide optimal trading opportunities based on the current market conditions and the discretized Black-Scholes pricing model.

Upgrade and migration processes

The Price Engine contract is owned and managed by Yield Harbour, with the upgrade and migration processes governed by the Kujira on-chain governance.

Governance Summary

The Price Engine contract is a critical component of the Yield Harbour protocol, responsible for calculating and providing volatility-adjusted strike prices for options markets. This contract serves as a transparent and decentralized way to determine strike prices, which are essential for the Strike-Bound liquidity mechanism during epoch initialization.

The contract is owned and managed by Yield Harbour, with upgrade and migration processes governed by the Kujira on-chain governance system. This ensures that any changes to the contract are subject to community approval and oversight, ensuring the integrity and security of the Yield Harbour protocol.

The Price Engine contract is designed to be flexible and adaptable, with the ability to integrate with multiple assets and markets. This allows for the expansion of the Yield Harbour protocol to new assets and markets, while maintaining a consistent and reliable source of volatility-adjusted strike prices.

By implementing the Price Engine contract, Yield Harbour aims to establish a decentralized and transparent source of strike prices, enabling accurate and efficient options markets, while also providing a valuable resource for the Kujira community. The contract's governance structure ensures that it will continue to evolve and improve over time, meeting the needs of the Yield Harbour protocol and the broader Kujira ecosystem.