Lien Protocol

A protocol for creating Options and Stablecoins out of ETH

The Lien Protocol is the smart contract that enables the bifurcation, or the tranching, of ETH into two components; the variable component and the stable component.

The variable component is the Liquid Bond Token (LBT) and the stable component is the Stable Bond Token (SBT). The LBT is designed to absorb most of the volatility, or the risk of the fluctuation in the ETH:USD price. This characteristic of the LBT makes it a supercharged financial instrument that performs essentially like a 2x leveraged call option on ETH. Because LBT strips away most of the price volatility, the SBT is stabilized against the US dollar. This characteristic of the SBT makes it a perfect collateral for the stable coin, iDOL.

How the Lien Protocol works

Users of the Lien Protocol will find the application easy to use. Users will be able to buy, trade, and sell assets using the Lien app like they would with any other exchange service.
However, the mechanics of the Lien Protocol and what goes on under the hood is sophisticated. You might find it cool and interesting!

Understanding the Lien Protocol - Step by Step

1. The Lien protocol smart contract tranches ETH into SBT and LBT that have the same maturity date and strike price.
2. The SBT is sent to the iDOL smart contract and is used as collateral to mint iDOL stable coins. The iDOL stable coin does not have a maturity date.
3. The iDOL tokens can be used like any other stable coin.
4. When the maturity date draws near, the SBT is auctioned off for iDOL by the smart contract.
5. Upon maturity, the smart contract will pay out to the SBT holder, the dollar amount that the holder is entitled to in ETH.
6. The smart contract will then pay out any remaining ETH to the LBT holder.
7.If the price of ETH upon maturity is lower than the strike price, then the smart contract will pay out the entire ETH to the SBT holder and the LBT holder will receive nothing.

Illustrative Example

1. User A tranches 1 ETH into 1 SBT and 1 LBT when the price of ETH is $100. The strike price and maturity of the SBT and LBT are $50 and one week from now, respectively.
2. 50 iDOL is minted from the SBT and now User A has 1 LBT and 50 iDOL.
3. User A can use the 50 iDOL just like any other stable coin. User A decides to use the 50 iDOL to buy the Lien token on FairSwap.
4. As the maturity date nears, the SBT is auctioned off to the highest bidder. User B comes along and wins the auction by placing a $50 bid.
5. Upon maturity, the price of ETH has gone up from $100 a week ago to $200. User B receives $50 worth of ETH or 0.25 ETH in exchange for the 1 SBT.
6. User A receives $150 worth of ETH or 0.75 ETH in exchange for the LBT. User A now has 0.75 ETH and the Lien token that the user bought on FairSwap.
7. If the price of ETH had gone down from $100 a week ago to $75, User B still receives $50 worth of ETH or 0.66 ETH. User A receives the remaining $25 worth of ETH or 0.33 ETH.

Lien Protocol Specification

Price Oracle: Chainlink

Learn More

Research Paper