DIVA Protocol

DIVA Protocol is a decentralized infrastructure enabling its users to create and settle customizable, event-driven products, also referred to as derivatives, in a permissionless manner. Users are able to pick any public data feed as the underlying value—like the price of an asset or a basket of assets, the TVL locked in DeFi, Ethereum gas price, Bitcoin hash rate, and the average temperature. It is then combined with a wide array of possible payoff profiles, whether binary, linear, convex, or concave, to create desired products.

The concept behind DIVA Protocol is referred to as Parametric Asset Claim Decomposition (PACD). After a user deposits collateral, which is usually ERC-20 tokens, they are issued two directionally reversed positions, called long and short positions, that, when combined, represent a claim on the deposited collateral. However, when the positions are held in isolation, the user is exposed to the upside (through the long position) or downside (through the short position) of the underlying metric.

The payoffs of long and short positions are zero-sum. For each unit of collateral gained by the long position, the short position will lose, and vice-versa. Four parameters govern the shape of the payoff curves, and they include floor, inflection, cap, and gradient. This enables the creation of a wide array of payoff profiles and derivative products.

Traders can purchase and sell position tokens on the secondary market for the sake of speculation or hedging. The payoffs of long- and short-position tokens are derived based on the outcome of the underlying event, like the BTC price at the end of the year, as well as the underlying payoff function. When the outcome is reported by an oracle after it expires, users will be able to withdraw their share in the collateral when they send their long- and short-position tokens back to the DIVA smart contract. In the process, the position tokens are burnt. The vault holding the collateral asset during the duration of the position tokens is called a contingent pool.

Illustration: Parametric Asset Claim Decomposition

Major features of DIVA Protocol include the following: ​

• Permissionless: Users can create and settle derivative assets on different things without an intermediary. ​
• Collateralized: The solvency of every position token is secured by the collateral that is locked in the DIVA smart contract, which prevents counterparty risk and the need for margin calls.
• Customizable underlyings: The underlyings are not limited to traded assets' prices, like BTC or ETH, but can include non-traded metrics with a public data feed, like the TVL locked in DeFi, Ethereum gas price, Bitcoin hash rate, the total crypto market cap, or the amount hacked in a DeFi protocol.
• Payoffs: DIVA Protocol provides a wide array of payoff profiles, including linear, binary, convex, and concave payoff curves.
• Oracles: The Protocol is oracle agnostic, meaning any oracle can be utilized, including individual accounts; existing decentralized oracles solutions, such as Chainlink, Tellor, or DIA; and custom oracle smart contracts.
• Collateral token: DIVA Protocol enables the use of different ERC20 tokens as collateral, such as DAI, USDC, USDT, WBTC, WETH, including interest/yield-bearing tokens like Compound's cDAI token or wrapped staked ETH (wstETH). ​
• Univeral settlement mechanism: The protocol uses a settlement mechanism to accommodate various kinds of oracles, including human oracles as well as decentralized oracle solutions, such as Tellor, DIA, Band, or Chainlink. Specifically, it implements an optional dispute mechanism and a fallback layer to ensure that position tokens are properly settled.

Products that can be built atop DIVA Protocol without smart contract programming skills include the following:

• Insurance products: derivatives with payouts that are linked to insurance loss events like natural disasters, credit default, DeFi hacks, or medical claim costs
• Structured products: derivatives that mirror the payoff curve of barrier reverse convertibles and other popular structured products
• Prediction products: derivatives with binary or linear payoffs linked to the outcome of sport, political, or economic events

An overview of products that can be powered by DIVA Protocol

The inaugural application developed on DIVA Protocol is DIVA app. It is the flagship implementation of an app utilizing DIVA Protocol as the underlying technology. With the DIVA app, users can interact with the protocol via a user-friendly interface. They are able to create and redeem their assets. Data providers can also report values through the application. Additionally, DIVA app integrates 0x's limit order protocol to enable users to trade derivative assets in a decentralized manner without giving up custody of their assets.

DIVA is the native token used to govern the DIVA Protocol. There is a total supply of 100 million tokens in circulation. Holding DIVA tokens is synonymous with voting power and influencing the direction of the DIVA Protocol. DIVA token holders will be able to vote on updates of protocol parameters like fees and settlement-related periods; they can decide how to spend the DIVA treasury funds for things like protocol developments, marketing, partnership incentives, hiring, security audits, token buyback, and burn.

Votes and the addition of data providers to the whitelist proposals will be conducted publicly with snapshot.org. Decisions will be executed by the DIVA multisig. It will initially consist of early contributors to the protocol. The end objective is to transition to a completely decentralized and immutable system with an automated value capture mechanism that does not need human intervention. The DIVA token is not utilized as a fundraising device or an investment opportunity.​

The protocol's goal is to distribute tokens to contributors and protocol users. 20-25% of DIVA tokens will be distributed to early contributors, and 60% will be subject to a two-year linear vesting following the token generation event. 75-80% of DIVA tokens will be earned by users and contributors in exchange for activities like development, participation in the testnet, and providing liquidity and trading on the mainnet. The share of DIVA tokens received is proportional to their activity.