Trading Core

The Buffer AMM on Arbitrum One, is comprised of a number of smart contracts that operate cohesively to match traders (takers) with LPs (makers). The platform also offers traders with the ability to effectively hedge their positions, and LPs a robustly delta hedged platform to provide liquidity for both collateral and premiums for the positions traded.

Protocol Contracts:

BufferBinaryPool

Allows users to deposit quote asset (tokenX) to receive Buffer Pool Liquidity Tokens (BLP), which represents a share of the LP. These funds are used as collateral for the options in the BufferBinaryOptions/

When a user provides liquidity to the pool by depositing tokenX, the amount of liquidity that will be added and stored along with a timestamp of the time liquidity enters the pool. Once processed, the user then receives BLP tokens in return.

The amount of BLP tokens minted for the user depends on the current ratio of the total tokenX in the pool to the total supply of BLP tokens.

The provide function calculates the amount of BLP to mint based on the amount of tokenX a user deposits. If the pool is not empty, the amount of BLP minted is proportional to the increase in pool size due to the added tokenX.

The formula used is:

$$mint = (tokenXAmount * supply) / balance$$

The BufferBinaryOptions contract sends the premium charged while buying an option to the pool. For ITM options at the time of expiry, the locked liquidity is sent as a reward thus resulting in a loss for the pool For ATM/OTM options at the time of expiry, the locked liquidity is released and nothing is sent to the user. The pool thus makes a profit from the premium collected at the time of option buying

info

Locked liquidity > Premium

The admin and other liquidity providers add this liquidity that’s locked in the pool to reward the users for ITM options and make a profit from the OTM and ATM options.

This profit is distributed amongst the LP in the ratio of the liquidity added.

note

The pool also has a lockup period of 1 day to prevent LPs from immediate withdrawal after an OTM option.

lockedAmount & lockedPremium

On Buffer, "Locking" means that the funds in the pool will not be used to underwrite new options.

When the user pays 100 USDC for the trade, assuming the current dyanmic settlement fee is 20%, the remaining 80 USDC goes to the pool as lockedPremium (this amount is locked until the option expires).

Then another 160 USDC from the pool's balance is locked as the lockedAmount until the option expires.

The above lockedPremium is given to the pool as a reward for taking the risk over the lockedAmount.

Here 2 scenarios can occur:

• if the option ends in-the-money, the entire lockedAmount is paid to the option's owner, and the lockedPremium is unlocked so the pool's net loss in this case is

$$lockedAmount - lockedPremium$$

• if the option ends on-the-moeny, nothing is paid to the option's owner and the pool unlocks both lockedAmount and lockedPremium and the pool's net profit is the lockedPremium on this trade.

BufferBinaryOptions

This is an ERC-721 contract where each option is an NFT. The contract is called by createFromRouter to open and close options on Buffer. Whenever the router opens a trade, this contract mints an NFT tokens and locks a specified amount of tokenX for the user and burns it at the time of closing.

The fee collected by the router is distributed amongst the BufferBinaryPool and SettlementFeeDisbursal.

Router

A single router is shared by all options contracts. Each asset pair has its own options contract linked to a liquidity pool. The pair is independent of the pool's deposit token. This is the primary contract that the users and keepers interact with.

Publisher

A trusted admin account that signs the market price. All prices are stored off-chain and signed by the publisher.

Keepers

Keepers are special admin accounts that trigger all the transactions on behalf of the users.

Buffer v2.5 comprises of 4 keepers:

• Open keeper
• Close keeper
• Early close keeper
• Revoke Keeper

In every iteration, the keeper calls a datasource to fetch the signed pending transactions that the user intends to broadcast on-chain. The publisher signs market prices required to open/close for a given market at a given time. The keeper collects all the information and writes these pending transactions on-chain.