COTI is a fully encompassing “finance on the blockchain” ecosystem and an enterprise-grade fintech platform that empowers organizations to build their own private payment solution and digitize any currency. COTI’s platform enables companies to effortlessly create advanced fintech products ranging from payment networks and stablecoins to loyalty programs, remittance services, and more. COTI provides functionality as robust as existing payment systems while allowing enterprises to create their own unique rules and payment system to save time, data, and money.
COTI created the Crypto Volatility Index (CVI), a decentralized version of VIX (Chicago Board Options Exchange's CBOE Volatility Index) that allows users to hedge against crypto market volatility and impermanent loss using elastic supply ‘volatility tokens’.
In order for CVI’s volatility tokens to maintain their peg to the underlying index tracking the volatility of the crypto market, COTI needed a decentralized and highly-reliable entity to call its smart contract on-chain and trigger the rebasing mechanism to execute once per day.
COTI integrated Chainlink Automation to trigger the rebasing mechanism of its CVI volatility tokens, giving users the ability to speculate on crypto market price volatility in a decentralized and automated manner.
Trading volatility can allow investors to find profitable opportunities in the market without requiring them to predict price direction. In traditional markets, the VIX—the Chicago Board Options Exchange's volatility index—is a commonly used measure of the stock market's expectation of volatility. Often referred to as the “fear index”, the VIX enables investors to quantify the level of market risk and gauge market sentiment.
The COTI team recognized an opportunity to utilize the permissionless and transparent nature of blockchains and create a decentralized version of VIX for cryptocurrency markets. They created the Crypto Volatility Index (CVI), an index and trading platform designed to predict the crypto market’s expected future volatility for the upcoming 30 days, allowing users to hedge against market volatility.
The calculation of CVI is made using Chainlink External Adapters. To help ensure the benefits of decentralization and transparency, CVI uses Chainlink’s data aggregation model to allow CVI to retrieve the required data and calculate the CVI formula. The calculated results from each oracle are aggregated, verified, and passed to the blockchain node. The combined CVI index is a weighted sum of CVI indices calculated for several cryptocurrencies on an hourly basis, with weights set according to market capitalization. The CVI token is a funding fee-adjusted rebasing volatility token that remains pegged to the CVI index over time, enabling investors to trade the token on secondary markets while making CVI composable with the larger DeFi ecosystem.
The secure, trust-minimized automation of recurring smart contract functions is a feat many development teams strive for. The COTI team’s goal was to automate and decentralize the rebasing mechanism of CVI and make the token more resilient to potential downtime or manipulation. Due to the inherent composability of the DeFi ecosystem, incorrect token pricing through a missed rebase can have cascading negative effects in a loop of interconnected decentralized applications.
Outsourcing such a critical DevOps task to a decentralized network isn’t a straightforward exercise. An often overlooked property of smart contracts is that they cannot call their own functions, meaning they need an on-chain transaction to trigger their predefined contract logic. While certain types of protocols such as automated market makers (AMMs) can rely on users initiating transactions to wake up the contract, the CVI token’s rebasing mechanism needs an external entity called a “keeper” to trigger smart contract execution.
One way for the COTI team to enable transaction automation would be to manually monitor and trigger the rebasing mechanism through a centralized server. However, this method would introduce a central point of failure and require precious development resources that otherwise could be spent improving the underlying logic of the protocol.
“It’s important for our team that token rebasing is carried out in a decentralized manner so our token rebases are consistent and we’re protected against failure and downtime. Chainlink Automation allows us to utilize a decentralized network of provably reliable nodes to trigger the rebasing mechanism.”
CVI integrated Chainlink Automation to trigger the rebasing mechanism of their volatility tokens. Chainlink Automation leverages a decentralized network of nodes that provides smart contract automation services in a cost-efficient and trust-minimized manner. With Chainlink Automation, developers can submit customized jobs to call smart contract functions based on predefined conditions. Chainlink Automation then checks these conditions through secure off-chain computation to trigger smart contract execution.
Chainlink Automation triggers CVI’s rebasing smart contract each day at midnight UTC. The CVI smart contract verifies that the time conditions have been met and automatically increases or decreases the total token supply in order to achieve the desired peg for the CVI token. Without Chainlink’s transaction automation solution, the task of triggering rebases would have to be performed manually or using a centralized process.
With the integration of Chainlink Automation, the COTI team realized several key benefits. The CVI smart contract can now execute token rebases in a fully automated manner, without any manual input. Moreover, Chainlink Automation provides strong guarantees around uptime and secure contract automation, as it is powered by the same Chainlink node operators that help secure over $75 billion dollars across other Chainlink services.
As a result, the COTI team has an automated way to execute the daily token rebasing mechanism of the CVI token with increased resiliency to outlier events, while mitigating the risks around manual interventions or using centralized servers.
“Chainlink Automation has reduced our overheads and advanced the CVI token towards more decentralization. The seamless integration process and strong reliability guarantees of Chainlink Automation set the standard for secure smart contract automation.”
Chainlink Automation is now a fundamental component of the Crypto Volatility Index, enabling an automated rebasing mechanism for the CVI token. By removing the need for a manual rebasing mechanism, the COTI team can save on development time that would have been required to write and maintain centralized scripts or manually trigger the rebase.
Furthermore, the security and reliability provided by the combination of Chainlink Automation and smart contracts contribute to the COTI team’s goal of creating a decentralized volatility index suitable for the trust-minimized blockchain economy.
As of December 2021, Chainlink Automation is helping to secure over $30M Total Value Locked (TVL) across the CVI protocol. Supported by Chainlink Automation, CVI is laying the foundation for advanced on-chain applications that establish more transparency in the global financial system.